Today, I'm considering an emerging pharmaceutical company called Intellipharmaceutics (NASDAQ:IPCI). In order to gain more insight on this opportunity, I conducted a phone interview with Mr. Shameze Rampertab, Vice President of Finance and CFO of Intellipharmaceutics. As stated on the company website, "Mr. Rampertab joined Intellipharmaceutics in November 2010. He is a chartered accountant (NASDAQ:CA) since 1994, brings public company experience to Intellipharmaceutics, having previously served as the Director, Finance and Secretary-Treasurer for then-public Drug Royalty Corp. Mr. Rampertab also served as health sciences and biotechnology analyst at several investment banking firms including Canaccord Capital, and was until recently a Partner, Healthcare Investment Banking at Loewen Ondaatje McCutcheon Limited, where he specialized in raising equity funds for life-science companies. He received an MBA from McMaster University and a BSc. from the University of Toronto and has substantial expertise with licensing and royalty deals." Following are excerpts from the phone interview:
To start off, could you please provide an overview of Intellipharmaceutics?
We are Nasdaq listed with 23 million shares; 31 million fully diluted. Our biggest shareholder is our Founders, Dr. Isa Odidi and Dr. Amina Odidii. They are the formulators and the reason we exist. They own 26 percent. Our cash is just short of $6 million. What makes our company interesting at this juncture is that, for the very first time, we have revenues. Trailing 12-month revenue is $7.7 million and we have analyst coverage from four firms.
So, Intellipharmaceutics is a specialty pharmaceutical company, but under that umbrella name for specialty pharmaceuticals, we are in the drug delivery space. Our drug delivery technologies are really controlled drug delivery release technologies. These controlled release technologies fit into three baskets:
The first basket is our abuse resistance drug delivery platform, which is called Rexista. We have some Phase 1 data on our Rexista oxycodone, and we'll have some additional data later on this year.
The second basket is our once-a-day formulations of drugs where once-a-day doesn't exist. We've done that with Pfizer's (NYSE:PFK) Lyrica. The generic name for Lyrica is Pregabalin, so we are working on providing Phase 1 data on that, and we should have additional data later on this year.
The third basket is our generic portfolio. We can actually create copycat generics of once-a-day formulated drugs. We do this without reverse engineering the innovator's patented XR technologies. We use our own XR technologies to create these once-a-day XR generics. Our marketed product is Focalin XR, which received approval in November 2013. We have seven other drugs filed with the FDA that are generic equivalents and are XR formulations.
So, we have quite a lot of products, and our patents surrounding our drug delivery solutions are not involved in the typical biotech companies developing novel drugs. Our patents are around our drug delivery solutions, which are our own proprietary methods of delivering drugs.
What's your overview on the future of your niche or specialization in the drug delivery industry?
Well, the specialization of drug delivery has been going in a lot of different directions. You can find drug delivery companies that are very much focused on injectables, and others which are focusing on transdermal applications. Our drug delivery solutions are all oral solid dosage forms (pills and caps). So, our controlled release formulations are really surrounding oral solid dosage forms.
The typical life cycle management strategy of Big Pharma is that they come out with a drug, such as Pfizer's Lyrica, which brings in around $2.8 billion a year in the US. Lyrica is a 2-to-3-times-a-day drug. Pfizer's patent for Lyrica is going to expire in 2017 or 2018. As a result, Pfizer is in the process of developing, filing and ultimately receiving approval for a once-a-day formulation of Lyrica. Thus, the life cycle management strategy of Big Pharma is to move patients on a more convenient dosage form (once a day) as patents expire, which actually improves compliance. For instance, think about yourself. Think about how many times you've missed a dose of a medication taken two or three times daily. But if you can take it only once a day, you're good for the entire day (and less likely to forget doses). So, people actually prefer once-a-day formulations.
Are the once-a-day drug formulations actually cheaper than the multiple-dose-per-day formulations?
Not necessarily. If it's replacing a three-times-a-day drug, it could actually cost more than the three-times-a-day drug because of the convenience factor and the compliance factor. Now, with many drugs, doctors want patients to take them multiple times a day because patients need to have certain minimum levels of the drug in their body in order to get the full therapeutic benefit of that drug. You don't want spikes in terms of the levels of that drug in your body. You want to have it in the body at certain times and certain levels. The pharmaceutical companies have developed drugs for that purpose, because when a patient starts missing doses, that's not good from a medical perspective.
What are the main challenges that the drug delivery industry faces today?
I'm going to personalize this answer to Intellipharmaceutics. So I talked about the specialty pharmaceutical umbrella, and under that we have the drug delivery companies. And under that umbrella, we are in the controlled release space. We consider that to be a niche area because there is a barrier to entry here. You have your own controlled release technologies, so we believe there is a barrier to entry, and the level of competition in the controlled release space is very different than many other spaces because when we talk about generics, for example, people think of Chinese and Indian generic pharma companies that drive down prices and have thin margins. It's all about market share, and it's good for consumers because they get really cheap products, but that's the generic space.
As I've mentioned, we are in the extended-release space; we are using our controlled-release delivery technology to create these once-a-day drugs. So what kind of competitors do we see in this space? We see Teva (NYSE:TEVA), Mylan (NASDAQ:MYL), Actavis (NYSE:ACT) and [indiscernible]. Those are the big domestic generic players because they all have their own technologies. Any of the Chinese generic makers are great at reverse engineering, but they don't have their own proprietary technologies to create these once-a-day drugs. So, when we talk a little bit later about who competes in the Focalin generic XR space, it's a very small group, and, thus, we're able to keep prices higher and margins are very healthy because of that.
Let's take a step back and look at the immediate-release generic space. Do you remember last year when Lipitor, the world's biggest selling drug ever went generic? Teva, the world's biggest generic pharmaceutical company, announced it would not launch a generic Lipitor. Lipitor is an immediate-release formulation, so there's no once-a-day Lipitor. The reason why Teva said it wouldn't launch is because there were too many Chinese generic companies that had approval and were going to launch and drive down prices. And as a public company, can Teva make 10 percent margins or 5 percent margins on sales of a high volume product? It doesn't make financial sense for Teva and it doesn't make financial sense for a lot of companies.
On the company website, it shows that Intellipharmaceutics has over 10 products awaiting regulatory approval, and, of course, a marketed Focalin XR generic product. Since this business aspect is of interest to investors, when can they roughly expect the next regulatory decision on any of these pipeline assets?
Biotech companies fit under a different regiment of the FDA; they fit under the Prescription Drug User Fee Act, and they receive dates when they complete a filing. They will receive a PDUFA date which the companies will publicly announce. In the generic space, however, you do not get that luxury, which is problematic as it is hurting the American population since it slows down the time that generic drugs can enter the market. So, because of that, the FDA did implement the Generic Drug User Fee Act about a year and a half ago, and it's a 5-year program. Under the Generic Drug User Fee Act, [the FDA] is collecting revenues from generic manufacturers and generic filers of drugs and they are using those funds to build up their own resources internally so they can deal with this problem.
When you file an ANDA with the FDA, you don't get a date from the FDA; it just goes into the queue. In the last 2 years, the average time for a generic drug to get approved has gotten worse and worse. In the month of June last year, the average time was 35 months, but the standard deviation around that is huge. Of those 31 drugs, the quickest one took only 17 months to get approved by the FDA. The one that took the longest took 89 months to get approved. So, we can't provide guidance since there is a problem in the generic industry and it's impossible to predict generic regulatory approval dates. Even if you look at Teva's presentations or Mylan's presentations with respect to their ANDA filings, they will estimate how many of their generic drugs will receive approvals; however, they won't tell you which ones. In terms of all that, the pipeline that you can access on our website--our Glucophage XR, Effexor XR and Protanix XR--have been awaiting approval for 4 years. Their markets have already gone generic, so we think there is a good probability that we will get a couple of these approved by the end of the year. We're hoping that they will get approved, but there are no absolutes here.
In terms of the regulatory queue, do larger pharmaceutical companies like Teva have an advantage over smaller companies like Intellipharmaceutics, or is it more in terms of whichever company is first in line?
The whole ANDA process that the FDA is triaging and the way that companies communicate with the FDA have changed significantly in the last 12 months. This is because of the Generic User Fee Act and because the FDA is trying to become much more efficient in dealing with the backlog of almost 3,000 ANDAs that have been filed with them.
As you've pointed out, there are more well financed competitors out there, so what differentiates Intellipharmaceutics in ways that you would consider advantageous?
The way I like to explain to people how we build the business is using the baseball analogy. Our ANDAs are like a bunch of singles and doubles. So we have a number of them lined up (pipeline on website), and even if a couple of them strike out, we still got a number of singles and doubles. And with that alone, we can win the game, and we'll continue to file more ANDAs as time moves on. So, if you can get 10 products that are generating $5 million a year in revenues, you actually have a nice little portfolio, and that's effectively the base of the company. But, what are the homerun potentials using the baseball analogy? Well, our Rexista oxycodone could have homerun potential because the FDA has said point blank that it wants drug abuse deterrent technology implemented in narcotics [indiscernible]. That's exactly the space that we're moving forward with. So, Rexista has homerun potential because there is a separate regulatory path that's not as simple as the ANDA path, but it's not as long and as cumbersome as the biotech path (the Phase 1-3). Our Rexista oxycodone is going down a quicker regulatory path that has pretty good reward potential.
Now that we're on the topic of Rexista, I want to bring up a comment that was recently made by Maxim Group. The firm stated that Rexista might face tough generic competition because it may only have a few advantages over other products. I want to ask you whether management shares this concern, as well as what precisely differentiates Rexista from other abuse deterrent opioids like Pain Therapeutics' (NASDAQ:PTIE) Romaxi and Pfizer's Oxecta?
We're trying to deal with dose dumping. Dose dumping is when you manipulate a product to release its full payload in 1-2 hours, so you get really high levels. With regards to narcotics, you get that euphoric state, but the risk is that you can have increased toxicity and side effects and possibly deaths. We've seen people dying of overdoses with various drugs when they tamper with it. Heath Ledger from Batman died of an overdose of Oxycontin in conjunction with red wine. That's all they found in his hotel room. So, that's what we're trying to deal with here.
What does our Rexista oxycodone do? Well, the main thing that all these products must have is some kind of crush resistance formulation. Rexista has that too, and we have a patent application that recently got published. The reality is all products that are out there can be crushed. If you can go buy a $20 coffee grinder, throw a pill in it, and you are left with some flakes and powder. If you snort our product in the presence of moisture, it's going to get very gummy and pasty and clog up your navel cavities. If you try and pop it in your mouth and inhale it into your lungs like a dry powder inhaler, it will, once again, get clogged up in your throat and you will have to cough it out. If you try to dilute our product in water, it will get very viscous and it's not syringable, so you can't inject it.
If you take that same powder and free base it, which is when you put a powder on a spoon and place a flame underneath it to inhale the vapors, it will spontaneously combust. And if you extract the vapors that come off that burning, there's not much of the oxycodone left, so you will have essentially destroyed our product. If you try to take our once-a-day product with alcohol, that full payload will dump into your body in 1-2 hours, which is very toxic to you. So we see the opposite of dose dumping happening with our product. We've tapered it in such a way that it will release less of the payload in a normal situation, so it actually penalizes patients who try to mix our drug with alcohol. Another way drug addicts are abusing oxycodone is by microwaving it. If you took oxycodone and put it in a microwave for 3 minutes to heat it up, and then let it cool off and proceed to pop it in your mouth, you would get dose dumping. You will have destroyed the abuse deterrent technology in oxycodone. If you do that with our product, however, it doesn't induce dose dumping when you microwave it; it operates completely normal. Furthermore, a way that recreational users abuse oxycodone is by dropping it into a can of Coca Cola, which leads to dose dumping. We don't know what it is about it, but this is one of the ways that drug addicts are abusing it. But again, if you do that with our product, we don't see dose dumping happening.
So, the takeaway here is that we're dealing with a number of different mechanisms of abuse, more so than many different players. We believe that we have the best in class here because we are dealing with abuse deterrents through multiple mechanisms of abuse. We're not aware of anyone that has quite the robustness of abuse deterrent technology in one technology platform and in one product. Sure, Teva is ahead of us, and so is Pain Therapeutics, but it doesn't matter. At the end of the day, even if you get out there 2 years after these guys hit the market, what's a doctor going to prescribe? If the efficacy of the drug works exactly the same as oxycodone, the doctor will likely prescribe the drug that is very difficult to abuse (Rexista) rather than one that is only crush resistant.
Lets shift back to Focalin. Where are you with sales?
So with Focalin for ADHD, we got approval in November on the 15 mg and 30 mg, and we got tentative approval on the other doses. Our trailing 12 months of revenue is $7.7 million. Our commercial partner is Par Pharmaceuticals. Right now, we're selling into 31 percent of the market. Teva was first to file on the 5 mg, 10 mg, 20 mg and 40 mg. I don't know why it hasn't launched on the 5 mg, 10 mg and 20 mg. Does it make sense that Teva hasn't launched? No, it doesn't make sense. But, the takeaway here is that on the lion share of the Focalin market, we haven't been able to sell to it yet, which is not bad with the sales we've had so far. So on the 15 mg and 30 mg for the month of June (the most recent record), we're still doing pretty good, considering that we lost exclusivity on the 15 mg in May. On the 15 mg we still have 43 percent of the scripts. Novartis (NYSE:NVS) and Teva are sharing the other 57 percent. On the 30 mg, no one received first-to-file exclusivity, so there are a number of competitors out there and we're still a quarter of the 30 mg market. We're doing okay just on two dosages.
Now let's look at the bigger landscape. On the tentative dosages, we can't provide guidance. It's as simple as that. So, when you look at our revenues, we only have 3/4 of our revenues recorded, which is where we get the $7.7 million from as I mentioned earlier.
What part of the business do you think is being ignored that has more upside potential than Wall Street is giving it?
Well, one of the things that we haven't really been talking about-- because of the limited information that we have released--is surrounding our Rexista platform technology. We've done lab based studies on other narcotics (e.g., hydrocodone, hydromorphone and morphine), and we've found that Rexista works just as well with those narcotics as with oxycodone. So, once we get oxycodone moved into a Phase 3 study or partnered off, there are other products that we can bring forward.
Could you please discuss management's latest efforts to license Rexista?
I can't give you a definitive answer, but please take a look at our management. The responsibilities of one of our latest hires, Christian Akyempon, Vice President of Commercial Operations, are twofold: to potentially license our products, but to also build our own commercializaton at an appropriate time. With respect to Rexista, if we don't get the right economics down, we will just wait until more Phase 1 data is available and disclose that to a potential licensing partner. And if we still don't get the right economics, we will have to conduct an analysis to see whether we should fund a Phase 3 trial ourselves and license Rexista after Phase 3. Rexista oxycodone would have to be licensed at some time because it would need to be [advertised] to doctors.
With regards to earnings, another concern of investors is the exponential increase in R&D expenses YOY. Could you please provide some clarity on this potential issue?
Sure. What happened in Q2 2014 was that our R&D expenses were significantly higher. Why? We clearly disclosed a $1 million one-time performance option paid to our Founders. This was based on performance criteria (filings and approvals). This performance option will expire in September 2014. It went to shareholders and we asked shareholders to approve the extension of the filing of that performance option by 2 years. So, it expires now in September 2016. Shareholders voted on it and they approved it. On the back of the approval, we now have to recognize the actual value increase in that performance option in our books immediately. That was a one-time $1 million hit to R&D. So, it would make no sense to put the one-time non-cash option expense line in an extrapolated-out financial model.
You touched on this already, but I just want to make sure to get this on record. Are you planning to process new ANDAs?
So, we are planning additional ANDA fillings. These are not new indications because they are copy-cat generics. However, we are using our own technologies so we're not infringing on the innovators' patents. That's why if you look at our financials, we have no outstanding litigation. In the past we've had litigation which we've settled, but that's not to say that we don't foresee future litigation because this is the industry we operate in.
Do you think future litigation would significantly impact business operations?
That's always a risk, but if you look at our historical financial statements, if it was a material amount in terms of our patent and litigation expenses, it would be a separate line item, but it isn't and it never has been.
I now want to ask you about IPCI stock performance. It has relatively low liquidity, so is management making efforts to increase awareness and attract more retail investors?
Absolutely, but if you and I were talking a year ago, IPCI was trading at 20,000 shares a day. Today, we are trading around 200,000 shares a day. Nevertheless, you're right, so we're attempting to increase the momentum behind IPCI stock, and, thus, improve liquidity.
So to wrap things up, and this is basically the takeaway from this interview, that at any point--whether that be tomorrow, next week or next year--the generics awaiting regulatory decision could receive approval without any prior notice from the FDA?
Correct.
Thank you so much for your time.
AI
