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One of the lessons the big pharmaceutical companies learned in the late 1990s was that sex sells, and not just in marketing. The discovery by Pfizer (PFE) that Sildenafil had minimal effects for hypertension and high blood pressure, but did have a marketable unexpected side effect, like helping to overcome Erectile Dysfunction (ED) helped to catapult the company. Since then, both Eli Lilly (LLY) and Bayer have developed their own versions of orally delivered ED medication.

Since then, the biopharmaceutical companies have been researching how to tap into the other 50% of the population and address female sexual dysfunction. While there are currently no approved medications, several have proven to be effective.

Apricus Biosciences (APRI) has developed an ED therapy that is applied topically instead of orally and is seeking approval for a female sexual dysfunction medication the company developed. APRI has been fighting to gain market share in the ED sector, and is beginning to make progress in the European market.

Overview

APRI is a micro-cap, trading at $2 with a market cap of just under $80 million, but has seen several catalysts recently that may indicate it is ready to advance to the next level. After a public offering in May, the company was able to raise just over $17 million, and currently has just under $20 million on their books. There have been several recent events that should boost this number, including the partnering with several companies in Europe.

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The company has been on a downtrend since their public offering. While investors generally see dilution as a bad thing, it can also be good if the cash raised is used to launch products or further development and not just to keep a company afloat. For APRI, they have used the cash to continue their partnerships and seek regulatory approvals in the EU.

Vitaros and the ED market

It is estimated that 10-20 million American men suffer from ED while the global number is close to 150 million men. According to the National Institutes of Health, approximately 5% of 40-year-old men and between 15% and 25% of 65-year-old men experience ED on a long-term basis. The three major drugs on the market - Viagra, Cialis, and Levitra - are all oral pills that use PDE5 inhibitors. There were 8 million Viagra prescriptions written in 2012 with total sales of about $2 billion. Sales of Cialis also totaled just under $2 billion in 2012, and Levitra pulled in just over $400 million. In Europe alone, sales for ED drugs totaled over $1 billion.

Vitaros is a topical cream for the treatment of ED and contains alprostadil. One of the significant downsides of the medication is the requirement for it to be refrigerated in order to extend the shelf life. The company is working on developing a non-refrigerated version which will likely be out in 2015, but is going forward with the current version in Canada and Europe.

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There is a significant market for an alternative to the more popular treatments. Approximately 20% of the population will not respond to Viagra, Cialis, or Levitra. There may also be concerns of drug interactions for those on other medications that may prevent the use of oral treatments. While it's difficult to predict the share of the market the company will be able to capture right now, 10% of the European market would be north of $100 million.

Financials

APRI's strategy to commercialize Vitaros is to sell the rights for distribution territories for a specific payment, contingent upon approval in that country, followed by guaranteed or tiered royalties. For Europe, the company hasn't announced the specific amount of the royalties, except to say it was in the double digits. For an estimate I used the estimated market of 1 billion, a 12% royalty, and then estimated the company capturing 5%, 10%, and 20% of market share.

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In Canada, the royalty is based on a tiered system derived from its sales performance. Again, the company did not release the specifics of the royalty. Again, based on a market of $100 million in Canada, a 5%, 10%, and 20% market share, and a royalty payment from 5%-12% and came up with the following estimate:

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These royalties will provide an ongoing income depending on how much of the market the company is able to capture. However, they are still entitled to one time payments once Vitaros is approved in each market. The following represents the payments the company has either already collected on or can expect to collect on once the product is approved:

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While the company has not received the payments eligible in 2013, they are still entitled to $121 million in payments should the product be approved in each respective market. So far, each country is looking promising, but the money is not in the bank yet.

APRI has been aggressively seeking to expand the market. The following is a summary of how the company stands now in each country:

  • Canada: Vitaros has been approved in Canada and APRI is working with Abbott Laboratories with the launch.
  • Germany, Austria, Belgium, Denmark, Finland, Iceland, Luxemburg, the Netherlands, Norway, Sweden, and Switzerland: Vitaros was approved in Europe under the Decentralized Procedure ("DCP") in June 2013. On December 16th, 2013 the company expanded its exclusive license agreement with Hexal AG, an affiliate within the Sandoz Division of the Novartis Group of Companies ("Sandoz"), for the commercialization of Vitaros. In combination with the previously signed license agreement for Germany, Apricus is now eligible to receive up to approximately $63 million from Sandoz in upfront, regulatory, launch and sales milestone payments for Vitaros in Germany and the Expanded Territory, which includes up to $4.5 million in new upfront and launch milestone compensation for the Expanded Territory.
  • Italy: On November 25th, 2013, the company announced that the Italian Medicines Agency (AIFA) had granted national phase approval to Vitaros.
  • France: On December 19th, 2013, the company announced that France's National Agency for Medicines and Health Products Safety (ANSM) had granted national phase approval to Vitaros. The CEO stated "The approval of the Vitaros® marketing authorization in France marks a significant milestone for Apricus and Laboratories Majorelle, our commercialization partner in France. We will continue to support Majorelle as they prepare for a successful launch of the first topical, on-demand treatment for ED in one of the largest ED markets in Europe."
  • Ireland and the Netherlands: On August 15, 2013 the company announced that the Irish Medicines Board and the Netherlands' Medicines Evaluations Board had each granted national phase approvals to Vitaros.
  • USA: While not currently available in the US, APRI is working with the FDA and Actavis (ACT) for further commercializing.

Is Vitaros a better product?

Viagra, Cialis, and Levitra all work as inhibitors of PhosphoDiEsterase type 5 (PDE5), an enzyme that restricts blood flow to specific tissue types. By inhibiting that enzyme, it allows blood to enter the tissue, and causes it to swell. In contrast, Vitaros works with Prostaglandin E1 (PGE1), known pharmaceutically as alprostadil, which uses a different active site, but produces similar results. While the PDE5 medications are by far the most popular treatments on the market, there is still a portion of the population that does not respond to PDE5 medications.

The method of application is significantly different. For a man that anticipates a romantic encounter, taking the little blue pill prior to going on a date is a discrete way to overcome a potentially embarrassing situation without letting his partner know of his difficulties.

Vitaros is topically applied, but is much faster acting than the oral treatments. Right now Vitaros requires refrigeration, although the company is working on developing a non-refrigerated product. Again, trying to apply a cold product while in the middle of a romantic encounter might be cumbersome, but provides an immediate effect.

Just like Viagra saw an increase in distribution with men not experiencing ED who believed it would enhance their experience, I foresee abuse with Vitaros by men who believe it will also enhance their experience. Studies showed that Viagra did not improve the experience for men without ED, but a topical application may help men without ED.

So the answer isn't if Vitaros is a better product, just that it's different, and provides an alternative.

Femprox and Female Sexual Dysfunction

Female Sexual Dysfunction (FSD) is not well understood even though the disorder may be more widespread than ED. APRI is developing Femprox for the treatment of FSD in the form of a cream, similar to Vitaros, and designed for local application. While there have been several drugs that have proven effective for the treatment of FSD, the FDA has never approved any medication for treatment. In late August the company completed an End-of-Phase II meeting with the FDA to gain further clarity regarding the Femprox regulatory pathway in the U.S. The FDA approved the proposed indication and patient population and supported both a pre-and post-menopausal study.

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During the recent 3rd quarter conference call, Mr. Richard W. Pascoe - Chief Executive Officer and Director, stated the following regarding the development and FDA approvals for Femprox:

An important gating item to be able to finalize the U.S. development plan for Femprox is understanding the outcome of a pending FDA approval decision for a competitive female sexual dysfunction product. We, along with our scientific advisers, believe that shareholder interest will be best served by advancing Femprox in the U.S., only after this decision by the FDA, regarding this FSD product is known, which we expect to occur around year end. Only then will we have a complete picture of the regulatory landscape in the U.S.

Given the recent approval of Vitaros in Europe, we believe there may be potentially a shorter path to approval in Europe. Both Vitaros and Femprox contain a unique concentration of the same active ingredient, alprostadil, as well as our novel proprietary permeation enhancer, DDAIP. The recent approval of Vitaros in Europe could allow for a streamlined path to approval in Europe for Femprox, and as such, in parallel with our work in the U.S., we are working to obtain regulatory guidance for Femprox in Europe. We have requested a meeting with the European regulatory authorities, expected to be held in the first quarter of 2014 to gain further clarity regarding the Femprox regulatory pathway there. At this time, we expect we will be in a position to disclose our development plans for Femprox in early 2014, following receipt of these 2 important pieces of regulatory feedback. In any event, we believe that shareholder interest is best served by advancing Femprox into the clinic with a development partner. And as such, we will initiate partnering discussions for Femprox following the completion of these key activities that I just outlined in 2014.

Flibanserin is the medication that is currently being evaluated by the FDA for approval for the treatment of female sexual disorders. While it has previously been denied by the FDA, the company is monitoring the way the drug is evaluated in order to understand how to better prepare for the application for Femprox. Flibanserin targets a different disorder than Femprox would, and would not be competing.

Assuming the market for Femprox is larger than the market for Vitaros, the company would be a pioneer in the area. If the medication is effective, the company would in effect have a monopoly on treatment of FSD. As the company stated, with Vitaros being approved in Europe, and Femprox using basically the same medication, approval would likely come there prior to the US.

Caution

As with any company, there are always potential pitfalls.

  • The company has 37.5 million shares outstanding. If the company begins to see progress being make with Vitaros or Femprox, it could elect to issue more shares to help finance further marketing and research and development. The recent offering should prevent any dilution until 2015 at the earliest.
  • The FDA may decline Flibanserin, further setting back Femprox. While Vitaros has been approved in Europe for the treatment of ED, Europe may decide not to approve Femprox for the treatment of women.

Conclusion

I am bullish towards APRI. They have two good products that have long term potential to turn the company around once they are in full swing of marketing and selling Vitaros and Femprox. The exposure in Canada and Europe could develop into annual revenues of $100 million within the next few years.

Source: Apricus Biosciences: Future Profits From Sexual Health Research And Marketing