Description

Long time reader of VIC who has made a lot of money with ideas here; I had a nearly two decade career as an institutional investor but am now free to post as I feel. Full disclosure, I own this idea personally.

I would like to contribute a highly asymmetric opportunity with limited downside, imminent catalysts, and a fairly simple path to upside of 6-100x. Sound too good to be true? Read on!

Alimera Sciences' sole drug (Iluvien) is a long acting corticosteroid implant (label of three years) for the treatment of two diseases; diabetic macular edema (DME), and a subset of a rare ocular disease called uveitis. Company is running about breakeven at the EBITDA level despite massive COVID disruptions (more on that later), which is a testament to the strength of the management team for a company this size.

The company has an investor presentation that lays out the story fairly succinctly, but I would highlight a couple of points. The DME drug market is app. $7.5 bil, comprised mainly of big pharma anti-VEGF treatments of various ilk (off label Avastin, Eyelea, Lucentis). ALIM received approval for DME slightly ahead of the anti-VEGFs, but the company's small size meant that Iluvien did not receive much attention once the anti-VEGFs were approved for DME, since retinal specialists were already comfortable treating patients with anti-VEGFs for another retinal disease called macular degeneration.

So the current standard of care for a DME patient past a certain point of vision loss is to get injected in the back of the retina with anti-VEGF, once every 2-6 months depending on severity of disease. And to give you an idea of the value ascribed to this market, there's a public company called Kodiak Sciences (KOD) worth nearly $7 bil, whose main claim to fame is a drug in phase 3 that's a modified anti-VEGF that pushes treatment out to 6-9 months.  

Just a reminder- Iluvien works for 3 YEARS.

It's a huge market, and even being considered a third line treatment in the space would likely get ALIM to $100-$200 mil in revenue in DME alone. FWIW, ALIM revs the last few Qs are basically holding flattish yoy, vs. management's estimates that overall DME patient visits are down app. 50% yoy (DME patients are very high risk of death from covid due to diabetic comorbidities). So as the world recovers post covid, this is a company that just turned positive EBITDA, with a super high margin product in a market that is about as levered to a COVID recovery as it gets.

But that's not all.

Remember that uveitis thing I mentioned? Management estimates the TAM somewhere around 20% of DME (ie, $1.5 bil). I won't bore you with the details, but Iluvien is highly effective in the specific subset of uveitis that it's approved for. So much so that growth in uveitis sales has helped offset patient declines in DME due to COVID (ALIM sells through distributors and doesn't have great visibility on which indication an order is going to).

Uveitis was just approved in late 2019, and ALIM is in the middle of broad European rollout (US rights for use of Iluvien for uveitis are owned by another entity). Keep in mind that the phase 3 trials for Iluvien in uveitis suggest it is VASTLY superior to standard of care. This is a classic, orphan indication that ALIM will have to itself for a while. I don't think it's unreasonable to get to $100 mill in revs from uveitis alone in 3-5 years time.  

Add it up, that's $200 mil- $300 mil in revenues for ALIM in 3-5 years time. The business is EBITDA positive at a $50 mil annual run rate. $150 mil in incremental revenue at 50% EBITDA flow through margins is $75 mil in EBITDA. Company has a lot of NOLs, and there's about 6 mil shares fully diluted for all instruments.

So it's not unreasonable for them to earn $10 a share in a few years time. 

But what about the 2027 patent expirations? I was worried, too. Until I found out that ALIM bought out the manufacturing IP/personnel from a company they co-developed Iluvien with, called Eyepoint. Any generic competitor would first have to develop a competing polymer scaffold, run three year trials, and get it approved. It's a big burden, and I think functionally extends out the economic value of the IP beyond the actual expiration date. But time will tell.

But, you say, this is all well and good, but you're pitching me a speculative biotech stock. Where's my margin of safety?

Try this on for size. Eyepoint, that entity i mentioned earlier, held a roughly 8% royalty stake to Iluvien as part of the original development deal. That stake was recently sold by Eyepoint to a pharma royalty investor for $16.5 mil (buyer was SWK Holdings). We can argue back and forth about how to value royalty streams vs holding the actual economic rights to the drug/overhead of running a company, but either way, someone bought roughly 8% of Iluvien for a valuation that implies $200 mil.

This is a $50 mil market cap company, with about $40 mil in debt, likely to turn big time EBITDA and EPS positive as COVID clears, and you've already had independent third party evaluation that suggests the core drug is worth at least $200 mil.

And that's not all, folks.

I won't bore you with the details, but one of the issues for Iluvien was the perception among retinal specialists that they would make less money treating patients 1x every 3 years instead of every 3-6 months (I know, what a world we live in). The two branded drugs in the space, Eyelea and Lucentis, both go off patent over the next few years. Once they do, the incentive for retinal specialists to ignore Iluvien will be reduced pretty meaningfully, since docs won't get the extra margin for branded treatments the way they used to.

You've read this far, and you've rightly deduced that everything i've told you is interesting, but doesn't get you to potential 100x upside. And here it is:

ALIM is running a clinical trial called New Day that will read out in late 2023. It's based on tens of thousands of patients they've already treated with Iluvien, and is designed to make ALIM the new standard of care in DME. There are good KOLs involved in the study. If it works, this moves the revenue potential into the $1 bil plus range (remember, KOD is a $7 bil valuation for a phase 3 asset that works for 6-9 months vs Iluvien at 3 years).

Run $1 bil in revenue at 50% ebitda margins on 6 mil shares outstanding, and there's your answer on how you get to 100x from where the stock is today.

ALIM has also historically had strong institutional ownership; some of those owners are returning.

Catalyst

Noted above. Covid clearance will be fairly immediate.