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By Jake King

BioDelivery Sciences (NASDAQ:BDSI) on Monday entered into a $20 million senior secured loan with MidCap Financial and issued to the group a warrant to purchase 357,143 shares of common stock with an exercise price of $4.20. In our view, the loan was a prudent move to extend the company's cash ramp while avoiding shareholder dilution, as BDSI is within range of key financial milestones that may materialize as early as year's end. BDSI has three late-stage product candidates and one FDA-approved treatment for breakthrough pain in cancer patients, and with a market capitalization of $167M, investors have yet to attribute much value to the company's pipeline. We consider BioDelivery Sciences fundamentally undervalued based on the market opportunities for its lead product candidates, and as these products receive further regulatory and clinical validation in the next nine months, shares should react in kind.

BioDelivery Sciences develops three product candidates, two based on its proprietary BioErodible MucoAdhesive (BEMA) technology. Consisting of a small, bioerodible polymer film for application to the inner lining of a patient's cheek, BEMA films deliver a dose of drug across the mucous membranes for time-sensitive conditions or to facilitate administration of drugs with poor oral absorption:

  1. BUNAVAIL - Utilizes BEMA technology to deliver buprenorphine and the opioid antagonist naloxone for the maintenance treatment of opioid dependence. Guiding for NDA submission at mid-year.
  2. BEMA Buprenorphine - a BEMA formulation of the partial mu-opioid agonist and a potential treatment for chronic pain. Awaiting results from two Phase III trials in opioid-naive patients and opioid-experienced patients, by year-end or early in 2014.
  3. Topical Clonidine Gel - In March, BDSI entered into a worldwide licensing agreement with privately held Arcion Therapeutics, where BDSI will develop and commercialize topical clonidine gel for the treatment of painful diabetic neuropathy (NYSEARCA:PDN). Expects initiation of a Phase IIb trial by year-end.
  4. Onsolis - Approved on July 16, 2009 for breakthrough pain in opioid-tolerant cancer patients. Onsolis has been through the ringer in reaching the market with material sales, and until a reformulated version is approved (possibly next year), we don't attribute much value to the product.

BDSI ended the first quarter with $49.7M in cash and no long-term debt, and the company will likely burn $11-13M this quarter. With the loan facility, BDSI should have approximately $58M in cash, sufficient to achieve key financial milestones in the next 9-12 months. BioDelivery will submit a New Drug Application for BUNAVAIL within the next month and is approaching the completion of two Phase III clinical trials for BEMA Buprenorphine for chronic pain. All three of these events will be potential value-unlocking catalysts for BDSI.

First, BDSI has repeatedly stated that they're evaluating whether to commercialize BUNAVAIL alone, partnered, or through a combination of the two. BDSI has been warming investors up to the idea of an internal marketing strategy since last year, and we suspect that the company is leaning in that direction. Nevertheless, a U.S. partnership would be immediately accretive to the small company. Braeburn Pharmaceuticals paid $15.75M up-front for U.S. and Canadian commercialization rights to Titan Pharmaceuticals' (OTCQB:TTNP) Probuphine (an implantable, extended -release formulation of buprenorphine), and up to $50M in milestones upon the approval of Probuphine by the FDA. Titan is eligible to receive up to $130M upon achievement of sales milestones and up to $35M in regulatory milestones for additional indications. Titan will receive tiered, double-digit percentage royalties on net sales of Probuphine in the U.S. and Canada. BDSI should be able to pull in a similar if not improved deal given BUNAVAIL's clinical profile. Titan secured the Braeburn partnership within months of filing the Probuphine NDA last yea, and BDSI has guided for a strategic decision in the fourth quarter of 2013. We may see BDSI announce a partnership within a few months of filing the NDA for BUNAVAIL. Again, BDSI expects to submit the NDA by mid-summer. A partnership should bring in $15M+ in non-dilutive and immediate capital, with significantly more upon FDA approval. An internal approach is not outside the realm of possibility given the relatively small sales force necessary to promote BUNAVAIL. Either way, BDSI won't commercialize the product on its own outside the U.S., and an ex-U.S. partnership would also be immediately beneficial to the balance sheet.

Second, BDSI expects to release top-line results from at least one of the ongoing Phase III BEMA Buprenorphine trials by year-end or early in 2014, with the second trial reading out shortly thereafter. BEMA Buprenorphine is partnered with Endo Health Solutions (NASDAQ:ENDP), and BDSI has guided for milestone payments from Endo of up to $30M based on completion of the ongoing Phase III trials and the NDA filings. Because BDSI encountered some issues with previous BEMA Buprenorphine trials in opioid-naive patients, the company broke its current Phase III program into separate opioid-naive and opioid-experienced studies; for this reason, we expect that Endo has tied separate milestone payments to each trial, as well as to each indication included in the FDA-approved label. Our best guess is that each trial read-out is worth $10M, and NDA filings for both opioid-naive and -experienced patients are worth $5M each. Finally, we expect $25M for each indication (-naive and -experienced) included in the approved BEMA Buprenorphine label.

Suboxone, the leading branded treatment for opioid-dependence, generated sales of $1.5B last year. And despite generic tablet formulations of the drug entering the market in March of 2013 (Suboxone is available in tablets and a sublingual film), sales of Soboxone film have thus far been unaffected. BDSI believes they can capture 25% of the now $1B branded market with the proprietary and easy-to-use BUNAVAIL -- $250M in sales.

Overall, we see BioDelivery's debt deal as the prudent move as BDSI approaches a number of value-adding events. Potential BUNAVAIL sales alone justify BDSI's current market capitalization, and BEMA Buprenorphine, if approved, would be the only non-combination Schedule III opioid on the market. BDSI expects it will be used as an alternative to hydrocodone combinations (like Vicodin) and in place of Schedule II opioids (high potential for abuse and more restrictive prescribing habits). Based on 2010 IMS numbers, BDSI believes that just 1% of the 130M annual hydrocodone combination prescriptions would result in nearly $300M in potential BEMA Buprenorphine sales, again, more than justifying the company's current valuation.

Source: BioDelivery Sciences' Debt Deal Puts Inflection Points Within Range

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