Editors' Note: This article covers a stock trading with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
pSivida (PSDV) and its holders have had a pretty hard time over the last 2-3 months. Nevertheless, despite twists, turns, rockets and crashes, the stock up is still up nearly 133% on its year to date opening price, primarily driven by speculation as to the approval of its Diabetic Macular Edema [DME] treatment, Iluvien. On October 17, the FDA issued a complete response letter stating it could not approve the treatment in its current form, and the stock crashed. To add insult to injury, the stock fell considerably before the announcement had been made, leaving some holders with the feeling that they may have been at some unfair disadvantage as far as information is concerned. Though one could always say follow the insider moves and assume all information leaks. With this in mind, and with many holding PSDV stock and wondering whether to cut or hope, what is next for pSivida?
The first thing pSivida holders should look to is an advisory meeting between Alimera (ALIM), the manufacturer of Iluvien, and the FDA. The meeting will take place on January 27, and will effectively be the watershed moment for Iluvien in the US. As Larry Smith explains, the driving factor behind the most recent, and subsequent, FDA non-approvals of the treatment is an imbalance between efficacy and harmful side effects. Among the patient group targeted, chronic DME sufferers in the latest application, there is simply not enough incentive to undergo treatment in the face of its potential for harm. The meeting will no doubt explore the possibility of Iluvien treatment among extreme sufferers-the more chronic the DME the fewer the available alternatives-which, while vastly reducing the potential market for the treatment, would at least enable the drug to move forward.
Despite the failure of Iluvien three times when faced with the FDA approval process, the treatment has to date received marketing authorization in the UK, Austria, France, Germany, Portugal and Spain and is pending in Italy. It is currently commercially available in both the UK and Germany. Announced two weeks prior to the FDA complete response, and somewhat ignored since, was the UK National Institute for Health and Care Excellence (NICE) issuance of a final draft guidance that recommends Iluvien as an option for the treatment of chronic DME. In the UK, the Department of Health, which is the government arm of the national healthcare system, refers treatments to NICE for recommendation. Any treatment or drug that received NICE recommendation (unofficially) becomes an almost standard of care treatment for the condition in question. The reason I say unofficially, is because National Health Service [NHS] doctors are under no obligation to administer recommended treatments. Having said this, and the reason I can make this claim, is that NHS hospitals are quality checked based on their doctors' adherence to NICE guidelines.
What is the market potential in the UK? This is difficult to estimate, as figures concerning the exact number of chronic DME sufferers are not available. Having said this, the company has received over $30M so far from Alimera Sciences under the terms of the Iluvien collaboration even before any profit split on sales. Factor in the UK NICE recommendation, and the remaining four or five European markets yet to be addressed, and Europe alone could be enough to fund pSivida's pipeline. Which brings me to my next point…
The company's current lead candidate is Medidur for posterior uveitis, which is now in phase III trials. Posterior uveitis has a prevalence of 38 per 100,000 in the US and is difficult to treat. It is the third largest cause of blindness in the US, being the direct cause of nearly 30,000 cases. Medidur is similar to Iluvien, in that it is a sustained release technology that is inserted into the back of the eye. The drug delivered is fluocinolone acetonide, which is the same drug used in Retisert, pSivida's treatment collaboration with Bausch and Lomb. Retisert is already approved by the FDA for uveitis that affects the posterior segment of the eye, which is the same indication the company is seeking for Medidur. The concern with Medidur is that its risk profile is similar to that of Iluvien. It increases intra-ocular pressure considerably and causes cataracts in almost all patients treated. The difference between Medidur and Iluvien however, is posterior uveitis is considered much more serious than DME. Therefore, although the risk profile of the two treatments is similar, the benefit gained compared with risk of undergoing the treatment to the patient is larger.
Iluvien's failure to gain approval has had a dramatic effect on the financial position of the company. Success would have meant an instant and guaranteed milestone payment of $25M, which at its current price is just under one third of its total market capitalization. This would have accelerated the Medidur trial, and allayed pSivida investors' fears of further dilution. Instead these fears remain. As of September 30, the company reported cash holdings just shy of $15M. Current burn rate is a little over $4M, with revenues of around $600,000. With this in mind, the company expects to be able to fund current and planned operations through calendar year 2014. This funding derives from a combination of existing capital resources together with expected royalty income and other expected cash inflows under existing collaboration and evaluation agreements.
The recent activity in this stock means two things. The first, that the pSivida holders who suffered post October 17, will likely need no lesson-much less to be preached to-as far as the risks involved with investing in development stage biotech companies are concerned. The second, that the recent events serve to illustrate the danger in doing so, and the way in which speculator perception as to the likelihood of a particular event can often be completely wrong. pSivida is a company that, all else aside, has just enough cash to survive 2014. Yes, it has what seems to be a strong candidate in its pipeline, but without successful financing, and the dilution that financing will bring with it, coupled with a statistically unlikely FDA approval, that product will never reach market. Investors must consider this before risking their capital. Nevertheless, this all can change if Medidur meets approval and PSDV can rocket back up once again. Those who got in early on this one are still quite happy with 133% gains.
So, with all this said, what does the next year look like for pSivida? I would estimate a range between its current $2.50-2.60 and $3.50-$3.60 between now and at least the end of January. If the advisory meeting between the FDA and Alimera is successful, I imagine the market will forgive pSivida somewhat and there is a chance it could be trading at its pre-October $5 before the end of next year. The focus then, of course, will be on Medidur.