Lodge Corporate is currently conducting public capital raising for the unlisted Lachesis Biosciences Limited. It an unusual raising in that it lets retail investors purchase shares in an investment normally only open to institutions and high net worth individuals. As such, it allows retail investors to get in on the ground floor and participate in the uplift in value (~+30%) that Initial Public Offerings (IPOs) often bring, due to the liquidity premium associated with being a public company bring. Lachesis intends to list in the 3rd quarter of calendar 2017. The prospectus for the offering can be found here.
Environment
Normally, oxymoron is the first thing that comes to mind when you hear the words “Alzheimer’s disease drug development” and “low-risk” used in the same sentence.
Normally, if I were valuing an AD drug development program, I would plug in a probability of success (POS) of about 1%. The area has been a graveyard for drug developers.
What keeps both large and small companies still trying to develop drugs to the disease? It is the size of the prize. The worldwide market for AD drugs was $6.5 billion in 2013, according to IMS Health, and they expect the market to reach $15.0 billion by 2023. The driver behind the numbers are:
- Increasing individual longevity: AD incidence correlates very strongly with age and without an effective cure, increases in prevalence are purely cumulative.
- The aging population: The numbers of elderly are increasing, simply because they are living longer.
- Improvements in the quality of healthcare: Per capita healthcare expenditure is increasing in certain nations, not traditionally thought of as desirable pharmaceutical markets (think Brazil, Russia, India and China).
There are two main AD drugs in development that the market is paying attention to at the moment. They are solanezumab from Eli Lilly and Co (NYSE: LLY) and aducanumab from Biogen Inc (NASDAQ: BIIB). But, there are big question marks over both of these drugs. Solanezumab has already failed two phase III trials and investors’ hopes for a third phase III trial in early AD patients expected to read out at the end of this year (2016) are low, to say the least. Aducanumab produced what were some very good interim results earlier this year in a phase Ib (n=166 patients) trial in AD patients, but data from a more recent analysis showed that aducanumab had failed to demonstrate significance on two key efficacy measures and, just as worrying, the study did not show a clear dose response for four doses of the drug tested (1mg, 3mg, 6mg and 10mg). Safety worries also appeared, with high rates of brain swelling. These results precipitated a 5% decline in Biogen’s share price, corresponding to an approximate USD3 billion decline in the company’s market capitalisation.
Many companies have shown very good early stage results with their AD candidates only to see them fail when studied in phase III trials.
Lachesis Biosciences Limited
Given the industries’ woeful record of developing new AD drugs, when we look at a new company looking for investment funds to develop a new AD drug, it usually doesn’t take me long to say, “no”, Lodge should not be involved.
Lachesis, I found, however, was a totally different proposition.
Lachesis understands what I have described, above. AD is a highly attractive market, but developing a drug to treat it is about the highest risk venture a company can undertake.
So, they are taking a different approach. They are looking to improve drugs for AD that have already been:
- Shown to work in extensive clinical trials
- Approved by the major regulators
- Shown to generate significant sales
- And where they see a pathway to developing a superior, patent protected version of the drug
By targeting these types of opportunities, the company can also take advantage of abbreviated pathways for drug development made available by the major regulators (US Food and Drug Administration; FDA; European Medicines Association, EMA). Consequently, Lachesis can have their drugs on the market in three to five years, compared to eight plus years for drugs developed from scratch (termed new chemical entities or NCEs), and at a small fraction of the cost of standard new drug development.
Lachesis’ initial and main development program is for a drug called rivastigmine. It is used to treat dementia in mild, moderate and severe AD and Parkinson’s disease. Oral forms of rivastigmine and patches already exist, but they both come with major drawbacks. Many AD patients have trouble swallowing often making oral delivery of the drug difficult to impossible, while the pharmacokinetics of the patches limit their use, because the side effects at higher doses outweigh the increases in efficacy (how well a drug works).
While I won’t go into great detail, Lachesis’ rivastigmine should prove, safer, more efficacious and offer an ease of use advantages over the oral and patch forms of the drug, we have looked very closely at the logic of Lachesis’ the claims and strongly believe they will be proven correct. The company has already clearly shown that nasal delivery leads to therapeutic doses rivastigmine in the blood and in a manner that is more efficient than either oral dosing or the use of a patch.
We also believe the company, when they say they can have their nasal formulation of the drug approved and on the market in 2020. The clinical trials they need to run are straight forward and carry little risk.
The current market for rivastigmine is substantial, with approximately 47 million patients worldwide are believed to be affected with AD based dementia and current sales of branded rivastigmine (Exelon) of USD726 million in 2015, down from a peak of US1.1 billion in 2011, due to generic competition. If generic sales were added in, it is reasonable to estimate branded and generic sales at a combined USD1 billion worldwide.
Given the likely advantages of nasally delivered rivastigmine, the product will command a premium price over the other forms of the drug and should take market share away from them, because of better performance. It may also grow the market, because AD patients who cannot tolerate the drug orally or via the patch, may well be able to tolerate the drug when delivered nasally.
Nasally delivered rivastigmine is not the only drug that the company has in its pipeline. Once the rivastigmine program is a bit further down the development, the company has a plan to commence development of an improved version of dextromethorphan in for the treatment of agitation in AD patients. In the past, dextromethorphan has mainly been used as a cough suppressant, but it was also recently approved a combination drug (dextromethorphan and quinidine) for pseudobulbar effect (emotional lability or exaggerated changes in mood).
Beyond rivastigmine and dextromethorphan, the company is looking at developing ifenprodil for an, as yet, undisclosed indication and a couple of combination drugs. So, the company is built on a pipeline, not just a single opportunity.
A real attraction of Lachesis is the quality of management, something lacking in many Australian life science companies. Founder and CEO, Dr Tim Morgan, has excellent and successful form when it comes to this type of drug development. Dr Morgan was a founder of Acrux and an inventor of its transdermal drug delivery technology. His technology has yielded three marketed drugs, one being Axiron, partnered with Eli Lilly. Axiron generated USD149.3 million in net sales for Lilly in FY16 in a highly competitive market. Of that USD149.3 million in net sales, Acrux received $25.3 million in royalties. Royalties are nice to receive, because they largely go straight to the bottom line. All the recipient needs to do is bank the cheques.
Lachesis is currently raising $5 million, with oversubscriptions to a total of $6 million via an unlisted, public offering through the issue of five to six million shares at $1.00 each. While the shares are unlisted, the company plans to IPO in Q3 CY17.
The money raised in this round will produce results from two clinical of its nasally delivered rivastigmine, such that the program will be phase III ready at the time of IPO. Investors can expect a significant uplift in value from both the results of the studies conducted before the IPO and the liquidity premium a listed company attracts over an unlisted one. Usually, institutions and high net worth individuals are the only ones that can take advantage of these types’ of investments. The prospectus for the offering can be found here.
We believe strongly that the company’s proposed development programs and highly experienced management can deliver on its objectives.
We also believe that the terms “Alzheimer’s disease drug development” and “low risk” is NOT an oxymoron when used in reference to Lachesis.
More Information on this offer can be found here.
