EyePoint Pharmaceuticals Inc (EYPT)

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pSivida: Positive Roche And Regeneron Conference Calls Confirm Tehadur's Potential

seekingalpha.com/article/2025831-psivida-positive-roche-and-regeneron-conference-calls-confirm-tehadurs-potential

Assessing the Long and Short View of pSivida Corp.

Company Overview

pSivida Corp. (PSDV) is not a proof-of-concept stage biopharmaceutical company, but is a developer of a proven, sustained release drug delivery system. pSivida already has two approved products, Retisert partnered with Bausch & Lomb for the treatment of chronic noninfectious uveitis, and Iluvien partnered with Alimera Sciences (ALIM) in the treatment of Diabetic Macular Edema (DME). Iluvien is already approved in 6 EU countries and it is expected to have an FDA decision by 4Q14. pSivida is entitled to 20% royalties of both products and is developing Medidur, which is their first full commercial rights product for posterior Uveitis in Phase III trials. Importantly, pSivida will retain all earnings from Medidur, and will likely replace Retisert in the market, because it is more efficacious with fewer side effects. Importantly, pSivida has no new molecular entity risks in its commercialization strategy because they focus on partnering with larger commercial players with drugs already FDA approved to incorporate into their drug delivery devices.

While pSivida is growing its sales with these approved products, the most significant catalyst and path to large commercial success relies upon a new product called Tethadur. Tethadur is a small honeycomb structure drug delivery device that has the surface area of over two tennis courts, which is designed to carry large complex proteins and peptides such as Avastin, Lucentis, Eyelea or Herceptin. Critically, pSivida's Tethadur platform can provide sustained release of these drugs for over two years with only one dose! With over $50B of biological drugs coming off patent within the next 5 years pSivida's strategy is centered around providing a patent extension strategy for these biological drugs by reformulating them with Tethadur, thereby reducing the frequency of dosing.

Market Overview of Diabetic Macular Edema (DME)

Diabetes affects an estimated 23.6 million people, or 8% of the US population. It is the leading cause of new cases of blindness among adults aged 20-74 years, with a projected 12,000-24,000 new cases of blindness in these adults each year in the U.S.

The prevalence of DME among U.S. diabetics approaches 30% in adults who have had diabetes for 20 years or more. This would imply that close to 8 million diabetic patients would require chronic treatment for DME over the next decade.

A large meta-analysis found that 27% of type I diabetic patients develop DME within 9 years of onset and estimated that the overall prevalence of DME was 6.8%. If left untreated, 50% of patients lose 2 lines of visual acuity (VA) within 2 years. Roche/Genentech estimates that DME affects more than 560,000 Americans with the disease. In Europe, nearly 5.4% of patients with diabetes are estimated to experience visual impairment due to diabetic macular edema (DME). While in the U.K., 336,000 individuals with diabetes have diabetic macular edema.

The most important drug class in the wet AMD and DME markets is the humanized monoclonal antibodies targeting VEGF. The relative differences amongst these three biologics (Avaston, Lucentis, and Eyelea) are not well differentiated based on efficacy, but are primarily only distinguishable based on their frequency of administration by intravitreal injection. And this is where things get interesting, the current market share for Lucentis, Eyelea, and Avastin are 24%, 24%, and 52%, respectively in the wet AMD market. Regeneron (REGN) recently announced full year 2013 sales for Eyelea of $1.4 Billion. All of which, comes at the expense of Roche/Genentech's (OTCQX:RHHBY) Avastin and Lucentis losing market share driven by a more convenient dosing schedule. Eyelea is dosed at 2 mg monthly and then 2 mg dosed every two months (after 5 initial monthly injections) compared to monthly injections with Avastin or Lucentis. It is undeniable that fewer injections are a powerful differentiator within a drug class, when efficacy and safety are equivalent. Iluvien is pursuing a similar approach in the much smaller steroid segment of the DME market and expect to have similar success based upon more convenient dosing.

The available patient pool for Iluvien is likely to be restricted to 2-5% of the total DME population, limited to pseudophakic patients (those who have undergone previous cataract surgery) who have chronic diabetic macular edema (DME) and as salvage therapy for non-responders to anti-VEGF therapies. Based on the available literature, anti-VEGF non-responders are a very small segment of the treated population ~2%, however, price and insurance coverage may work in Iluvien's favor with its reduced price and with patients reluctant to receive intravitreal injections every 4-8 weeks. Although a recent physician survey provides direct evidence of marginally higher rates than what is reported in the literature at 6.25% switching from anti-VEGF therapies. Of these, one-third switched to steroid therapies or ~2% of the total. pSivida's CEO Dr. Paul Ashton proclaims "the pseudophakic DME population represents a large subgroup, as patients with DME have a far higher incidence of cataract than the overall population. In the Phase III FAME trials of ILUVIEN, over 50 percent of control patients were pseudophakic at the end of the trial." As a result, the number of pseudophakic patients will grow over time, and Iluvien's market opportunity will grow in proportion.

The current treatment landscape in the United States for DME is distributed 60%/40% between anti-VEGF and laser/steroid therapy respectively (steroids account for 5-10%). Based on a physician survey conducted by Merrill Lynch, who prescribe anti-VEGF therapies to a patient population of 7,000 wet AMD and 5,000 DME patients per month found that the rates of discontinuation of anti-VEGF therapy was approximately 6.25% or 750 patients during a three-month period. Of these patients, 31% discontinued anti-VEGF treatment, 30% switched to Lucentis, and 39% switched to Eyelea.

In April 2012, the wet AMD market share distribution for Avastin, Lucentis, and Eyelea were 57%, 32%, and 11%. But in July 2013, the market share shifted strongly toward Eyelea gaining a market share of 24%, with Avastin falling to 52%, and Lucentis falling to 24%. This is noteworthy because the survey also determined that over 65% of physicians prescribe Eyelea over other anti-VEGFs due to less frequent dosing.

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This establishes that there is strong preference in the clinic for prescribing less frequently dosed therapies, which bodes well for Iluvien.

Since Lucentis' approval in DME there has been a revival of Lucentis sales growth despite the attrition in sales in the wet AMD indication due to Eyelea. Recall, Eyelea is slated for an FDA decision in DME on August 18, 2014, upon notice of approval Lucentis sales will likely continue their decline or at best flatten. This could provide the impetus needed for Roche/Genentech to confirm a competitive initiative with pSivida's Tethadur platform with Lucentis. Lucentis is a potent VEGF inhibitor and would regain a substantial advantage over Eyelea if Lucentis could be successfully formulated with pSivida's Tethadur insert. Roche held their 4Q13 conference call on January 30th 2014, Daniel O'Day - Chief Executive Officer of Roche Molecular Diagnostics and President of Roche Molecular Diagnostics stated "In DME, we continue to gain share and do well there. I would just remind you that in the second half of the year, we expect to have competition from Eylea in this DME setting, just to raise that to your attention for the course of the year." This was an attempt to reduce 2H14 expectations of Lucentis growth in DME prior to Eyelea's PDUFA on August 18, 2014. Importantly, pSivida will be the last one to enter this market, if at all, and will garner only a small share of 1-5% of the overall DME market.

Typically, this makes a bearish case for a stock. However, pSivida is starting with really low expectations, a small market valuation, and only requires modest royalties to justify its current valuation. If global sales launch exceed $100 million in 2015 it would provide $20 million in royalties to pSivida. This would disproportionately propel shares substantially higher if coupled with a favorable outlook and forward guidance.

Reported steroid use is broken down among triamcinolone acetate, dexamethasone, and fluocinolone acetate. Unfortunately, it was not possible to ascertain what the market share is for each steroid in DME indicating that there is wide dispersion and no real preference for one over another. However, extrapolating from this physician survey and other sources there is evidence that longer duration therapies with evidence of fewer side effects would provide strong incentive for physician's preference of Iluvien over other steroids.

We could reasonably assume that after 1-2 years on the market Iluvien could reach >25% market share (equivalent to Eyelea in anti-VEGF market) of the steroid segment in the DME market which would indicate 1.25% of the total DME market. This assumption is based on its extended duration of action and its infrequent dosing. Recall, steroid/laser therapy collectively represents 40% of the overall DME market, but the steroid component has fallen from 10% to only 5-7% (see chart below) since Lucentis' approval in DME. Although, it is possible to envision that the best bull case for Iluvien could reach 50% of the steroid market in DME, this translates into 2.5-3.5% of the whole DME market. More conservatively, if Iluvien only penetrated 10% of the steroid market in 2015 it would represent 0.25-0.35% of the DME market. On August 12, 2013, Alimera reported that 30 DME patients were treated with Iluvien and $300,000 in total sales, but stated that demand from funding requests for Iluvien were 3x these numbers. On November 11, 2013, Alimera reported total sales of Iluvien of $758,000 or 323% growth within the Eurozone, and does not include any sales inside the U.K. A recent press release said they only recently shipped its first product to the U.K., in January 2014. On December 2, 2013, Iluvien received approval for reimbursement in the U.K. where there are 336,000 eligible patients to receive Iluvien. In the best-case scenario, using recent Iluvien growth metrics and reducing them 80%, we will model 68.75% average growth per quarter for 4Q13 and 2014 resulting in:

Best Case Model

Alimera

$1,279,125 4Q13

$2,158,523 1Q14

$3,642,508 2Q14

$6,146,732 3Q14

$10,372,610 4Q14

pSivida 20% royalty ~$2.06 million

But if approved in the United States sales growth could reaccelerate to at least 80% per quarter 2Q 2015:

$18,670,698 1Q15 (80% growth)

$33,607,256 2Q15

$60,493,060 3Q15

$108,887,508 4Q15

pSivida 20% royalty ~$22 million

P/S ratio of 20: $440 million market cap or $17.23/share

These growth rates are premised on the assumption that Iluvien's most recent sales data are primarily derived from 3-4 European countries and expected 2014 launches in France, Italy, and U.K. Additionally, 2015 sales growth will be supported by a United States launch that is at least 1-1.5x E.U. demand. A substantial risk to these estimates comes from the fact that Iluvien is dosed only every 2-3 years, and therefore a lack of recurring revenues. Consequently, Iluvien sales may peak relatively rapidly and trying to determine the timing is not feasible, but may occur 1.5x redosing period implying 4-5 years. Moreover, Alimera's marketing strategy in the U.S. will be paramount to its success. According to Alimera's 3Q13 press release they contracted this effort out to Quintiles Inc. (Q), a global leader and should be able to accomplish sales goals in a cost-efficient manner.

Base Case Model

The current demand for Iluvien in the EU is approximately $1-1.5 million per quarter and since it only recently started sales in the U.K., it is fair to assume similar demand, representing at least a combined $3 million in quarterly sales outside the U.S. and $12 million per annum. The United States market potential is likely to be 1.5-2x the total E.U./U.K. combined, when simply adding identical sales demand seen in the EU/UK and the U.S. this would equate to at least $24-36 million in world-wide sales providing royalties to pSivida of $4.8-7.2 million annually, producing a P/S ratio of 16-25 at its current market price, and assumes no growth in the future. The most important factor when elucidating if pSivida's stock is fairly valued or undervalued is how to model Iluvien's medium-term growth rate. If it can achieve sustainable 60-100% quarterly growth then the stock is undervalued, however if it only attains 20-40% growth there is 20-30% downside in the stock. However, as revealed during pSivida's fiscal 1Q14 conference call, they do not receive any royalties until Iluvien is at breakeven by Alimera's cost of production, distribution, and marketing in each country. Management provided no guidance as to when that threshold would be met.

Base Case

$4.8-7.2 million in 2014 sales of Iluvien

Gives a P/S ratio of ~17-25 at current market valuations

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The cost effectiveness of Lucentis (ranibizumab) in DME was evaluated from evidence gathered in the RESTORE trial. Using a Markov model simulating a 15-year time frame for treating DME in one eye using 2010 price levels, it was found that the Lucentis monotherapy was approximately US$39,072 compared to laser monotherapy. Previous sales prices for pSivida's Retisert cost $20,000 for each implant, compared to the Ozurdex (dexamethasone insert) price of $1,600 every 6 months. When adjusting costs to Iluvien's 2-3 year dosing schedule, Ozurdex 2-3 year equivalent cost is $7,200-$10,800 per eye. An important metric that supports Iluvien from a cost-benefit perspective is that outpatient department visits for DME patients accounted for $10,557 vs. $5,353 for non-DME patients. Thus, it is reasonable to assume a 30-40% reduction in overall costs of care in DME patients treated with Iluvien as a result of fewer outpatient visits and reduced drug costs compared to anti-VEGFs. When compared to Ozurdex, however, there are some noteworthy differences on efficacy between these two ocular inserts. Ozurdex's primary outcome for efficacy in clinical trials was measuring the proportion of patients at week 8 that achieved a 3-line improvement from baseline best corrected visual acuity (BCVA). In this small study of 143 patients, 43% met the primary endpoint at week 8. In two Phase III trials consisting of over 956 patients treated with Iluvien inserts demonstrated statistical significance at 24 months with 26.8% (p value 0.029) of the low dose patients having an improvement in BCVA of 15 letters or greater over baseline and 26.0% (p value of 0.034) of the high dose patients having an improvement in BCVA of 15 letters or greater from baseline. These distinguishable qualities of Iluvien should give Iluvien an advantage and support pricing of at least $10,000 per insert in the U.S. The main disadvantage of steroids is an amelioration of its efficacy over time, but Iluvien has reasonable efficacy at the end of 2-years of follow-up.

Multiple Pathways to Commercial Success

pSivida is more akin to a medical device company than a drug company. The reality is that the agents currently being utilized with their Durasert platform are lackluster and do not provide a meaningful advantage beyond a slight benefit in diminished side effects and longer durations of response with less frequent dosing. Not to minimize this meaningful achievement or sales potential relative to its small market cap, but the drugs pSivida and its partners are utilizing with their Durasert technology significantly limits its full commercial potential.

While pSivida's ongoing development programs for Medidur in Uveitis and Iluvien in DME could provide meaningful upside to its stock price, pSivida's long-term potential and commercial success will be driven by their ability to commercialize their Tethadur platform for large biological molecules. And with that will follow their stock price. The commercial opportunity is so disproportionate in size that it diminishes Medidur and Iluvien as sideshows to the main event. Again, using Regeneron as an example, which currently trades at 15x 2013 sales, pSivida would only require $8 million in royalties in 2014, and the expectation of consistent growth greater than 50% per year through 2017 to justify its current market value.

Thus, our bogey for validating our cautious, but bullish thesis is:

Consistent sales growth of at least 60-80% per quarter.
FDA approval in the U.S.
Official announcement with a large commercial partner for Tethadur and entry into Phase I development in 2015.

The pathway to Tethadur's commercial development and approval will require a partnership with a leading ophthalmology company that will fund the development of Tethadur with a potent agent such as Lucentis for DME. Their technology for sustained delivery of drug to the site of action is an attractive modality for many indications. The question remains why they have not sought more lucrative therapeutic indications for market entry with more efficacious therapies.

Although, this is fairly speculative at this point, but additional pathways to substantial shareholder returns may come in the form of an acquisition. And would certainly be contingent on Tethadur completing Phase I/II trials successfully, which is still in the distant since it is still in preclinical testing. OPKO (OPK) stands out as one potential bidder, and has a long history of pursuing high risk high-reward acquisitions. However, any transaction would likely occur as a stock-for-stock deal. Upon successful regulatory approval of Tethadur many other of the typical large ophthalmology focused companies would surely become potential suitors as well.

As noted previously, remarks from pSivida's management at a medical conference claimed to have an ongoing feasibility study with a "…large specialty pharmaceutical company in the ophthalmic market for testing its Tethadur platform to deliver a large antibody." This was also confirmed during the 4Q13 conference call "Tethadur in certain ophthalmic applications is being evaluated under a funded evaluation agreement with a leading global biopharmaceutical company. Two other major pharmaceutical companies are evaluating our technology platforms in other ophthalmic applications under funded agreements." The upcoming Fiscal 1Q14 conference call may provide additional developmental details about Tethadur's future.

The two potential companies that immediately come into play are Genentech (Avastin and Lucentis) or Regeneron (Eyelea). However, surveying the competitive landscape and treatment trends of eye diseases over the past few years implicate Genentech as a more likely partner than Regeneron. Since the launch of Eyelea (aflibercept) Regeneron generated $838 million in 2012 during its first full year of commercial sales, and sales grew 60% in 2013 to $1.4 billion. Eyelea's commercial success is almost exclusively attributable to its more convenient dosing every 8 weeks versus Lucentis or Avastin every 4 weeks. Avastin and Lucentis remain the market leader in diabetic retinopathy (DR) and DME. However, since the launch of Eyelea Genentech has continuously lost market share to Eyelea in wet AMD. Consequently, due to the recognition that less frequent dosing translates into higher sales, it is plausible that Roche/Genentech are seeking new modalities to reassert its dominance in the DME market with pSivida's Tethadur delivery platform.

Regeneron expects its PDUFA for Eyelea in DME by August 18, 2014 and expects to file for BRVO (branch retinal vein occlusion) in 1Q14. Regeneron is seeking to develop a PDGFR-B antibody co-formulated in combination with Eyelea for DME, as well as with an ANG2 antibody. These recent moves in their late stage programs conclusively reveals their patent extension strategy for Eyelea and provide additional evidence that Genentech is the more likely partner for pSivida.

Support for this Hypothesis from both Roche's and Regeneron's Conference Call

Roche/Genentech has no patent extension strategy in development. With reported total sales for Avastin and Lucentis in eye diseases somewhere around $2 billion per annum, if formulated with pSivida's Tethadur insert and a similar royalty scheme with Alimera would result in $400 million of royalties to pSivida.

On February 11, 2014, Regeneron reported 4Q13 results that provided additional evidence of these assertions. On the conference call Regeneron provided additional long-term safety and efficacy data from its Phase III VISTA DME trial with Eyelea. These results showed that the improvement in vision compared to laser photocoagulation therapy that was seen after one year of treatment with Eyelea dosed either monthly or every other month after five initial injections was sustained after two years of treatment. In this long-term study, EYLEA dosed every other month resulted in visual acuity benefit that was similar to that achieved with monthly dosing. It is also worth noting that 43% of the patients in the VISTA study were not treated naïve and in fact had received prior anti-VEGF therapy (Lucentis/Avastin).

It stands to reason that Eyelea will continue to take market share from Lucentis/Avastin in DME, as it has already accomplished in wet AMD. This puts substantial pressure on Roche/Genentech to protect its eye disease franchise, but with only one new agent in Phase I trials in wet AMD, it appears that Roche has lost the initiative against competing Eyelea. However, something very interesting that most investors have failed to recognize (including myself) is that Roche is actively exploring a sustained delivery system for Lucentis with Novartis and ForSight Lab's VISION4 platform (see figure below courtesy of Roche), although there was immaterial information available with regard to frequency of dosing, other than a brief statement "the device is a refillable drug port delivery system (PDS) designed to release Lucentis over a period of months." The lack of recognition of this program is due to Roche's widespread development pipeline, which makes it easy to overlook small cues and their implications for smaller companies. Other important metrics to be able to determine the potential significance of this program or their long-term strategy for protecting their eye disease franchise remain unavailable and ambiguous at this time.

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According to a press release on January 13, 2012 from ForSight Labs- Genentech, a member of the Roche Group announced it entered into an agreement in December 2010 for exclusive worldwide rights for ForSight's implantable ocular device and made its first milestone payment to ForSight VISION4, Inc. on January 13, 2012. This milestone was achieved based on Genentech's decision to move forward and submit an (IND) with the FDA as part of an exclusive license agreement to develop the company's investigational drug delivery device, designed to provide sustained delivery of Lucentis (ranibizumab).

The implications of this program are confirmation that there is significant interest from global pharma companies in developing new dosing modalities to extend the duration of action of monoclonal antibodies. Furthermore, this confirmed my suspicions that Roche would more likely be identified as pSivida's undisclosed partner. While the ForSight Vision4 program would enable Roche to "catch up" to Regeneron with regard to less frequent dosing regimens, and may provide a small advantage, it is nonetheless not all that impressive. In fact, this program with such a small incremental improvement in less frequent dosing may not justify the costs to carry through full clinical development.

According to ClinicalTrials.gov, the ForSight Vision4 program has enrolled 20 patients from Latvia in a Phase I study, with primary outcome (change in retinal thickness measured by Optical Coherence Tomography) completion date in May 2012, and estimated study completion data May 2014. No study data has been released at the time of this writing.

There are important read-throughs from Roche's strategy and Regeneron's 4Q13 conference call for pSivida , specifically with regard to their Tethadur platform in preclinical development. Tethadur, which is designed to achieve sustained delivery over 2 years with Lucentis and Avastin, would offer a significant competitive advantage. This achievement, if attained would provide a strong incentive for Roche to carry Tethadur through full clinical development and would represent an additional $1-2B annual opportunity.

On the Regeneron conference call Jefferies & Co., analyst Biren Amin asked:

"on your competitors they are working at more infrequent delivery of anti-VEGFs could you may be share your thoughts on EYLEA and your efforts on -- around this, thanks."

Leonard S. Schleifer Chief Executive Officer of Regeneron responded:

"Yeah we continue to look at alternative delivery systems whether it would be through genetic approaches whether it would be through delivery devices or what have you as far we know one of our competitors had something in Phase I for quite some time now and we haven't seen that progress (Roche/Forsight4). We don't know much more than you do. And we don't have anything in the clinic as yet but I can assure you we look at this area very carefully and we'll see whether or not this combination will make a difference as well."

Eyelea's 2013 full year sales were $1.4B representing approximately 25% of the wet AMD market share, Lucentis was roughly equivalent in market share, with Avastin remaining the leader with approximately 50%. It is reasonable to assume that a new device that delivers Lucentis over 2 years would become the dominant product in wet AMD and DME, if using 2013 as a representative example, the market opportunity would be at least $1.4B (Eyelea). As described previously, the prescribing behavior of physicians in wet AMD and DME are determined from dosing convenience, when the efficacy of anti-VEGF products is equivalent. Lucentis is highly efficacious and prominently positioned to be formulated with Tethadur. pSivida is keen on the size of this opportunity focusing their preclinical development of Tethadur on Roche products. Clearly, they are trying to court Roche in some respects, and may already be working with them. Below are some in-vitro data for Tethadur using Lucentis and Avastin from pSivida presentations at medical conferences in 2013:

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The key points to observe from these Tethadur slides is that it appears that the "dosing and coating" process does not alter the stability of the antibodies, and that Tethadur exhibits modifiable drug delivery kinetics based on alterations of the pore size of the cylinders which alters the delivery rate of the drug.

pSivida's "dosing and coating" is an ideal approach, which simply requires adding water to lyophilized biological drugs in the vial and then drawing the liquid into a prefilled syringe containing the Tethadur insert followed by an intravitreal injection. This bypasses a complicated manufacturing process that would be required if pre-coating the Tethadur insert prior to injection, which would present significant problems in protein stability. While very early in development, the early data looks promising.

Bullish Case

The most compelling metric that supports a long bias on pSivida is the fact that its market capitalization is only $120 million. With a PDUFA (Prescription Drug User Fee Act) expected from the FDA in 4Q14, if granted marketing approval would provide pSivida a $25 million milestone payment or about 20% of its total market cap and 20% royalties on U.S. based sales and profits. Additionally, they are entitled to a similar 20% profit-sharing scheme in Europe where Iluvien is already approved in 6 countries. Their most recent cash utilization rates for fiscal year 2013/2012 was -$11.9 million and -$24.8 million respectively with no debt. Consequently, the anticipated milestone payment would fund 1-2 years of operations. At June 30, 2013, cash, cash equivalents and marketable securities totaled $10.3 million. In July 2013, the Company completed an underwritten public offering of common shares for gross proceeds of approximately $10.8 million. Significant risks exist for additional secondary offerings, pSivida has no debt and has consistently shown a strong preference for issuing equity rather than debt financing, which removes a certain element of urgency for scaling into a large long position today.

For any value oriented investor it is important to recognize that it would only require $8 to $10 million in annual sales to trade on par with other ophthalmologic oriented specialty pharmaceutical companies like Regeneron. Regeneron's market capitalization is $28.78 billion and currently has a P/S ratio of 15. Clearly Regeneron is not a fair comparison for pSivida because Regeneron had to grow into this valuation and justify its current P/S multiple. It accomplished this through flawless execution taking market share from Roche/Genentech, an established leader in eye diseases with their Avastin and Lucentis franchises. But the important framework that supported this multiple expansion stems from the following:

Consistent high double-digit to triple-digit sales growth.
Managing market expectations.
Pursuing and succeeding in gaining marketing approval with new drugs or additional indications.

The bullish case for pSivida would have to replicate similar growth metrics relative to the Eyelea franchise, not the same scale in nominal dollars, but growth rates of sales.

However, the most important component to pSivida's future prospects resides with its Tethadur platform. As stated previously, they are currently working with a "major pharma company conducting a feasibility study." For micro-cap stocks such as this, any official press release of licensing or partnering with a major and established player could provide substantial upside and would be a powerful source of momentum in its shares providing optionality not reflected in the current share price.

Bearish Case

The bearish case for pSivida is quite obvious in this case and primarily centers on three issues. First, their cash burn rate exceeds its ability to generate milestone payments or other sources of revenues exposes investors to heightened risk of shareholder dilution from additional equity offerings.

Second, fluocinolone acetate is a steroid, and even though it is efficacious in DME at reducing vision loss and edema, it is not probable that pSivida's will be successful in its efforts to decouple fluocinolone acetates innate pharmacological effects from its negative side effects, such as steroid induced glaucoma and cataract formation. These side effects are a class effect and are an innate pharmacodynamic (what the drug does to the body) property of all steroids. Thus, sales of Iluvien if approved in the U.S. are likely to be inadequate for a significant P/S multiple expansion. Regardless of these facts, steroids will forever hold a place in the DME treatment paradigm for one simple reason; they work rapidly. The problem has largely been that the duration of action with intravitreal injections are not favorable for a prolonged response. Iluvien has provided evidence that it differentiates itself amongst other steroid treatments by both prolonging its duration of action and reducing the frequency of serious adverse events due to orders of magnitude reduction in total exposure to drug. The FDA labeling will likely restrict its use to pseudophakic patients and as salvage therapy, where the risks of side effects are reduced.

Lastly, Iluvien was submitted to the FDA on 2 separate occasions previously without success and after receiving a Complete Response Letter (CRL) from the FDA with concerns about safety stating: "The risks of adverse reactions shown for Iluvien in the FAME Study were significant and were not offset by the benefits demonstrated by Iluvien in these clinical trials," and that additional Phase III clinical trials would be required for approval, but Alimera has elected not to do so. Two key adverse events tied to Iluvien caused most of the concern. First, cataract extraction had to be done in 41.1 percent of the low-dose patients, 50.9 percent of the high-dose patients and only 7 percent of the sham group; and second, more Iluvien patients require intraocular pressure-reducing interventions (8.1 percent high-dose versus 3.7 percent low-dose versus 0.5 percent sham). However, recent events should allay some of these concerns since the FDA has cancelled its Advisory Committee meeting this month and moved directly into labeling discussions. While not a guarantee of FDA approval, certainly is a positive signal. Consequently, these issues will remain and are likely to provide an overhang on shares until 4Q14.

Highlights from pSivida's Fiscal Year 2Q14 Conference Call

1Q14 Revenues $592,000 vs. $585,000
Net loss for the quarter ended December 31, 2013 was $3.5 million, or $0.13 per share, compared to a net loss of $2.6 million, or $0.11 per share
$15.7M cash (enough to fund through 1Q2015)
Quarterly burn rate highly variable
Do not know if they will or not issue a secondary offering, and if so under what terms
$1.25 million of net proceeds from sales of common stock under pSivida's at-the-market (ATM) offering program
Sold $224,000 in January using ATM facility
May sell additional under their ATM program
$1.2M from collaboration agreement
Retisert and other expected cash inflows will fund current and planned operations through calendar 1Q15 calendar including Phase III trials; excludes net profits and milestones with Alimera
Beyond 1Q15 depends significantly on successful commercialization of Iluvien in US and $25M milestone on approval, and other existing agreements

Medidur

Phase III enrollment continues as planned and expects full enrollment by this summer
December 2014 (Final data collection date for primary outcome measure)
Goal: To be as effective as Retisert, but with fewer side effects.
However, this will cannibalize Retisert sales from Bausch & Lomb

Tethadur

$50B expiring patents for Biologics over next 5 years
Funded agreement in eye disease
Looking in other indications
Data mid-year (Summer)
Tethadur great candidate for partnering (expect 4Q14/2015)
Provide leverage to go after applications outside of Eye diseases.
Critical financing needs being met.
Already received $30M in milestones for Iluvien

Iluvien

Iluvien Approved for DME and reimbursement by NICE in U.K.
FDA Cancelled Advisory Committee meeting
Ongoing labeling discussions with FDA, will file response to FDA's complete response letter by end of this 1Q14, based on completed data and recent safety data from UK and Germany
$25M milestone upon FDA approval in U.S. 4Q14
Europe: launch in France this year
UK NICE pseudophakic patients covered
Private pay already approved
Already sent product in January to NICE hospitals
No guidance on royalty scheme with partner
Has not received any royalties yet
Alimera wont commercialize Iluvien in other countries until positive cash flow on sales in first 3 EU countries.

2014 Catalysts

Phase III program Medidur (Q3/Q4'14)
Preclinical data on Tethadur (2H14) most important!
Iluvien Sales in EU (fiscal 2Q14?)
Iluvien approval in U.S. (4Q14)
$25M milestone payment may be altered to receive higher backend royalties for less upfront milestone payment, which management stated when asked by an analyst as "interesting thought, can't really comment."

Risks

The recent risk-off bias in equity markets dissuades any sense of urgency for initiating new long positions. It is important to note that the various valuation metrics used to justify valuations in BioPharma in 2013 will come under pressure if risk-off remains much longer. Investors may revert back to a trailing-twelve month valuation basis in the biopharma sector instead of forward P/S and forward P/E ratios. Key metrics to monitor for this are intra-equity correlations; ten-year U.S. treasury yields remaining below 2.8%, and Global Financial Stress Indices. These global-macro indicators at first glance seem unrelated to the sector, but micro-cap BioPharma are especially exposed to overall risk-sentiment. Sector specific indicators that are useful to measure risk-appetite are the number of biotech IPOs scheduled, but are then delayed or cancelled. 2013 was a record year for biotech IPOs and monitoring new deals coming to market will be an important metric to monitor for 2014.

As stressed previously, on July 2013, pSivida completed a secondary offering of common shares for gross proceeds of approximately $10.8 million. Significant risks exist for additional secondary offerings.

Finally, it is critical to appreciate that the clinical research and data available in DME is meager at best, especially compared to other therapeutic areas. Specifically, it was not possible to establish any reliable estimates in pseudophakic incidence and prevalence. This is problematic when forecasting Iluvien sales because it is most likely going to be the FDA approved indication and the largest source of sales in the U.K. and U.S.

Upside pressure to estimates would come from persistent triple-digit sales growth of Iluvien in the E.U./U.K., positive clinical trial results for Medidur in Uveitis, and upside headline risks of partnering Tethadur.

Price Targets

Expect an additional 20% equity dilution through 2016.
Target a P/S ratio of 15x Iluvien royalties for 2014 of $4.8-7.2 million gives a market capitalization of $72 million-108 million and a share price range $2.66-$4.
Taking the midpoint of the price range gives us a target of $3.33/share for Iluvien and would be a buyer around these levels.
These estimates assign no value to Medidur or Tethadur programs.
Look forward to hearing both Alimera and pSivida's upcoming conference calls to gain clarity on what level of sustainable growth rates for Iluvien can be reached in the E.U.
Currently, uncomfortable assigning growth levels higher than this model given that the most recent growth of 336% for Iluvien was only for one quarter, if similar growth rates are reported we would likely assign a 150% growth rate quarter-on-quarter for the remainder of 2014.
Upside price targets is based on 20x 2014 royalties of $7.2 million, giving a market capitalization of $142 million or $5.26/share.
Upside potential is only 12%
Downside potential of 29% using the midpoint target price range of $3.33/share.
Any improved clarity on Tethadur partnering and filing for an investigation new drug/device (IND) would likely be a key fundamental change that could increase shares substantially.
Tethadur could represent at least $40/share in value.