Description

Over the next 18 months, Isotechnika (Toronto: ISA) is scheduled to receive a C$75 million cash payment from pharmaceutical giant Roche, gain a marketing partner for the psoriasis market, complete a U.S. Phase III psoriasis trial, complete a Phase IIB transplant trial, present new data on how its drug works with stents, and will be close to having its European phase III trial close to completion. For a biotech with already over C$60 million in cash, and a market cap of only C$159 million, this is a big deal. Investors are completely ignoring the safety and efficacy of its drug, ISA247 and do not appreciate the massive payments soon to happen. I believe that ISA is sitting on at least a $1 billion a year blockbuster drug and that over the next 18 months, this will become very clear. With numerous catalysts, especially in the next six months, ISA is one of my best ideas.

What is ISA247?

ISA247 is an analog of cyclosporine, a popular immunosuppressant for transplant patients. After receiving an organ transplant, the body recognizes the new organ as an invader and attacks the foreign tissue. Cyclosporine extends the lives of transplant patients for five to ten years by inhibiting calcineurin, a family of enzymes that play a key role in immune response. However, decreasing the activity of calcineurin also changes the amount of blood flow to the kidneys, which eventually causes nephrotoxicity (damage to the kidneys). Many transplant patients survive the initial operation, only to succumb to kidney failure in later years.

In 1997, researchers at Isotechnika carefully tweaked the molecular structure of cyclosporine and created ISA247, an analogue of cyclosporine that selectively inhibits the calcineurin enzymes that are more associated with the immune system and affects the variants associated with the kidneys less. While cyclosporine is the starting material, Isotechnika through a four step process chemically synthesize and then change the chemical makeup and geometry of the amino acid, thereby altering the drug-recptor binding and the metabolism of the cyclosporine. The net result is a version of cyclosporine that is both more effective at lower doses and less toxic at any dose.

Despite Toxicity, Cyclosporine is a blockbuster drug

Despite its toxicity and it being a generic drug, cyclosporine does $1 billion in annual sales through Neoral the cyclosporine drug from Novartis. Add in another drug with similar toxicity and drawbacks, Prograf (Fujisawa), and the immunosuppressant calcineurin inhibitor market that ISA247 is looking to replace is $2.2 billion worldwide. Though sales are mainly for the transplant market, in Europe there are sales for psoriasis.

Imagine what sales would be for cyclosporine without the toxicity. And this is the promise of ISA247, which so far in clinical trials has shown none of the toxicity of cyclosporine.

And more importantly, ISA247 could be used for auto-immune indications where people are hesitant to use cyclosporine such as psoriasis, rheumatoid arthritis and others.

Before discussing the results to each indication that ISA247 is being tested with, consider that 1245 people have been involved in clinical trials for ISA247 to date. There is a lot of data to confirm the power of its drug.

Psoriasis Indication

As noted above, by drastically decreasing the nephrotoxicity of cyclosporine, ISA247 can be used to treat immune diseases that are not life threatening, like psoriasis. Psoriasis is a skin disease which generally appears as patches of raised red skin covered by a white, flakey buildup. Psoriasis affects 1-2% of the population worldwide, with 7 million patients in the US alone. The worldwide market for psoriasis drugs was estimated to be $3 billion in 2004.

Isotechnika has successfully completed a Phase II and Phase III trials for psoriasis with impressive results that are on par with their kidney transplant success.

Phase II results: A .75mg/kg dose of ISA247 was successful for 54% of psoriasis patients when measure by SAG (Static Global Assessment) scores and successful for 74% of patients when measured by the PASI (psoriasis area and severity index).

Phase III results: The trial delivered data according to the Psoriasis Area Severity Index, which is a number representing the size, redness, thickness, and scaliness of a person's psoriasis. At different composite levels, 50 and 75 representing how bad the psoriasis was.

The overall decrease in PASI scores at 24 weeks for the low (0.2 mg/kg twice daily), mid (0.3 mg/kg twice daily) and high (0.4 mg/kg twice daily) dose groups were 41%, 55% and 70%, respectively. For the placebo patients that converted to the mid dose group at 12 weeks the overall decrease in PASI score was 62%. The PASI 50 scores at 24 weeks for the mid (0.3 mg/kg twice daily) and high (0.4 mg/kg twice daily) dose groups were 56% and 70%, respectively. PASI 75 scores for the mid and high dose groups were 26% and 49% at 24 weeks. Patients treated in the mid dose group and low dose group (0.2 mg/kg twice daily) experienced a continual increase in efficacy over the 24 week period with minimal effect on renal function. Both the PASI 50 and PASI 75 scores were statistically significant (p less than 0.05) versus placebo. In all dose groups, PASI scores exhibited good efficacy.

Some key points for all of this data are that ISA247 appears to perform better than Enbrel, a $2 billion drug from Immunex. Also, 85% of the patients chose to stay on with the extension trial. This is a really high number and indicates that patients are extremely pleased with the safety and efficacy.

Transplant Indication Data

As stated above the immunosuppressant market that ISA247 is trying to reach represents a $2.2 billion a year opportunity. Below is the most recent data from the Phase IIa clinical trial for transplant.

ISA247 was directly compared to Neoral (a branded generic cyclosporine) in a Phase II(a) study on 132 kidney transplant recipients. ISA247 was able to achieve identical calcineurin inhibition with peak blood concentrations of 200ng/mL versus 600ng/mL of Neoral.

In addition to decreasing the required dose by 70% to 75%, ISA247 dramatically lowered the observed side effects, as indicated in the table below. These results were consistent with the observations of Phase I clinical trials.

ISA247 CsA (Neoral)
Hyperlipidemia 1.10% 7.10%
Hypertriglyceridemia 0% 7.10%
Diarrhea 5.70% 14.30%
Peripheral Edema 1.10% 7.10%
Nausea 5.70% 7.10%
Hypertension 5.60% 7.10%

The Phase II(b) trial will start by year end. This trial will be finished by year end 2006 and results should be available by early 2007. The trial will include 332 de novo patients. The primary endpoint of the trial is non-inferiority in Biopsy Proven Acute Rejection at six months.

This trial should be “easy” because all ISA247 is trying to prove is that it is non-inferior to cyclosporine in safety and efficacy. Considering that cyclosporine is so toxic, the safety comparison will be easy.

It will be “hard” in the sense that transplant trials take a long time to recruit and are expensive to run. This trial will not be as cut and dry as the psoriasis trials from an execution standpoint, but should be easy from a data standpoint.

Timelines for each indication

Psoriasis:
Final 24 week data, q1 2006
Extension study data, q3 2006
US phase III mid 2006
European phase III, second half 2006.
NDA filing with FDA second half 2008.

Transplant:
Phase IIb begins year end 2005
Interim data August 2006
Phase IIb ends q4 2006
Final results q107
Roche payment q1 2007
Phase III starts in 2007
Interim data in late 2007
Phase III trial ends late 2008
Final results 2009
NDA filing with the FDA in 2009

ISA’s second drug, TAFA93 could be a blockbuster with Stents and medical devices

Investors yawned when they saw the press release on Atrium Medical licensing ISA247 and TAFA93, Isotechnika’s second drug, for uses with medical devices. In fact, management was surprised that investors didn’t fully comprehend the magnitude of what this could mean for ISA.

Isotechnika and Atrium have found that ISA247 has anti-inflammation characteristics, specifically with the left ventricle of the heart. TAFA93 reduces adhesion scarring after surgery. This means that these drugs could be used with stents, surgical netting and much more. The opportunity here is enormous. Look at the market cap of Surmodics (NASDAQ:SRDX) to see what multiples and valuations companies get who are in this field.

Trials are expected to start in 2006 and continue into 2007. And we may see products from this as early as 2008. Why so early? Due to the fact that only trace elements of these drugs are used, all the devices need is device approval, not drug approval. They each need just a phase I trial.

Partnerships

Roche: ISA has received $70 million to date and have $215 million deal overall. That leaves $145 million left to receive. Royalty will be 28% on $2 billion in sales. Next payment is $75 million.

Atrium: ISA has received $3 million payment upfront for non-systemic applications of ISA247 and TAFA93, and they will get a double digit royalty rate, plus sell Atrium the drug at cost plus 10%.

I expect that when Isotechnika partners for psoriasis, it will receive an upfront payment of $10 to $15 million plus help on R&D and a royalty of 15% on future sales.

Comparables make Istoechnika’s valuation silly

There are no direct comparables, no other companies who are pursuing cyclosporine with the success that ISA is. Instead, there are two companies pursuing other drugs that are in similar stages of development, but instead have hype and research surrounding their companies. These companies are: Keryx Biopharmaceuticals (NASDAQ: KERX), Ariad Pharmaceuticals (NASDAQ: ARIA).

The average market cap of these companies is about $390 million, net of cash, almost four times the value of Isotechnika. Now these aren’t perfect examples, but each shows something of the promise and undervaluation of Isotechnika.

Consider that Atrium Medical is working with ISA’s drug coated stents and other medical devices. The market for this is enormous. Check out the valuation for Surmodics (NASDAQ: SRDX) and Angiotech (NASDAQ: ANPI). These two companies have $700 million and $1.2 billion market caps respectively.

Cash Burn Analysis

I estimate that ISA will never have to raise money again. Here is why:

ISA had about C$60 million in cash as of September 30th. The ongoing burn rate will be C$2.5 to C$3 million per month. This means ISA has 20 months of cash. So, ISA doesn’t have to receive any new cash until June 2007.

The company should sign a marketing partnership for psoriasis by March of 2006. This marketing partnership should bring about C$15 million in cash and future milestone payments. This would bring ISA until the end of 2007.

More importantly, is that upon successful completion of its Phase IIb transplant trial, Roche should pay ISA $75 million in a milestone payment. I expect this payment to happen in the first few months of 2007.

So, two years from now, ISA should have around the same cash balance as it has now with no dilution to shareholders, and will be looking at an FDA filing.

Summary

In five years, I believe that ISA could be a C$22 to C$58 stock. How do I get there? I believe in five years that ISA247 will be doing sales of $1 to $2 billion, and that Isotechnika’s royalty rate will be 15% to 20% depending on the sales number. Multiply that royalty rate with a 10 times multiple for it being pure income and you get a stock worth C$22 to C$58 per share.

I believe that the data and evidence to date allows investors to purchase a lottery ticket in Isotechnika. The difference is that the odds are very strong in your favor due to all of the data and studies showing its efficacy and safety. With a very busy 12 to 18 months ahead of it, Isotechnika is poised to leap higher when news such as a marketing partner comes out.

Catalyst

1) Marketing Partner for psoraisis
2) Analyst coverage
3) Start of Phase IIb trial for transplant
4) Final Phase III results
5) Data on TAFA93 with stents
6) Initiation of US phase III for psoriasis
7) $75 million payment from Roche in early 2007