DiaMedica IPO: At Phase 2 And Target Market Of More Than $14.4 Billion

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About: DiaMedica Therapeutics (DMAC), DMCAF, Includes: ATHX, BIIB
by: Wilsonville Capital
Summary

DiaMedica Therapeutics is a biopharmaceutical company developing novel recombinant (synthetic) proteins to treat neurological and kidney diseases.

The World Health Organization notes that 15 million people every year suffer a stroke.

Using an estimated cost of $8,500 per patient and with 15 million patients, the expected target market equals more than $127 billion worldwide.

The company is testing with a protein, which is currently being used in Asia.

Investors should follow closely the sale of equity in this case. Stock dilution may be quite significant on this case and could push the share price down.

Targeting a total market opportunity of more than $14.4 billion, DiaMedica Therapeutics (DMAC) could deliver stock returns in Q4 2019 or Q1 2020, when its Phase 2 results will be released. With $20 million in cash, a market capitalization of $53.1 million and no debt, the company could easily trade higher. Investors should also appreciate that the company’s treatment of acute ischemic stroke uses a protein that is already used in Asia.

Source: Prospectus

Business And Product Candidates

Founded in 2000 and headquartered in Minneapolis, Minnesota, DiaMedica Therapeutics is a biopharmaceutical company developing novel recombinant (synthetic) proteins to treat neurological and kidney diseases.

Source: Prospectus

The company’s lead candidate, DM199, consists of a recombinant form of human tissue kallikrein-1, an endogenous serine protease (protein), which is very important for the regulation of local blood flow and vasodilation in the body and managing inflammation and oxidative stress.

DiaMedica Therapeutics believes that its candidate can treat a disease in which activity of kallikrein-1 is not working properly. In particular, the company is focused on acute ischemic stroke, “AIS”, and chronic kidney disease, “CKD.” DiaMedica Therapeutics provided the following explanation on how DM199 could help the patients suffering from these two diseases:

“AIS and CKD patients suffer from a lack of blood flow to the brain and kidneys, respectively. These patients also tend to exhibit lower than normal levels of endogenous KLK1. We believe treatment with DM199 could replenish low levels of endogenous KLK1, thereby releasing physiological levels of bradykinin when and where needed, generating beneficial nitric oxide and prostacyclin setting in motion metabolic pathways that can improve blood flow (through vasoregulation) to damaged end-organs, such as the brain and kidneys, supporting the structural integrity and normal functioning.” Source: Prospectus

With more than 100 published papers demonstrating the beneficial properties of KLK1 to treat AIS, CKD, this protein is already being sold in Japan, China, and Korea to treat these diseases. KLK1 is not sold in the United States, since there seems to be a number of drawbacks associated with this protein. With this in mind, the company intends to develop a synthetic version of KLK1.

Five clinical trials with 120 volunteers treated with DM199 demonstrated that the product has been well-tolerated. It is promising. The Phase 2 for the treatment of AIS has already commenced. The company expects to enroll 90 to 100 patients. The lines below provide further details on how study will be executed:

Source: Prospectus

The trials for the treatment of AIS should have beneficial results. Keep in mind that KLK1 is sold in Asia, where a trial involving 446 patients was successfully executed. The image below provides further details on this matter:

Source: Prospectus

Regarding the treatment of CKD patients, over 20 clinical papers have been published about the use of porcine KLK1. In a 90 CKD patients study executed in 2011, the treatment restored kidney function to normalized levels. The image below provides further details on the results:

Source: Prospectus

Stock Catalysts: Focus On The Treatment Of AIS

The company expects to release information about the treatment of AIS in Q4 2019 or Q1 2020. In addition, information about the treatment of CKD will be released in mid-2019.

The treatment of AIS is in Phase 2 of development and that of CKD is at Phase Ib of development. In addition, the company expects to initiate Phase 2 study for the treatment of Vascular Dementia following AIS study. The image below provides further details on this matter:

Source: Prospectus

Investors should focus on the information to be released about the treatment of AIS. If the results are beneficial, the share price should pop in Q4 2019 or Q1 2020. Other product candidates are also relevant, but the company does not expect to complete the tests before 2020. The lines below provide further details on the company’s current strategy:

Source: Prospectus

Investors should understand well that DiaMedica Therapeutics may not have sufficient resources to complete trials for CKD and Vascular Dementia. This means that the company could sell more equity to finance these two trials, which could lead to share price depreciations.

Market Opportunity

The World Health Organization notes that 15 million people every year suffer a stroke. Taking into account that there is currently only one FDA-approved pharmacological intervention for AIS, there seems to be a large market opportunity for DiaMedica Therapeutics. Using an estimated cost of $8,500 per patient and with 15 million patients, the expected target market equals more than $127 billion worldwide. In the United States, Europe, and Japan, there are $1.7 million strokes each year. Thus, the market opportunity in these countries should be equal to $14.4 billion.

DiaMedica Has No Financial Risk But Burns Cash At High Pace

Most investors will appreciate the company’s financial situation. With an asset/liability ratio of 1.8x and no long-term debt, the financial risk of DiaMedica Therapeutics seems almost non-existent. In addition, the largest part of the total amount of assets is cash. As of December 31, 2017, the cash in hand, equal to $1.3 million, represents 75% of the total amount of assets. The image below provides further details on this matter:

Source: Prospectus

With that, the income statement shows that DiaMedica Therapeutics burns significant amount of cash each year. In 2017 and 2016, the company used $3.2 million and $1.7 million, respectively, in research and development. In addition, with total expenses equal to $4.2 million in 2017, the amount of cash owned by DiaMedica Therapeutics does not seem very significant. The company will need to raise a substantial amount of cash to finance its operations. Investors should follow closely the sale of equity in this case. Stock dilution may be quite significant on this case and could push the share price down. The image below provides further details on this matter:

Source: Prospectus

The cash flow statement shows a very similar profile. The CFO in 2017 and 2016 was equal to -$3.9 million and -$2.98 million, respectively. With that, it seems beneficial that the share-based compensations are not very significant. They were equal to $0.4 million and $0.2 million in 2017 and 2016, respectively. Other directors running biopharmaceutical companies receive a larger amount of shares in exchange for their services. The image below provides further details on this matter: Source: Prospectus

Use Of Proceeds And Expected Capitalization

DiaMedica Therapeutics expects to use the proceeds to finance the clinical development of DM199. In addition, the company expects to use the proceeds to finance the Phase 1b and Phase 2 in patients with chronic kidney disease. The following lines provide further details on this matter:

Source: Prospectus

The image below provides further details on the expected capitalization of DiaMedica Therapeutics after the IPO.

Source: Prospectus

Please note that the table above does not take into account certain convertible securities. After the IPO, the company will have outstanding certain stock options with an exercise price of $7.87 and warrants that can be exercised at $6.67. These securities could create stock dilution, which may push the stock price down, so investors should study these features closely. The lines below provide further details on this matter:

Source: Prospectus

Valuation

With 11.8 million shares outstanding after the offering at $4.5, the expected market capitalization should be equal to $53.1 million. Deducting cash of 20 million, the enterprise value should be equal to $33 million.

Other competitors are targeting different approaches to treat AIS. The prospects read the names as given below:

  • Athersys, Inc. (ATHX)

  • Biogen Inc. (BIIB)

  • ZZ Biotech LLC

  • Acticor Biotech SAS

Among these companies, only ATHX seems to have a size to be comparable to DiaMedica Therapeutics. Athersys, Inc. has several product candidates at Phase 3 and Phase 2 as shown in the image below:

Source: Athersys

ATHX has an enterprise value of $243 million with cash in hand of $47 million and no debt. DiaMedica Therapeutics has less product candidates, and they are at stage 1 and 2, while ATHX has several candidates at Phase 3 of development.

Downside Risk

The amount of cash in hand is a feature to monitor very closely after the IPO. Keep in mind that if DiaMedica runs out of cash, it will sell further equity, which could lead to share price depreciation. The company did not mention when it will run out of cash, but it did say that further financing will be required to finish the research of the clinical development of DM199.

In addition, if the results are beneficial in Q4 2019 or Q1 2020, trading losses could be significant. In this scenario, the share price could decline. The company could trade at $1.69, its cash per share.

Conclusion

With the target market for acute ischemic stroke being more than $14.4 billion, DiaMedica Therapeutics could be trading with a market capitalization of more than $53.1 million. Keep in mind that the company is testing with a protein which is currently being used in Asia.

DiaMedica’s main product candidate is still at Phase 2 of development. The company will take until Q4 2019 or Q1 2020 to complete its Phase 2. With that, the company should raise capital to complete its Phase 3 of development, so investors should expect stock dilution after the company releases its results in Q4 2019 or Q1 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.