Cellmid Ltd (ASX: CDY) is an Australian biotech company that is in the process of harvesting multiple and long term cash flow streams from the sale of cosmeceuticals, and royalties generated from the licensing of midkine in cancer diagnostics.
Cellmid has a deep pipeline that is being nurtured and developed by a strong biotech management team with a pedigree that includes Graeme Kaufman who helped build CSL into a multi-billion dollar biotech company, Martin Rogers who serves with Prima BioMed and Maria Halasz as its MD.
Maria Halasz serves as MD and CEO and is in the enviable position of driving the development of midkine as a leading edge molecular diagnostic for the identification of 26 different cancers, and helping develop other applications for the same technology.
The first licensing agreement with Quest Diagnostics (NYSE: DGX) for the midkine lung cancer diagnostic is expected to develop into an annualised multi-million dollar royalty revenue stream, and the second licensing agreement with Pacific Edge (NZSX: PEB) for the non-exclusive use of the midkine bladder cancer diagnostic is expected to develop into a royalty return that approaches a million dollars per year.
Cellmid now has the opportunity to develop multiple royalty streams for a variety of midkine cancer diagnostics, and is in the early stages of developing midkine in a number of therapeutic applications.
MIDKINE DIAGNOSTIC AGREEMENT SIGNED
Cellmid has signed an important option agreement on 11 February 2013 with listed Japanese company Fujikura Kasei Co Ltd (Fujikura), a major supplier of latex particles used in medical diagnostics.
Fujikura Kasei is listed on the Tokyo Stock Exchange with headquarters in Tokyo and has a Market Cap. of over JPY12 billion.
Under the terms of the Option to License agreement Cellmid will supply its proprietary anti-midkine diagnostic antibodies for validation on Fujikura's latex platform. Cellmid will receive an initial fee and a further payment should Fujikura elect to exercise its license option.
Cellmid will also receive royalties on any future midkine diagnostic products sold by Fujikura.
The license agreement will proceed on condition that Fujikura is able to reach a limit of detection (LOD) of 500 picogram/mL midkine in serum on its proprietary latex diagnostic platform. Cellmid's highly sensitive MK-ELISA detects midkine to a limit of 8 picogram/mL, and Fujikura is planning to achieve a LOD close to that level on its latex platform using the same antibody pair.
A latex based assay will be highly beneficial for the commercial launch of any midkine diagnostic product, as it is widely used and accepted in pathology laboratories. It is also preferred as it can easily be automated, reducing processing costs.
Share Price: $0.02
Issued Shares: 545.1M shares
Market Cap: $10.9M
Cash: $1.77M plus early sales from cosmeceuticals
Cellmid's wholly owned subsidiary Advangen International which has launched a range of hairdressing products that contain botanicals that arrest hair loss and are marketed as Jo-Ju Shampoo, Jo-Ju Conditioning Treatment, Jo-Ju for Women, and Lexilis for Men. The products have been well received and will be placed in 210 salons by the end of 2013.
A prescription only version is being sold in pharmacies that is branded as évolis for men and évolis for women, and is backed by rigorous scientific testing that confirms that 74% of users reported a decrease in hair loss and increase in hair growth after 16 weeks of application of évolis.
The product competes directly with Minoxidil that reported annual sales of $300M and Propecia with $1,097M, and is expected to capture market share from both. Sales are currently under development in Australia and will soon expand to licensed territories in the USA, Europe, India and South America.
Revenue projections are not yet possible but are expected to be significant, and will be utilised to develop the diagnostics and the therapeutics side of Cellmid.
Royalties for both the lung and bladder diagnostics are conservatively estimated to build up to an annualised rate of $2.64M - $3.59M over the next five years.
DIRECTORS AND MANAGEMENT TEAM
David King serves as the Non-Executive Chairman, and is a Fellow of The Australian Institute of Company Directors, Fellow of the Australian Institute of Geoscientists and a PHD in Seismology from the Australian National University. He has experience in high growth companies and a track record in starting business ventures and developing them into attractive investment and or take-over targets, and indirectly holds 22,500,000 shares. He is a director of Robust Resources Limited and Republic Gold and was previously with Gas2Grid Limited, Ausmon Resources Limited, Sapex Limited and Eastern Star Gas Limited.
Maria Halasz serves as Managing Director and Chief Executive Officer and has over 18 years of experience in biotechnology companies; initially working in executive positions in biotechnology firms, then managing investment funds and later holding senior positions in corporate finance specializing in life sciences. She is a graduate of the Australian Institute of Company Directors, and holds a BSc degree in microbiology and an MBA from the University of Western Australia, and indirectly holds 2,725,250 shares.
Managing director Maria Halasz
Graeme Kaufman serves as a Non-Executive Director and has over 45 years' of experience in biotechnology spanning technical, commercial and financial areas. He has a BSc & MBA from Melbourne University and worked for 34 years at CSL
Limited, Australia's largest biopharmaceutical company, and held senior positions that including Production Director, General Manager Finance and General Manager Biosciences.
Martin Rogers serves as a Non-Executive Director and is the former CEO and current Non-Executive Director ofPrima BioMed Ltd and Deputy Chairman of Consegna Group Ltd. He has chemical engineering and science degrees and has a depth of experience in incubating companies and publicly listed organisations where he has raised over $100M in equity. He has been both an investor and senior executive in a private funded advisory business in the science and biotechnology sectors, where he was instrumental in significantly increasing the value of those investments.
Nicholas Falzon serves as Company Secretary and Financial Controller and is a partner at Lawler Partners where he works with a number of listed and unlisted companies advising them on all aspects of their financial management. His special area is R & D Tax Concessions and he has been successful in applying for substantial tax offsets forCellmid in the past and also has extensive business management, corporate finance and compliance related experience.
Andrew Bald serves as joint Company Secretary, alongside Nicholas Falzon. He has 25 years' experience in banking and corporate finance, having advised private and ASX listed companies in a number of industries. Prior to his role as a corporate advisor, he was an investment banker managing balance sheet and trading risks as well as advising on a number of significant project financing transactions.
Darren Jones serves as Head of Product Development and has worked in the Australian biotechnology industry for over 10 years, with particular responsibilities for developing promising therapeutic antibody candidates from discovery, screening, preclinical testing and humanising through to clinical trials. In addition to his considerable technical expertise in all aspects of the development of antibody therapeutics, he has extensive expertise in intellectual property management and strategic business planning. Prior to working in the biotechnology sector he worked as a research scientist at the University of Technology and at St Vincent's Hospital, Sydney in the fields of immunology, cancer and HIV. He has a BSc from the University of Sydney and a MSc degree from the University of Technology, Sydney.
Emeritus Professor Takashi Muramatsu is the co-discoverer of midkine. He has authored more than 200 peer-reviewed publications on the role of this exciting novel target during the past 25 years, and is the inventor on a number of Cellmid's patents and he continues to actively contribute to the field of midkine research.
Professor Kenji Kadomatsu is the co-discoverer of midkine and author of over 150 peer reviewed publications on the function and properties of this novel target. He is inventor on a number of Cellmids' patents with an ongoing interest in midkine research.
SHAREHOLDING AND FUNDING
Cellmid has issued 545.1M shares, largest shareholders include Cell Signals Inc 28.5M / 5.2%, DW King Super Fund 22.5M / 4.1%, and Hera Investments 21.2M / 3.9%.
The Company issued 290.5M options on 24/10/12 at $0.002 and raised $545,000. The exercise date is 24/10/16 at a price of $0.034. Unlisted options total 38.32M and are exercisable at $0.03 - $0.05735 from 2013 - 2017.
DECEMBER 2012 QUARTER RESULTS
During the reporting period Cellmid, via its subsidiary Advangen International Pty Ltd, received $187,000 from customers. Since the commencement of cash receipts of its évolis® hair growth products in September 2012 the Company has receipts of $286,000.
Late payments on the Company's products have not been significant, and returns and defects have been minimal. During the quarter the Company sold its shares in Pacific Edge Biotechnology Limited, which it received in 2010 as part of a diagnostic license agreement.
The company received $92,000 from the sale of the shares, net of brokerage. The shares were originally issued toCellmid at NZ$0.17 and sold at NZ$0.40.
There was a small increase in the Company's cash position of $22,000 at the end of the quarter. Comparatively, the previous quarter had a significantly greater increase in cash position of $709,000. This was attributable to the R&D tax refund of $786,000, which is a once a year event.
In September of 2012, Cellmid reported a positive net cash flow of $331,000 that included an R&D tax refund of $786,000. First sales of OTC product for $275,000 will be spread over two quarters.
Cash at the end of the quarter was $1,777,000 and there are no outstanding loans or credit arrangements.
ADVANGEN INTERNATIONAL PTY LTD - TARGETS ALLEVIATION OF HAIR LOSS
Advangen International Pty Ltd is a wholly owned subsidiary of Cellmid Ltd and was established to develop and sell products that alleviate and treat hair loss or alopecia.
The Company owns exclusive international manufacturing, marketing and distribution rights for a range of scientifically validated products that prevent hair loss with the exception of China, Japan, South Korea, Malaysia, Singapore and Taiwan.
Each hair follicle has a three stage growth cycle that includes growth (anagen), transitional (catagen) and resting (telogen) phases that can last from one to seven years and is triggered by a protein that is known as Fibroblast growth factor or FGF-5.
This protein is known to accumulate in the scalp to the point where it eventually causes the hair follicles to fall out and its increase is triggered by a number of factors that include ageing, exposure to pollution, and stress or illness.
Advangen has developed a product range that includes active ingredients that extend the growth or anagen phase of hair follicles by inhibiting the accumulation of FGF-5 in the scalp.
The Company is also developing a new treatment for androgenic alopecia which affects women and is similar to male pattern baldness, and chemotherapy induced alopecia with midkine as the active ingredient.
All of the Advangen products are subject to rigorous scientific testing and quality control from research to manufacture, and employ the same type of scrutiny that is normally applied to pharmaceuticals.
This allows each product to have a well understood mechanism of action that has been proven to work by independent scientific testing.
PRODUCTS SOLD AT HAIRDRESSERS, SPAS, BEAUTY SALONS AND ONLINE
The current product range includes Jo-Ju Shampoo, Jo-Ju Conditioning Treatment, Jo-Ju for women and Lexilis for men and can be purchased from selected hairdressers, beauty salons, spas and online at advangen.com.au.
The company is targeting distribution nationwide to 210 salons by the end of 2013.
Jo-Ju Shampoo contains extracts from Garden Burnet (Sanguisorba officinalis) and Multiflora rose (Rosa multiflora) that has been proven to inhibit production of FGF-5 and extend the growth phase of the hair cycle.
Jo-Ju Conditioning Treatment and Jo-Ju for women both contain the same active ingredients as the Jo-Ju Shampoo, and Lexilis Lotion for men contains the leaf extract from Loquat (Eriobotrya japonica).
Advangen notes that approximately 50% of users who used these products reported a noticeable improvement in their hair volume and condition, and that 500,000 bottles were sold in Japan since 2008 with no reported adverse side effects.
PRODUCTS SOLD AT PHARMACIES - ÉVOLIS
Advangen holds exclusive manufacturing and distribution rights for the évolis™ range of products in Australia, USA, Europe, India and South America, and is currently seeking to establish international distribution through OTC pharma companies and direct distribution to pharmacy chains.
In July of 2012 Advangen launched the TGA approved and GMP manufactured évolis™ range of hair growth products into 700 pharmacies across Australia, and will extend penetration to 1,300 pharmacies in 2013.
The évolis™ for Men and évolis™ for Women products have important TGA approved claims of "promotes hair growth", "helps prevent hair loss and thinning" and "restores the natural hair growth cycle".
Double blinded, placebo controlled clinical trials have shown that 16 weeks of use resulted in decreased hair loss and increased hair growth in 74% of study participants.
Purchase of the product is over-the-counter (non prescription) and contains botanicals that include Eriobotrya japonica, Ginko biloba and Swertia chirata for men, and Poterium officinale, Rosa multiflora and Swertia chirata for women.
In September of 2012 the Company appointed Frostbland Pty Ltd as its exclusive distributor for the pharmacy and drug store market in Australia and New Zealand.
Frostbland has had a very successful history in marketing and distributing beauty and healthcare products to 3,500 pharmacies in Australasia.
MIDKINE A NOVEL DIAGNOSTIC BIOMARKER
Cellmid holds granted patents worldwide for midkine that include the US, Europe, Japan, Australia and China for cancer diagnosis and monitoring.
Midkine "MK" is a novel diagnostic biomarker with the potential to improve the way cancer is managed at all phases of the disease. Studies by both Cellmid and independent research groups show that MK testing can improve early detection, staging and prognosis of cancer, as well as sensitively monitor disease recurrence after treatment.
MK is a compelling cancer marker that is present in circulating blood and urine, and is often found at elevated levels at a very early stage of disease formation, and can be used to identify 26 different types of cancers.
QUEST DIAGNOSTICS - LUNG CANCER TEST
Cellmid licensed MK as a biomarker to Quest Diagnostics for early diagnosis, prognosis and monitoring of lung cancer.
Quest is a $9.4 billion market valued company that completes 150 million diagnostic tests in the United States each year and is the world's leading provider of clinical testing and leading provider of diagnostic cancer testing.
Quest has developed a new lung cancer screening test that will launch in the United States in mid-2013.
This incorporates the MK biomarker that provides more accurate results at lower cost, when compared with alternate testing. Quest will pay milestone payments and royalties to Cellmid on terms that are confidential.
Recent data suggests that 6.2% of the population that is over the age of 40 years are eligible for testing out of a population of 312M, and according to data from the National Lung Screening Test that equates to approximately 1.9M tests per year.
Assuming a conservative market penetration of 5% within 5 years equates to the completion of 95,000 diagnostic tests at $1,000 - $1,500 per test, and produces total revenue within a range of $95M - $142.5M.
Cellmid has not released royalty terms but it is reasonable to assume a rate of 2% for a payout within a range of $1.9M - $2.85M per year in the fifth year.
As Quest is the largest supplier of cancer tests in the USA it is not unreasonable to assume that the penetration rate could be higher, and the annual payout to Cellmid much larger.
PACIFIC EDGE BIOTECHNOLOGY - BLADDER CANCER TEST
The test provides a cost effective and non-invasive method to more accurately identify the presence of bladder cancer when compared to current testing methods.
The bladder cancer test has been certified for use in Australasia and Spain, and is CLIA certified for the US market.
The Australasian market is fairly small with 50,000 - 60,000 tests for bladder cancer completed each year. By comparison, the U.S. market is much larger with approximately 1 million patients and generates 1.8 million tests each year.
The test will cost approximately $550 and assuming a 5% penetration rate within 5 years will generate approximately 90,000 tests per year for a total of $49.5M.
Cellmid will collect milestone payments and royalties of ~1.5% for an annualised return of $743,000 in the fifth year.
UTILISATION OF MIDKLINE HERALDS DEEP PIPELINE DEVELOPMENT
The MK technology provides a very prominent biomarker for 26 cancers that are easily identified in blood and urine. Clinical trials for MK metastatic colorectal diagnostic and MK hepatocellular carcinoma diagnostic are currently underway.
Pre-clinical trials for therapeutic applications are also underway for MK antibodies for multiple cancers, inflammation and heart attack. Pre-clinical validation has been confirmed in animal studies for other applications such as surgical adhesion, renal injury and disease, B cell disorders and bone fracture.
The Company also markets MK-ELISA as a kit that can identify MK levels in human serum.
All of these applications confirm the evolving depth of the Cellmid pipeline.
CATALYSTS FOR 2013
• Growing distribution and sales for évolis locally and globally
• Building brand awareness for évolis
• Building distribution through hairdressers for Jo-Ju and Lexilis
• 2H 2013 royalty revenues from:
• Launch of Quest lung cancer diagnostic test in mid-2013 and
• Launch of Pacific Edge Cxbladder test in the USA in mid-2013
• Additional developments from various trials that are underway
Évolis is the first clinically validated hair growth product to be launched in 24 years and has a number of advantages over Minoxidil that include no reported side effects, no initial shedding and with hair continuing to grow through its natural hair cycle.
The product can be used by all ages and is composed of natural extracts and contains no fragrances and is residue free.
There are a number of serious issues related to the use of both Minoxidil and Propecia that should allow évolis to grow market share and provide significant up upside potential.
Revenues will also commence shortly from the licensing of midkine biomarkers for lung and bladder cancers to Quest Diagnostics and Pacific Edge respectively.
Both tests are on schedule to be launched in 2H2013 in the U.S. as a Laboratory Developed Tests that will be regulated under Clinical Laboratories Improvement Amendment. Significantly, these do not require FDA approval.
Under both license agreements, Cellmid will receive milestone payments in addition to single digit royalties. This sends a message to investors that Cellmid's products have near term monetisation capabilities and provide a platform for further revenue growth.
The agreement with Japanese company Fujikura Kasei Co Ltd (Market Cap. of JPY12.4B) shows that Cellmid's midkine diagnostic platform lends itself to multiple, high value product development opportunities.
Another strong sign for investors is the accumulation of shares by directors of Cellmid in on market transactions, and participated in the recent options issue.
The retracement in share price from $0.028-$0.03 to $0.02 provides an opportunity for investors. We assessCellmid to be worth closer to $0.035 on our calculations, offering substantive upside.
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