Investment Perspective on Iluvien
The investment outlooks for pSivida (PSDV) and Alimera (ALIM) in 2013 will be driven by issues related to Iluvien, an ophthalmic implant which has been developed for the treatment of diabetic macular edema or DME. Diabetes can lead to chronically elevated levels of blood sugar that can cause structural damage to the inner lining of blood vessels in the retina that leads to blood vessel permeability (leakage).
The increased permeability can lead to a breakdown of the blood-retina barrier, and allow fluid and proteins to leak into the retina, thickening the macula (the central part of the retina) and distorting nerve cells. This can lead to dysfunction and eventually blood vessel occlusion. The result is a decrease in visual acuity which can become permanent if left untreated. The most prevalent cause of blindness in adults of working age is diabetic retinopathy and DME is the most common complication of diabetic retinopathy.
The incidence of DME is increasing sharply coincident to the diabetes epidemic in the US. Estimates are that the prevalence of DME is as much as 1.3 million eyes in the US. Because this is a chronic disease, prevalence as opposed to incidence should determine usage. Based on talking to physicians and industry sources, I estimate that about two-thirds or 900,000 eyes could benefit from drug therapy. Because Iluvien treatment lasts for three years, the addressable market at steady state would be one-third of 900,000, or 300,000 eyes. Initially, there might be pent-up demand that could make the market opportunity much larger.
Alimera's detailed market research in Europe suggested that 20% of eyes treated with drugs receive injectable steroids. The replacement of injectable steroids, which are not currently approved for DME and are used off-label, is the most logical immediate use for Iluvien. Assuming that the U.S. and European markets are of comparable size, the number of eyes treated with steroids in the U.S. and Europe would each be 60,000. Further assuming a price of $8,000 per treatment, the addressable market opportunity for Iluvien as a replacement for injectable steroids is a sizeable $480 million in both the U.S. and Europe.
Iluvien will enter a market in which the primary current treatments are laser photocoagulation, the anti-VEGF products Lucentis and Eylea, and steroids that are injected into the eye. There is no question that Iluvien is as effective as any of these therapies, but it does have troublesome side effects relative to laser photocoagulation and anti-VEGF products, such as increasing intraocular pressure (which is what glaucoma does) and increasing the rate of cataract formation. Its eventual role in treating DME will probably be in patients who don't respond initially or no longer respond to laser photocoagulation and anti-VEGF therapy.
One of two major issues relating to Iluvien this year will be whether the FDA will approve the product in the U.S. pSivida's marketing partner for Iluvien, Alimera, has now received two complete response letters and in the latest one, the FDA asked for two new phase III trials. If the FDA is unbending, meeting its request could mean that the NDA could not be refiled until 2016 or later and it may be the case that Alimera would decide not to do the trials. Alimera has met with the FDA and believes that it can satisfy the agency with a re-analysis and improved presentation of the data in the NDA. Encouragingly, the FDA has accepted the refiling of the NDA and has set a PDUFA date of October 17, 2013. I think that there is a better than 50/50 chance that Iluvien will be approved at that time in the U.S. However, if it is approved, I expect the usual headwinds from managed care and I look for a slow launch.
The second and equally important issue for 2013 will be the roll out of Iluvien in Europe, where it has been approved in seven countries. In European countries, once a product is approved, a company has to then apply for reimbursement from the national health care agencies. This takes time and is an uneven process from country to country. Iluvien has received pricing approval in Germany and in the private pay sector of the UK, which accounts for 10% of the market opportunity. The agency that controls pricing in the UK national health system, an organization called NICE, has stated that at Alimera's requested price, Iluvien is not cost effective. While this sounds and may be ominous, NICE frequently takes this tack with new products that ultimately receive price approval.
Investors will obviously focus on initial European sales that will obviously shape expectations for future sales. Second half sales in 2013 will primarily come from Germany and I would expect them to be in the $3 to $5 million range. In an analysts' day presentation on July 28, 2013, Alimera presented market research data that it used to make a projection for European sales of about $150 million in 2014 and $450 million in 2017. There have been delays in the rollout in Europe that would seem to make the estimate of $150 million in 2014 unrealistic, but Alimera has not adjusted its guidance. I believe that investor expectations for 2014 are much less than Alimera's estimate and for 2017 may be around $175 to $200 million. I personally find it hard to come up with estimates for 2014 and beyond. I will need to see how trends develop before I have much confidence in any estimates.
The Alimera/Iluvien outlook reminds me of Dendreon (DNDN)/Provenge. Shortly after its launch, Provenge was impacted by the new launches of Zytiga and Xtandi that competed for some of the same patients. Iluvien is similarly facing competition in the U.S. from the already approved anti-VEGF product Lucentis and another anti-VEGF product Eylea should shortly be approved for this indication. Iluvien also faces the issue that it is a long acting steroid and ophthalmologists are reluctant to use steroids because of their side effects.
Aside from competition muddying the competitive landscape, Provenge was further impacted by the concern that the product cost $90,000 and there was no way to predict in which patients it might work. Oftentimes, physicians try a drug and if it doesn't work, they can stop the therapy and the patient/payor incur no further costs. With Provenge, there is no way for predicting which patients will benefit so that treatment failures pay for the full cost of therapy. Iluvien has a somewhat similar situation in that the product is designed to work for three years. The cost of the product may be about $8,000 and there is no way to predict which patients will respond and which will fail.
Injectable steroids as I previously mentioned may be used in as many as 60,000 eyes in the U.S. They are somewhat cheaper than Iluvien so that managed care may compare prices. The injectable steroids are not approved for DME and there is no data I am aware of that clearly shows efficacy. This makes it more difficult for managed care to encourage the use of injectable steroids over Iluvien. Still, I expect managed care to throw up initial roadblocks to slow the uptake of Iluvien. Along with the now usual caution on the part of physicians on new drugs and their concerns with side effects common to steroids, I think the initial launch will be slow as has become normal for new products.
Investment Thinking on Alimera
I think that the uncertainties about the potential for Iluvien in Europe, whether Iluvien will be approved in the U.S. and the probability for a slow launch even if is approved in the U.S., will present considerable headwinds for the stock price of Alimera. These headwinds will be strengthened by the concern that Alimera will have significant financing needs in the next year or two. In October of 2012, ALIM sold a $40 million convertible preferred offering that it stated would be used to finance the Iluvien launch in Europe. Even with this capital infusion, it ended Q1 2013 with only $39 million of cash and it showed cash burn of $10 million in that quarter. In May, it announced a venture debt deal by its UK subsidiary also intended for the European launch that brought in $5 million as a term loan and established a $15 million line of credit. Looking forward, I think that the cash burn will be substantial going forward based on needs for continued spending on the European launch. The spending will accelerate further if Iluvien is approved in the U.S. and launched in 2014. Further, Alimera has to pay pSivida a $25 million milestone payment upon U.S. approval of Iluvien.
In its two recent financings with the convertible preferred and venture debt deals, the company seems to be trying to avoid directly selling shares. This may be for the purpose of avoiding shareholder concern over dilution. I view these as very risky financing tools for a company that is likely to burn significant amounts of cash for some time into the future.
Alimera is launching Iluvien with its own small sales force in northern Europe and plans to do the same in the U.S. Based on the slow launches I expect in the U.S. and Europe, I think that Alimera will not be profitable until 2015 or 2016 and possibly longer. I see the need for significant financing in the interim if Alimera follows through on its current strategic plan. Of course, it could elect to go to a partnering scheme or try to sell the company.
Because of the two Complete Response Letters of CRLs that Alimera has received on Iluvien, there is naturally considerable uncertainty as to whether it will be approved following the October 17 PDUFA date. I think that based on the approvals in Europe, which has sophisticated regulators like the U.S. and the recent acceptance of the NDA resubmission that the product has a reasonable chance for approval. I also noted in the last 10-K that Alimera paid a consulting firm to help on the NDA resubmission; it has paid that firm $4 million and will pay another $2 million if the NDA is accepted. This raises the thought in my mind that the earlier NDA submissions were not well prepared and that better organization of the data might give the FDA the information it needs to approve Iluvien.
There is considerable uncertainty on the potential for Iluvien approval and this is a critical ingredient for an asymmetric investment opportunity. However, there are just too many uncertainties about the outlook in regard to financing and the sales ramp if approved for me to consider buying Alimera based on U.S. approval of Iluvien and I am taking a wait and see approach to the company and stock. I do see the potential for Iluvien to become a very significant product and that Alimera could be a good investment opportunity if it can navigate the financing and slow initial launch hurdles.
Investment Thinking on pSivida
I think that pSivida offers an interesting way to play the potential approval of Iluvien in the U.S. Alimera upon approval of Iluvien has 30 days to pay pSivida a $25 million milestone payment or Iluvien rights will be transferred back to pSivida. This makes payment of this milestone the top priority of Alimera and this will be paid before any other expenses in the company. However, if Alimera somehow did not pay the milestone, Iluvien would be a very valuable asset for pSivida. Of course, I assume the payment will be made.
In terms of economics, pSivida is entitled to receive 20% of net profit of Iluvien on a country by country basis. (This is initially reduced to about 16% until Alimera recovers launch expenses.) Net profit is defined as net sales minus COGS minus sales force expense minus launch expense. Because the target audience for Iluvien is a small number of retinal specialists, sales force costs are not that much. I estimate that pSivida will realize about 15% of net sales.
Germany is likely to reach profitability first. On an optimistic basis this could be in 2014, but it is more likely to take longer. The stream of payments could become quite meaningful in the 2016 to 2020 period if Alimera's projections are accurate. Its projection of $450 million for Iluvien revenues in Europe would produce about $68 million of revenues for pSivida and U.S. payments might be the same. This would create $136 million of revenues with no associated costs. I hope that Alimera is right as this would be a major upside for pSivida.
Under the agreement with Alimera, pSivida has the right to develop a product that is essentially the same as Iluvien for a disease known as posterior uveitis. Posterior uveitis is caused by a different mechanism of action than DME. DME is in part a vascular disease that can be addressed by laser photocoagulation and anti-VEGF therapy; it also has an inflammatory component that Iluvien can uniquely address. Posterior uveitis is quite different from DME, it is an auto-immune disease in which steroids and other drugs for autoimmune disease are needed; laser photocoagulation and anti-VEGF therapies are not indicated.
The posterior uveitis market is not that much smaller than DME. Estimates place it at roughly 400,000 eyes. pSivida has branded its product as Medidur and I expect it to be priced at the same price as Iluvien or $8,000 per year. This indicates an addressable market of $360 million in the U.S., roughly the same opportunity as Iluvien. Posterior uveitis is a more severe disease than DME and there are roughly 30,000 Americans who have been blinded by posterior uveitis. There are two drugs approved for this condition: Retisert in 2005 and Allergan's (AGN) Ozurdex in 2012. Neither drug has done particularly well for reasons I will discuss shortly.
Because Medidur is essentially the same product as Iluvien, its side effect profile should be comparable and, if so, it would be far superior to Retrisert. In its clinical trials, 60% of Retisert patients developed intraocular pressure above 30 mg/mm2. This is considered a serious side effect that is treated by the use of eyedrops normally used to treat glaucoma as compared to 18% of patients in the Iluvien trials. Because physicians usually treat intraocular pressure when it reaches 25 mg/mm2, 38% of Iluvien patients used eyedrops. About 15% of Retisert patients required surgery to relieve the pressure versus 5% for Iluvien. If approved, I would think that this advantage would be a significant incentive for Medidur to replace Retrisert usage. Very importantly, Medidur can be injected into the eye with a syringe whereas Retisert requires a surgical incision for the implant.
The approval of Iluvien could greatly speed the timeline for development of Medidur. A phase III trial for Medidur will begin shortly and will take about one year to enroll and will require a one-year follow-up. If Iluvien is approved, pSivida might be able to gain approval of Medidur based on just this one phase III trial. It could file a supplement to the Iluvien NDA and could reference the safety data in the Iluvien NDA. If the FDA accepts this approach, it would put Medidur on a pathway that would complete enrollment in one year, have a one year follow-up, six months of data analysis, NDA submission and nine month review leading to approval in 2016 for posterior uveitis.
I am basing my recommendation of pSivida on the basis that Iluvien will be approved in the U.S. and highlight the potential of Medidur. This would result in the $25 million milestone payment that could fund the company into 2015 by my estimates. It could also shorten the timeline for Medidur leading to approval in 2016. If Iluvien is not approved in the U.S., it will lengthen the timeline for Medidur and require substantial future financing. I think that Iluvien can create a significant amount of revenues for pSivida that would be a significant driver for the stock. However, in the near term there will be uncertainty and investors may not attribute much value to Iluvien. However, the relief of the financing overhang and the promise of Medidur could allow the stock to do quite well in 2014 and 2015.
There are other parts to the pSivida story. It has a partnership with Pfizer to develop a surgical implant for Pfizer's highly successful product for glaucoma Xalatan, which is facing a patent expiration. I am not inclined to give much weight to the potential for this product. pSivida management will be focusing most of its basic research on a new drug delivery technology for back of the eye drug delivery called Tethadur, a bioerodible implant. Management believes that it can deliver antibodies (such as Lucentis and Eylea), and other protein based drugs as well as the small organic molecules that it delivers. Lucentis and Eylea are multi-billion dollar products that require 6 to 8 injections per year. If PSDV can develop a product that would deliver the drug via an implant for six months or longer, it could take a large share of these sales. This is an exciting product opportunity.
Price Target for pSivida
The upside for pSivida is based on the approval of Iluvien in the U.S. In addition to the longer term potential from its share of Iluvien revenues, which could be very substantial, this would remove the financing overhang and probably point the way for approval of Medidur in 2016. I think that this would give the company credibility and gain investor attention. The focus might then shift to Tethadur and its potential to develop a product that could deliver a VEGF therapy to the back of the eye. This would give a new product potential on top of the Medidur story and Iluvien story. The current market capitalization of the company is $74 million. If all of these positives come about, I think that we could be looking at a five to ten fold increase in price.
If Iluvien is not approved, Medidur would remain an interesting product candidate. However, with no milestone payment from the approval of Iluvien and a stretched out timeline for Medidur development that moves potential approval from 2016 to perhaps 2018, the company would face daunting financing challenges and indeed it might have to outlicense Medidur to stay alive. This is not a pretty picture and I think that the stock could sell off meaningfully if Iluvien is not approved. My guess is that we could see a 30% or more price decrease. There is significant risk in the stock, but I think this is very much offset by the upside. I see this as an asymmetric investment opportunity.
pSivida's History of Technology and Product Development
As with the brain, the eye is protected by barriers from systemic blood circulation. This makes it difficult to deliver systemic drugs for diseases that affect the posterior or back of the eye (most importantly the retina) at effective dose levels and with acceptable side effects. As a consequence, back of the eye diseases usually must be treated with intravitreal injections (directly into the eye). This exposes the patient to pain and potential side effects as well as monthly to bi-monthly office visits for the injections.
PSivida was founded to develop an implant that could be surgically implanted and could deliver sustained release of a drug to the back of the eye over a long period. At the time, the HIV epidemic was raging and cytomegalovirus emerged as a secondary infection affecting the eye that could cause blindness. The company's founders developed Vitrasert, a surgical implant that could deliver gancicovir to the back of the eye; this was the only approved drug for cytomegalovirus. This product was licensed to Chiron, one of the charter members of the biotechnology club. It was introduced in 1996, but never became a big seller as new drugs emerged for HIV that gave better control of the disease and reduced the occurrence of opportunistic infections like cytomegalovirus.
The company then went on to develop Retisert as a drug delivery vehicle for the steroid fluocinolone acetonide. This was the first approved intravitreal drug implant for the treatment of chronic non-infectious posterior uveitis, a sight-threatening autoimmune disease affecting the back of the eye. (This is the disease target for Medidur.) Retisert is a very small device, about the size of a grain of rice, which is surgically implanted in the eye through a small, 3-4 mm incision and releases precise amounts of medication each day for approximately 2.5 years.
Retisert was approved as an orphan drug by the FDA in April 2005 and is marketed under license by Bausch & Lomb. Bausch then tried to extend use of the product to treat diabetic macular edema. However, they abandoned the clinical development effort after they determined that increased intraocular pressure and increased formation of cataracts were unacceptable side effects when weighed against therapeutic benefit. pSivida stepped in and picked up the project believing that they could develop an improved delivery system that would reduce the side effect issue. This led to the development of Iluvien.
Iluvien is an implant containing the steroid fluocinolone that is administered through a small 25 gauge needle and can be administered in a physician's office. The eye is anesthetized and the doctor injects the implant about halfway back in the eye. After the needle is pulled out, the sclera seals on its own without the need for stitching. The implant holds about 190 micrograms of fluocinolone and releases about 0.23 micrograms each day giving the product about a three year life. The implant is not bioerodible and remains in the vitreous bed. The material used in Iluvien is poyimide, the same material used in intraocular lenses and which are, of course, permanent; there is nearly 70 years of clinical experience with intraocular implants.
This is a summary of a more extensive report that has been published on my website. For readers who want a more in-depth understanding of my reasoning, I refer you there.