BioDelivery Sciences - Investment In Ending The Opioid Epidemic

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About: BioDelivery Sciences International, Inc. (BDSI)
by: TripleGate
Summary

BDSI and Belbuca are part of the solution to the opioid epidemic, not the problem.

Buprenorphine is finally getting the recognition by doctors and insurance companies for being a safer long-term pain treatment alternative.

I Believe recent Short Report is riddled with mistakes.

BDSI and Belbuca are Part of the Solution to Opioid Epidemic

As everyone knows by now, the U.S. healthcare system has been struggling with millions of people becoming dependent and/or abusing opioid pain killers. BDSI is one of the companies whose main product, Belbuca (buprenorphine buccal film), is a key component in ending this epidemic.

In the U.S., the Drug Enforcement Agency (DEA) classifies drug substances based on their abuse/dependency potential. Oxycodone, fentanyl, etc. are classified as Schedule 2, compounds with a "high potential for abuse, with use potentially leading to severe psychological or physical dependence."

Buprenorphine, the active ingredient in Belbuca has been classified as Schedule 3 by the DEA since 2002 (moved from Schedule 5), because it has a "moderate to low risk of developing dependence." Buprenorphine also does not lead to respiratory depression, and has a number of other safety advantages.

Finding safer yet effective analgesic is an unavoidable component of fighting the opioid epidemic. Belbuca is one of the few tools the healthcare system has in this fight.

Healthcare System Beginning to Recognize the Value of Belbuca

Prior to 2017, Belbuca was marketed by ENDP without any success, in spite of a large, 375-person salesforce. However, since opioid dependence/abuse has taken the national spotlight over the last 18 months, insurance companies and doctors began to pay attention to Belbuca.

Insurance companies and PBM's have started to place the drug on preferred formulary status across the board. Today, more than 115 million people have preferred access to Belbuca. Every major PBM and major insurance company covers the product. These are the updates from BDSI on insurance coverage: Feb 2019, Nov 2018, Aug 2018, June 2017.

Even though BDSI has been promoting Belbuca with a small salesforce of ~130 reps, Rx's have been on a steady rise since insurance coverage started to kick in mid-2017. Doctors also started to pay attention to the product, as the number of physicians prescribing Belbuca has increased from ~2,700 to ~4,000 during 2018 alone! (See Slide 16)

Below is the actual TRx's from Bloomberg/Symphony:

Upside Potential for BDSI Stock

BDSI has guided to $200m+ of peak sales for Belbuca, but I do not know why sales couldn't reach twice that amount. Once Belbuca sales reach a critical level, I believe a larger pharma company will step in and purchase Belbuca to eliminate all of the BDSI overhead.

BDSI could easily be valued at $9-10/shr in a take-out.

I Believe recent Short Report is riddled with mistakes.

BDSI has been the target of a Short Seller attack on Twitter and then on SeekingAlpha. I believe the report is riddled with mistakes in judgment. I'll go through most of them:

1) "Insiders are Selling (Frank O'Donnell & Broadfin Capital)"

First, the Short Report claims that Broadfin has "filed to sell 100% of their shares at prices below today’s market price. (Source)" This statement contains a number of mistakes:

  • This is simply a registration statement for the unregistered stock Broadfin received during their private placement. All shares issued in PIPEs get registered. BDSI has NOT actually announced any offering. The original S-3 was filed in Nov 2018, and BDSI did NOT conduct any offering then, either. Once the registration statement is effective, BDSI and/or Broadfin will be ABLE to sell shares if they decide to, but this document is not an indication whether or not, or when, that could occur.
  • Besides these 12mm shares, Broadfin also owns ~4.2mm of registered shares, which the filing does not cover. Here is a statement of their beneficial ownership showing the two classes of shares. The claim that Broadfin filed on "100%" of their ownership is also incorrect.
  • The stock price on the registration statement, as the footnote indicates, is just a place holder to calculate fees. That's not an actual offer price.

Second, the Short Report draws tries nefarious conclusions from the fact that Frank O'Donnell is selling stock. Per Bloomberg, he owns less than 1% of BDSI common stock. Also, he and other directors have been selling stock consistently for at least the last 6 years. That's nothing new and hardly news.

The news is, that after many years of languishing, the prospects of BDSI stock finally got the who's who of the healthcare specialist investor world interested. As of Dec 2018, the largest investors in BDSI are blue chip hedge funds which are still buying the stock:

2) "BDSI pays doctors with questionable history and engages in other questionable business practices like co-pay cards for free opioids."

I believe these claims are also erroneous and are misleading:

  • First, the CMS link in their article trying to prove "questionable business practices" is showing payments BDSI made to doctors in the context of Bunavail, their medication for the TREATMENT of opioid addiction.
  • Second, the only doctor in their other link who is shown to receive material compensation may have exaggerated his connection to some universities during a foreign conference. Again, hardly news-worthy, in my opinion. More importantly, as the Slide 16 above showed, there are ~4,000 doctors who are prescribing Belbuca, a number which has been growing by ~300 doctors/month.
  • Third, every single branded medication in the US comes with co-pay cards. Given the sky high out-of-pocket expenses for chronic drugs, that's a welcome gesture by everyone. I think drawing nefarious conclusions from the existence of co-pay cards is a mistake.

More importantly, BDSI put brand new management in place during 2018. Scott Plesha from SLXP became President and Herm Cukier from AGN became CEO. I am familiar with the President's track record from his prior life at SLXP, where he did an excellent job selling lots of products.

3) "BDSI - Dispelling the Bull Story"

The Short Sellers also tries to dispel the Bull case on BDSI with claims, in my opinion, that are riddled with mistakes in judgment:

Their first claim is that TEVA can launch a generic when Belbuca market share reaches a certain point, which is not far away, since Belbuca market share is already 31% (Slide 14 above). Here are some issues with this idea:

  • Belbuca does NOT ONLY compete with Butrans, which is show on Slide 14 of the Investment Presentation. It obviously competes against the Schedule 2 opioids also. Slide 15 shows that Belbuca's market share is about 1.6% of the market. Therefore, it has not even begun scratching the surface.
  • NEVER in the history of generic settlements, was anyone able to launch a generic, because the brand "sold too much." If anything, the brand company controls uptake with marketing, so they can limit market share in such a theoretical scenario.

Their second claim is that other competitors may enter the market; either generics or Purdue with a competing product. Here are some of my issues with these ideas:

  • Regarding Purdue, they are showing this article from Rolling Stone. Except, even the headline says that this patent relates to an addiction TREATMENT product. Which, even if approved, would compete with Bunavail and NOT Belbuca.
  • Regarding Belbuca going generic...TEVA, the the first-to-filer on Belbuca, settled w/ BDSI for a 2027 launch. That means that other generic filers are blocked from receiving approval until TEVA's 6-months of exclusivity period expires, unless they can invalidate the Belbuca patent, which is THE highest possible hurdle in any patent challenge. To date, BDSI has prevailed in ALL of their patent challenges and IPR's to date vs Indivior, Monosol, Teva, etc. A patent, which has been litigated by the largest generic manufacturer in world, getting invalidated is not exactly a thesis I would count on as my Plan A. In my opinion, this claim is simply trying to create panic.

Another claim they make is, that recent growth in Belbuca Rx's has been due to a "large increase in salesfore," implying that the growth is not sustainable. As evidence for their theory, they show the chart below.

Source – data from within Jan 2019 Company Presentation – Slide 14

Here are the mistakes in these claims:

First, this chart does NOT reflect reality. I don't know where the data for the chart came from, since Slide 14 of the company's slide show does NOT contain TRx information. As I showed above, this is the actual TRx data for Belbuca from Bloomberg/Symphony. Not only is Belbuca growing, its growth is ACCELERATING.

Second, prior to 2017, ENDP used a 375-person salesforce to market Belbuca, without any success. Current sales run-rate is several fold higher, in spite of a salesforce that 1/3 of the size. The reason for this, as I explained above, is insurance coverage and doctors starting to discover a safer chronic pain medicine.

There are other claims in the Short Report that I find to be irrelevant. Whether or not patients like a drug is not relevant; what is relevant whether doctors prescribe it and patients take it - which is what the TRx data show. I also do not care about the founder's past business practices. BDSI has been around for many years, it's not a new company; three of its products received FDA approval.

While I am the first one to agree that BDSI was mismanaged in the past in several ways, I believe they got lucky with ENDP returning Belbuca to them. With the current focus on the opioid epidemic, I believe Belbuca sales will continue to accelerate, because Buprenorphine is a safer alternative to oxycodone.

Risks

The only theoretical risk to BDSI, as I see it, is a generic company invalidating the Belbuca patent. Which is a risk to any branded pharmaceutical. However, even that event would take a fews years to unfold and given the fact that TEVA has settled with BDSI, I find this risk to be rather small.

Disclosure: I am/we are long BDSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.