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Thesis

Intellipharmaceutics (IPCI) represents an unusual deep value opportunity with respect to the net present value of its businesses as compared to an absence of sell- and buy-side following and liquidity.

IPCI maintains two diversified business lines; namely, a generic drug development effort that has been extremely productive, and an extended and controlled release business with respect to the development of new drug applications that seek to improve the distribution, therapeutic profile, and safety or abuse potential of existing blockbuster products.

With a fully diluted enterprise value of $66 million ($39 million on a primary basis), and five (5) current ANDAs on file with the U.S. FDA, representing approximately $7 billion[1] in branded sales, IPCI represents our top-rated, small-cap, deep-value, special situations candidate with several near-term catalysts.

In addition to its lower risk, high ROIC (18%-20% at steady state) strategy of developing difficult to formulate ANDAs, IPCI is conducting clinical trials on their improved versions of existing blockbuster drugs. Currently IPCI is developing an improved version of the narcotic pain reliever, Oxycontin ($2.9B)[1], using the company’s considerable formulation development capabilities. IPCI is pursuing a New Drug Application approach (505b2) with the U.S. FDA as well as other regulatory agencies.

IPCI's equity value should be driven by multiple near term catalysts in respect of ANDA settlements and further submissions to the FDA. The company has already settled on Focalin, a $553 million[1] ADHD brand, with Novartis (NVS), and recently Effexor XR, a $2.6 billion[1] depression brand with Pfizer (PFE).

In addition, IPCI is in partnering and licensing discussions regarding additional ANDA programs. Unpartnered products currently include: i) Protonix ($2.0B)[1] in gastrointestinal reflux; ii) Glucophage XR ($400mm)[1] in diabetes; iii) Seroquel XR ($981mm)[1] in schizophrenia, bipolar disorder and depression; and iv) Coreg XR ($324mm)[1] in congestive heart failure.

IPCI is one of the leading companies to have developed extended release drug development capabilities. IPCI represents an unusual risk-adjusted investment opportunity based on its business model of developing high ROIC and short generation time extended release generic drugs, while investing in higher margin, higher risk new drug candidates via the FDA’s 505b2 process – changing the release characteristics of an existing compound.

IPCI’s business model therefore represents a balance of multiple near-term revenue opportunities from the launch of extended release generic drugs with longer dated npv opportunities from the development of proprietary extended and controlled release narcotic (pain) analgesic products that may offer safety advantages as compared to existing drugs.

Probability adjusted NPV analysis suggests that IPCI is worth $15.22 per share (please see analysis below). In addition, we model four fundamental cases for IPCI: Base ($15.00; $360TEV), Best ($18.00), Worst ($2.50), Tail Risk ($1.75).

Proprietary Products

IPCI’s Hypermatrix technologies comprise a unique controlled-release drug delivery platform that can be applied to the development of a wide range of existing and new pharmaceutical products.

The competitive advantages of the Hypermatrix technologies facilitates the company’s focus in two areas: i) difficult to formulate and manufacture controlled-release generic drugs; and ii) improving current medicines via controlled release, and resulting in an New Drug Application (NDA) 505(b)(2) regulatory approval pathway.

With respect to existing controlled-release (once-a-day) products covered by drug molecule patents that are near to expiration, IPCI can formulate generic drugs, which are bioequivalent to the branded products. These products can then be licensed to and sold by generic drug companies. IPCI scientists have demonstrated a successful track record with such products, having previously developed several drugs which have been commercialized in the United States by their former employer/clients.

For branded immediate-release drugs, IPCI can formulate improved replacement products, typically by developing new, potentially patentable, controlled-release once-a-day drugs. Among other out-licensing opportunities, these drugs can be licensed to and sold by the pharmaceutical company that made the original immediate-release product. This provides the brand developer a life cycle extension strategy. The regulatory pathway for this approach requires NDAs via a 505(b)(2) application for the U.S. The 505 (b)(2) pathway both accelerates development timelines and reduces costs in comparison to NDAs for new chemical entities.

ANDA and NDA Product Candidates

Dexmethylphenidate hydrochloride – Generic Focalin XR

In 2005, IPCI entered into a license and commercialization arrangement with Par Pharmaceutical (Par) for the development of a generic version of Focalin XR.

Dexmethylphenidate hydrochloride is a Schedule II restricted product in the United States, and is indicated for the treatment of attention deficit hyperactivity disorder (ADHD). According to Wolters Kluwer Health, sales of Focalin XR in the U.S. were approximately $553 million for the 12 months ending August 2011.

Effective May 2007, IPCI filed an ANDA for its generic version of Focalin XR with the FDA.

Marketing of generic versions of Focalin XR should begin in the fourth quarter of 2012. IPCI has a ten year profit-sharing agreement with Par for the sale of Focalin XR in the U.S., which commences with the commercial launch of the product by Par.

In December 2010, IPCI filed an ANDA for the 30 mg strength of dexmethylphenidate hydrochloride extended-release capsules. The application was filed as an amendment to the ANDA previously filed for the 5, 10, 15 and 20 mg dosage strengths of the drug.

Venlafaxine hydrochloride – Generic Effexor XR

IPCI’s venlafaxine hydrochloride extended-release capsules are a generic version of the marketed drug Effexor XR. Venlafaxine hydrochloride is indicated for the treatment of symptoms of depressive disorders. According to Wolters Kluwer Health, sales of venlafaxine hydrochloride extended-release capsules in the U.S. were approximately $2.6 billion for the 12 months ending August 2011.

IPCI’s ANDA is under review with the FDA for sale in the U.S market.

On June 21, 2011, IPCI announced that patent infringement litigation with Pfizer was settled, granting the company a non-exclusive license to the patents in suit that will permit the company to launch a generic version of Effexor XR in the U.S. following FDA approval.

IPCI is currently exploring licensing opportunities Effexor XR.

Pantoprazole sodium – Generic Protonix

IPCI’s pantoprazole sodium delayed-release tablets are a generic version of the marketed drug Protonix. Pantoprazole sodium inhibits gastric acid secretion and is indicated for the short-term treatment of conditions such as stomach ulcers associated with gastroesophageal reflux disease, as well as the long term treatment of pathological hypersecretory conditions. According to Wolters Kluwer Health, sales of pantoprazole sodium delayed-release tablets in the United States were approximately $2.0 billion for the 12 months ending August 2011.

An ANDA for generic pantoprazole sodium, is under review with the FDA.

On December 22, 2010 IPCI informed the FDA that it had not received notification, as provided for under the Hatch-Waxman Act, of any patent infringement proceeding by the brand owner, Pfizer. As a result, the company will not be subject to the automatic 30-month stay of FDA approval to market the product. Therefore, IPCI will be in a position to market the product in the United States upon FDA approval.

IPCI is exploring licensing agreement opportunities for Protonix.

Glucophage XR – Generic Metformin hydrochloride

IPCI’s metformin hydrochloride extended-release tablets are a generic version of the marketed drug Glucophage XR. Metformin hydrochloride is an oral antihyperglycemia drug indicated for the management of type 2 diabetes. According to Wolters Kluwer Health, sales of Glucophage XR in the United States were approximately $400 million for the 12 months ending August 2011.

An ANDA has been filed and the application is under review, with the FDA for sale in the U.S market.

IPCI is exploring licensing agreement opportunities or other possibilities for this product.

Quetiapine fumarate – Generic Seroquel XR

IPCI’s quetiapine fumarate extended-release tablets are a generic version of the marketed drug Seroquel XR. Quetiapine fumarate is an oral psychotropic agent indicated for the treatment of schizophrenia, bipolar disorder, and major depressive disorder. According to Wolters Kluwer Health, sales of Seroquel XR in the United States were approximately $981 million for the 12 months ending August 2011.

The ANDA application is under review with the FDA for sale of the product in the U.S. market.

IPCI is exploring licensing opportunities or other possibilities for this product.

Carvedilol phosphate – Generic Coreg CR

IPCI’s carvedilol phosphate controlled-release capsules, in development, are intended to be a generic version of the marketed drug Coreg CR. Carvedilol phosphate is indicated for the treatment of hypertension and heart failure. This product is currently in late stage development.

Rexista oxycodone (Oxycodone hydrochloride)

The company’s branded product candidate under development is Rexista oxycodone hydrochloride, intended to be an abuse and alcohol resistant controlled-release oral formulation of oxycodone hydrochloride, a narcotic pain reliever. Rexista is a unique dosage form designed to deter some of the abuses associated with currently marketed controlled-release oxycodone products. These abuse include nasal inhalation when crushed or powdered, or by injection when combined with solvents. Rexista oxycodone is also designed to partially release a dose when consumed with alcohol, a significant problem with some opioid drugs. According to Wolters Kluwer Health, sales of OxyContin (oxycodone hydrochloride controlled-release tablets) in the United States were approximately $2.9 billion for the 12 months ending August 2011. OxyContin currently represents 93% of the $3.1 billion oxycodone sustained-release market.

Rexista oxycodone is expected to initiate clinical trials by year-end 2011. The company will continue to hold discussions with the FDA regarding the best clinical development plan for Rexista oxycodone (e.g., 1x or 2x/day dosing), especially given FDA’s desire to approve tamper resistant narcotic formulations.

Recent Events

On August 18, 2011, IPCI and Par added additional strengths of generic Focalin XR (dexmethylphenidate hydrochloride) for the U.S. market to their existing agreement, which applied to the development and commercialization of 5mg, 10mg, 15mg and 20mg strengths of generic Focalin XR. Under the terms of the expanded agreement, IPCI received a cash payment from Par and will continue to receive a share of profits from any future sales of the company’s generic versions of Focalin XR.

Catalysts

I expect IPCI to announce several catalysts over the next four quarters. I am anticipating the launch of generic Focalin XR, partnered with Par Pharmaceuticals, with $553 million in branded sales by innovator Novartis. We expect that IPCI has first-to-file status on at least one dosage strength, and has filed on a total of five strengths of Focalin XR. Next, we expect that IPCI will likely announce the filings (or acceptance) of two more ANDAs by year-end 2011. We also expect IPCI to disclose two additional extended release programs addressing substantial market opportunities by 1H2012. Next, IPCI will complete its dosing trials of Rexista, the company’s proprietary formulation of Oxycodone XR, a $2.9 billion narcotic pain relief product. We believe that the company may show a beneficial onset and/or distribution profile of this blockbuster drug, in conjunction with a beneficial tamper resistant profile, as compared to the current brand, Oxycontin. Next, I expect that IPCI will likely enter into additional pharmaceutical or specialty pharmaceutical partnering arrangements. Finally, as a number of sell-side firms have recently become aware of IPCI’s efforts, I would expect that the company will be able to secure research sponsorship, which should begin to address the liquidity issue.

Valuation

I have used two primary approaches to valuing IPCI: i) net present value analysis of the company’s ANDAs and NDA; and ii) corporate DCF analysis.

IPCI product-by-product net present value analysis introduces probability adjustments to the company’s ANDA and NDA pipelines.

Product NPV Analysis

The NPVof the company, based strictly on a product-by-product analysis, is $15.22 per fully diluted share (see NPV analysis below). This excludes $7.5 million in cash (also excludes an NTM cash burn of approximately $5 million), and also excludes asset value (PP&E and excluding patent valuation and NOLs of approximately $25 million). While this result is a substantial step-up to IPCI’s current valuation (5.3x), I have taken a fairly conservative approach to valuing IPCI’s programs. For example, I decided to fully exclude the potential licensing and ANDA approval of Seroquel XR, a brand that is sold by AstraZeneca (AZN) with sales for the 12 months ended August 2011 of $981 million, according to Wolters Kluwer Health.

Discounted Cash Flow Analysis

Our DCF analysis assumes a range of discount rates beginning at 20%, and a sensitivity of terminal multiples beginning with 10x. We expect IPCI to become cash flow breakeven in 1H2013. I assume a tax rate of 10% given NOLs, Canadian tax status, and the potential for the contribution of intellectual property in more tax advantageous venues. The implied value per share is a range of $7.23 to $9.44.

Management Team

One of the primary reasons that I became interested in IPCI is the management team. The CEO, Isa Odidi, Ph.D., and several of the key employees, led the development of ANDAs for several extended release medicines at specialty pharmaceutical company, Biovail. More than 15 years ago, I became aware of Dr. Odidi when I was on the sell-side with Merrill Lynch. Dr. Odidi and his wife, Amina Odidi, Ph.D., invested approximately $10 million of their own capital in order to start IPCI, after Isa left Biovail. Biovail was recently sold to Valeant (VRX) for a total consideration of $3.3 billion.

The CEO and president of IPCI represent 24.9% of the shares outstanding.

Rexista Oxycodone XR

The size of the opioid market is approximately $15 billion. Regulators, citizen groups, physicians, among other constituents, would like to have tamper or abuse resistant opioids available to patients. Rexista is a controlled release oxycodone formulation within a novel capsule that is designed to mitigate abuse from snorting, inhalation or heating with subsequent iv injection of the active drug product. The platform also deters the release of oxycodone when it is chewed or taken with alcohol. The Rexista technology is also applicable to other opioid drug candidates such as, oxymorphone, hydrocodone, and morphine. As discussed below in the Valuation section, this kind of drug delivery program has been valued highly by pharma and specialty pharma companies alike.

Research Coverage Expansion

IPCI is an undiscovered opportunity. Currently, the company is covered by one sell side firm of note – Ladenburg Thalmann. Ladenburg maintains a $7 price target. We believe that several branded sell-side firms should be interested in IPCI given its unusual formulation development capabilities and large target markets.

Patent Estate

IPCI has 30 patents issued or pending.

IPCI appears to maintain enabling IP around its Hypermatrix technology. This platform technology appears to enhance the bioavailability of drugs and it may have broad applicability to: i) controlled release, ii) extended release, iii) pulsatile release, iv) chrono-cycling, v) rapid dissolve, vi) site specific delivery, and viii) abuse and alcohol resistance. The benefits of Hypermatrix appear to include: i) shorter development timelines, ii) high margin/low cost of manufacturing, iii) once-daily dosing, iv) flexiblity with respect to hydropobic (water-repelling) and hydrophilic (water soluable) potency.

Important Disclosures

We and our affiliates are long IPCI, and may buy additional shares or sell some or all of our shares at any time. We do not maintain an obligation to update changes to our fundamental view of IPCI. This is not a recommendation to buy or sell shares.

[1] Wolters Kluwer Health for the 12 months ending August 2011

Pharmaceuticals

$368 ($m)

$15.34

Top Pipeline ($m):

256

Healthcare:

"

Other Pipeline:

112

Other Business:

"

Total Pipeline:

368

Total NPV($m)

368

or

$ 15.34

per share

Source: Intellipharmaceutics: A Deep Value Opportunity In Generics And Specialty Pharmaceuticals