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Investment Scenarios: The Positive and Negative Case

pSivida (NASDAQ:PSDV) has a very important binary event upcoming on October 17, 2013; this is the PDUFA date for Iluvien, an ocular implant for diabetic macular edema that was licensed to Alimera (NASDAQ:ALIM). I cannot answer the question of whether the government shutdown might delay the PDUFA date and if so, how long.

Approval would trigger a $25 million milestone payment to pSivida and potentially could expedite the approval of Medidur as early as 2016. Medidur is an ocular implant that uses the same insert device as Iluvien and the same dose of the same drug. Iluvien is indicated for diabetic macular edema (DME) and Medidur, if approved, would be indicated for the different indication of posterior uveitis; commercial potential may be comparable for these indications. Iluvien's approval could allow pSivida to file an NDA on the basis of a single phase III trial that is now underway. The company has profit sharing rights that provide it roughly 20% of Iluvien's operating profits in the US; this is based on sales minus cost of goods sold and direct selling expenses.

The $25 million milestone payment would put the company in a comfortable cash position with about $41 million on its balance sheet as of year-end 2013. This would be enough to take the company through the possible approval of Medidur in 2016 and might put pSivida in the position of being able to market Medidur in the US entirely on its own. This would dramatically change the business model from a licensing business to a much more attractive specialty pharmaceutical model.

This would also allow pSivida to adequately fund new ocular drug delivery products based on Tethadur. The company's current ocular implants do not degrade once they are implanted in the eye and can only deliver small molecule drugs. Tethadur is based on a new biodegradable technology that can potentially deliver biologics such as Lucentis or Eylea to the back of the eye. If successful, this would be a major technology and commercial advance. Tethadur is in pre-clinical testing and is currently being evaluated for an undisclosed product under a funded evaluation agreement with a leading global biopharmaceutical company.

If Iluvien is approved on October 17th, investors will focus on the potential approval of Medidur in 2016 and the evolution to a specialty pharmaceutical model. I expect a very slow sales ramp for Iluvien in the US, but with time it probably has sales potential of $100 to $200 million of sales, perhaps by 2019. This could result in $15 to $30 million of revenues for pSivida with no offsetting costs. Iluvien has already been approved in Europe and has similar sales prospects in the same timeframe in Europe. Topping off this very positive investment scenario is the significant promise of a new technology, Tethadur.

So far, I have laid out the positive case for pSivida. If this comes to be, I could see a significant move in the stock. Its current fully diluted share count is 31.3 shares if every outstanding option and warrant is included; by GAAP accounting the fully diluted share count is about 27.0 million. Based on 31.3 million shares and the recent price of $4.50, the current market capitalization is $140 million. If the positive case prevails, I think that it could drive market capitalization to $280 to $350 million or $9 to $11 based on valuations of similar companies.

This potential 100% to 150% upside must be weighed against what would likely be s sharp downside move of 40% to 50% in the negative case. There would be no $25 million milestone payment, Medidur would require another phase III trial pushing approval to 2018 and no payments based on Iluvien's US sales could be expected. While there would still be promise for pSivida based on Medidur, Tethadur and European sales of Iluvien, the investment potential would be meaningfully diminished.

So what are the odds of an approval for Iluvien, which has previously received two complete response letters from the FDA? In the last CRL, the FDA asked Alimera to conduct two new phase III trials which would be extremely expensive and could take three to four years to complete. Alimera believed that the information that the FDA needed to approve Iluvien could be provided from the data already compiled for the previous NDA filings. Alimera hired a consulting company to reorganize the NDA paying them $4 million and potentially another $2 million upon approval. Encouragingly, the FDA accepted the refiling and set the October 17th PDUFA date. This along with the previous approval of Iluvien in seven European countries suggests that there is a reasonable chance for approval.

I place the upside as potentially $9 to $13 with Iluvien's approval and $2.25 to $2.50 if it is not approved. I place the odds for approval as better than 60%. The approval by European regulatory agencies indicates to me that there is a persuasive case for approval based on the data in the NDA. I am inclined to think that the format of the initial NDA filing was flawed and with a better presentation of the underlying data that the US may follow Europe in approving Iluvien. I want to caution investors that these are guesses on my part meant to convey magnitude of the potential upside and downside. They convey more precision than is actually the case. Based on this reasoning, I think that the potential upside in the case of approval substantially offsets the downside if Iluvien is rejected.

More Detailed Analysis of pSivida and Alimera

I wrote a more detailed analysis of pSivida and Alimera on May 31, 2013. I would suggest that investors interested in pSivida carefully read that report. This note is only a brief summary and update of that earlier, more in-depth report.

The European Launch of Iluvien Has Been Slow and Disappointing So Far

pSivida receives 20% of net profits of Iluvien in Europe using the same determination previously described for the US; sales minus cost of goods sold minus direct sales expenses on a country by country basis. Iluvien has been approved in seven European countries and has been going through the slow and rigorous process of gaining satisfactory reimbursement in the three major markets: Germany, the UK and France. Work continues on pricing and reimbursement in Italy, Spain, Portugal and Austria. However, Alimera does not currently plan to commercialize Iluvien in those countries until it achieves positive cash flow in Germany, the United Kingdom and France.

Germany is most advanced in terms of commercialization, but progress has been slow. In Germany, reimbursement requires individual negotiations with over 20 health insurers and associations and reimbursement is gained one at a time. Without such approvals, patients must file individual requests to be reimbursed. This is a tedious, slow process. Alimera reported that nearly 90 individual funding requests have been made and of these less than one third of patients have been treated. This has obviously slowed the commercial launch in Germany.

The launch in the UK has been greatly affected by determination of the National Institute for Health and Care Excellence, or NICE, not to recommend Iluvien for DME. However, NICE's Appraisal Committee has since recommended Iluvien for the treatment of pseudophakic patients with chronic DME considered insufficiently responsive to available therapies. Alimera hopes that this will lead to pricing approval in this indication in 4Q, 2013. The Transparency Commission of the French National Health Authority issued a favorable opinion for the reimbursement and hospital listing of Iluvien by the French National Health Insurance. The commercial launch could begin in early 2014.

Iluvien was initially rejected by NICE in the UK as being not cost effective for use in diabetic macular edema, which meant that it would not be reimbursed by the National Health Service, which is responsible for reimbursement for 90% of UK patients. This meant that only private pay patients could be addressed. However, NICE has recently found Iluvien to be cost effective for pseudophakic patients and this opens up a not insignificant opportunity.

Alimera began realizing Iluvien revenues in the second quarter of 2013 from operations in Germany and the UK as 18 units (90% in Germany) were implanted leading to revenues of $179,000. As of the quarterly conference call on August 12th 2013, Iluvien had been used by 14 physicians in the U.K. and Germany to treat a total of 30 patients with chronic diabetic macular edema. Initially patients are treated in one eye, but the company reports that good outcomes have led to some patients being treated in the second eye.

The European uptake has been slower than management expected primarily because of these reimbursement hurdles. Looking ahead, they cautioned that demand could flatten in the 3Q and early 4Q as physicians assess the first patients treated before some upward inflection occurs in late 2013. By that time they hope that most of the reimbursement issues will be behind them. It seems to me that sales will probably be about $1 million in 2013. I would expect some significant improvement in 2014, but I can't give anything more than an outright guess of perhaps $5 to $10 million. I do believe that Iluvien has an important role to play in DME patients who have failed both VEGF and laser therapy and also in pseudophakic patients.

Source: pSivida: Previewing The Possible Effect On The Stock Of The October 17th PDUFA Date For Iluvien