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Aequus Pharmaceuticals (OTCQB:AQSZF) has a very low market cap of ~18Mio CAD, a Q3/2018 revenue of only ~420k CAD, and the company does not promise to heal Alzheimer's, cancer or diabetes. Even more, it does not have a spectacular multi-billion dollar blockbuster in its pipeline, and the company's current focus is the Canadian market. You may wonder why such a company deserves any investor's attention. In this article, I'd like to answer this question by sharing with you Aequus' business strategy, the current products and anticipated next events for 2019 and beyond.
Business Strategy - Phase 1
CEO Doug Janzen has a background as investment banker and has been involved in the life science industry for 19 years. When he co-founded Aequus in 2013, he wanted to go a different path than many other biotech startups.
Figure 1: Aequus CEO Doug Janzen
The traditional approach in the biotech startup sector is to find a promising early-stage drug and push it through clinical trials. This is a 5-10 year, high-risk endeavor which requires large fundings and statistically has a very low success rate.
Aequus, however, decided to focus on sales and marketing of existing medicines in Canada in the first phase - medicines that will not generate enough revenue in the Canadian market to be of interest for global health care players, but still being of interest for a small company like Aequus.
Janzen understood that in Canada 80% of the population is concentrated in a handful of metropolitan areas. This allows a small company like Aequus to reach most people in the country with a small and efficient sales structure, operating with a low cash burn rate of currently ~5Mio CAD per year.
Goal of "phase 1" is to in-license enough products for sales and marketing in Canada to reach profitability. On achieving this goal, Aequus will be in a position to fund "phase 2" of its business strategy, which intends to bring the company up to the next level of revenue growth.
Business Strategy - Phase 2
For "phase 2", the company specializes in improving existing medicines by applying an existing and approved component through a long-acting transdermal patch. As an example, with "AQS-1303", the patient will have to apply one transdermal patch daily instead of orally taking pills up to four times a day. This results in significant safety and usage improvements, making the product superior in the eyes of health authorities and doctors. There are three products in the development pipeline for "phase 2", for which Aequus has global rights, and I will talk about them later in this article.
Besides the development of the transdermal patch, this approach usually requires one or two small clinical studies only to demonstrate bioequivalence to the original medicine. Furthermore, 2 of these 3 products are expected to qualify for the FDA 505(b)(2) pathway for approval, an abbreviated regulatory process. This means, in short, very low funding requirements, much shorter timelines and much lower risks until market compared to going through full clinical I-III trials and a full FDA New Drug Application process.
Products and Status
Figure 2: AQS Products and Pipeline
Aequus is progressing with "phase 1", i.e., sales and marketing of in-licensed products in Canada. The following products are marketed today:
- Vistitan (Glaucoma)
- Tacrolimus IR (Transplant)
- Zepto (Cataract Surgery)
The most interesting product here is Zepto. Zepto is a revolutionary, cost-effective method for cataract surgery available since 2017 and exclusively licensed for the Canadian market by AQS in April 2018. It originally has been intended to replace the traditional femtosecond-laser method for the premium 10% of cataract surgery cases, i.e., 10% of ~350,000 procedures per year in Canada. Meanwhile, Zepto has been proven most effective and with the indication of additional unexpected medical benefits. It is anticipated to potentially become the standard method for a significantly higher percentage of procedures and has the potential to be Aequus' driver to profitability in 2019. Zepto started generating revenue in Q3/2018, and sales are expected to grow substantially in the following quarters.
The latest addition to the portfolio has been announced on 7th March, 2019. The company signed a term sheet for an exclusive license for Canada for preservative free dry eye products, for which "Aequus expects all products to be launched in Canada this year with peak annual revenues from this basket of products estimated to be approximately $5Mio CAD". Considering Aequus to require ~5Mio CAD for breakeven only, this volume is a great deal for the company.
In February 2016, Aequus licensed two exciting products from Supernus Pharmaceuticals (SUPN): Trokendi XR (Topiramate XR) and Oxcarbazepine XR for the treatment of epilepsy. The anticipated annual peak sales of each product are ~15-20Mio CAD. The components Topiramate and Oxcarbazepine are already approved by the Canadian health authorities with twice-daily dosing. Trokendi XR and Oxcarbazepine XR are once-daily, extended-release products requiring a small, low-cost clinical study before submitting to the health authorities. Here again, "once-daily" and "extended-release" make them superior to existing products, which means they are anticipated to squeeze the current products out of the market.
Unfortunately, the clinical studies have not been initiated since, for reasons not officially communicated. On January 29-30, 2019, at the Cantech Investment Conference, however, the long-awaited study for Trokendi XR was announced to start in Q1/2019 and the product to hit the market in 2020 after approval of the health authorities.
These two products have been seen by many investors as the short-to-mid term key opportunity during the past two years. The long delay has impacted the trust and patience of investors during the past many months. My assumption is that it was one of the main reasons why the share price saw a general downtrend during this period. The recent Trokendi XR study announcement certainly contributed to the latest uptrend.
Although the company has not yet reached profitability, it is already preparing "phase 2" and is pushing the pipeline as much as currently possible with its limited resources.
- AQS-1301 is a transdermal patch for aripiprazole, a component approved under the name Ablify (by Otsuka Pharmaceutical), for the treatment of many neurological conditions, including schizophrenia and major depressive disorder. Two proof-of-concept studies have been successfully completed already.
- AQS-1303 (pyridoxine/doxylamine) is a transdermal patch for the treatment of nausea and vomiting related with pregnancy. It is certainly the most interesting product in the pipeline. The currently available 4-times-a-day pyridoxine/doxylamine equivalent (Diclegis) of Duchesnay USA reached sales revenues of ~186Mio USD in the US market alone. Similar to the other products, a daily transdermal patch has significant safety and usage advantages compared to a 4-times-a-day tablet dosing, and will therefore be preferred by health authorities and doctors. Aequus partners with Corium (CORI), a leading transdermal product developer and manufacturer that is in the process of finalizing the formulation at no cost in exchange for the right to be the exclusive clinical and commercial manufacturer of the product. FDA already confirmed in May 2018 that the abbreviated 505(b)(2) regulatory pathway would be appropriate for AQS-1303, and that a single bioequivalence study is expected to be sufficient as preparation for submission.
- For AQS-1304, there is little information available yet. On 10th January, 2018, CannaRoyalty and Aequus announced a joint venture to develop and commercialize cannabis-based therapies targeting neurological disorders. Given the still-ongoing cannabis hype in the market, a surprising announcement at the right time may trigger unexpected investment interest.
Balance Sheet and Cash Flow
We see that Aequus requires 4-5Mio CAD of annual revenue for profitability at this stage. For 2018, it will likely be at ~1.6-1.7Mio CAD of revenue with a loss of ~2.8Mio CAD. Doug Janzen already announced Q4/2018 to be a new record quarter for revenue, continuing the history of growth:
Growth is anticipated to accelerate significantly in 2019 due to increasing Zepto sales and, later in the year, by the market entrance of the dry eye products. The annual financial report for 2018, covering Q4/2018 (expected end of April 2019), and the Q1/2019 report (expected end of May 2019) are highly anticipated, as they may give a strong indication for the Zepto sales and growth potential.
Last but not least, the company's balance sheet:
The balance sheet confirms that this is currently a penny stock where traditionally cash is short and the next equity financing is always waiting around the corner. The good news is that Aequus has proven to be very considerate with equity financing in the past. The low cash burn rate also contributed to the fact that with only ~78Mio shares available, dilution has been reasonably limited.
It is likely that another equity funding is coming up soon. My personal guess is that it may be sized for around 1.0-1.5Mio CAD in order to ensure daily operations and to fund upcoming bioequivalence studies, adding a dilution of ~4-6Mio shares (plus ~2-3Mio warrants). Given the growth potential, this looks quite acceptable to me, and it may well be the very last equity financing required for covering losses in daily operations.
Investment Opportunity and Risks
At the beginning of the article, I raised the question as to why such a company deserves the interest of investors. It got my interest because it is led by capable management with a proven track record and it has found a smart approach in a low-risk niche of a high-risk sector. Of course, "low-risk" is relative in this case, as we are still talking about a penny stock in a high-risk sector. If you are the risk-averse type, then this stock is certainly not for you.
Why do I think it is now an interesting time to look at Aequus? The company had a rather slow two years in 2017/2018, where a lot of background work was done and a network was built up. It has, however, not delivered what many investors anticipated for this period.
In the past 2-3 years, the main focus had been on the Supernus products (Trokendi XR, Oxcarbazepine XR), as they were expected to bring Aequus to profitability short term, and on AQS-1303, as this product was seen as the mid-term "kind of blockbuster".
Meanwhile, the Trokendi XR trials have been announced as starting towards end of Q1/2019, and AQS-1303 made significant progress too with the Corium partnership and the positive FDA confirmation regarding study requirements and regulatory approval pathway. In addition, Aequus in-licensed with Zepto an extraordinary product which will, together with the recently announced dry eye products, fill the gap in 2019 until the "big products" above are ready for market in 2020 and 2021.
The recently published unexpected medical benefits of Zepto, the rumors of significant sales growth in Q4/2018 and Q1/2019 mainly due to Zepto, and the announcement of the Trokendi XR trials are assumed to be the drivers for the uptrend in the chart since the beginning of the year.
- Opportunity and Projection for 2019: With a focus on Zepto and the dry eye products, it is reasonable to assume that it is feasible for Aequus to reach profitability until end of 2019 with a quarterly revenue of >1.2Mio CAD. This event will certainly be a milestone in the history of the company.
- Opportunity and Projection for 2020: With the imminent start of the Trokendi XR studies, the company will likely be able to submit for regulatory approval in Q4/2019, which would allow the product to generate revenue as of mid-2020. With a projected ~20Mio CAD of annual peak revenue and ~5Mio CAD revenue for a first full year, this product will be the next game changer for Aequus. A projection of 8-10Mio CAD of revenue for 2020 seems achievable.
- Opportunity and Projection for 2021: Even just focusing on the basket with Vistitan / Tacrolimus / Zepto (>5Mio CAD), the dry eye products (3-5Mio CAD) and Trokendi XR (5-10Mio CAD), revenue projections anticipate an annual revenue up to 20Mio CAD for 2021. The same number was mentioned by CEO Doug Janzen as the revenue target for 2021.
In addition, my expectation is that after the Trokendi XR studies, Aequus will initiate the final study for AQS-1303. This would allow the product to be ready for FDA submission around mid-2020 and start to generate revenue towards mid-2021, which will be another game changer for the company. Furthermore, as Aequus has the global rights for AQS-1303 but will not be in the position to handle global sales and marketing, it will out-license the product for other countries and regions, generating further revenue.
You realize I haven't mentioned AQS-1301 and AQS-1304 yet, of which the latter has the biggest potential for a surprise during 2019, if you want to believe the rumors that Aequus soon intends to announce news in the cannabis area. For AQS-1301, I only expect significant progress once AQS-1303 has entered the market, due to capacity and resource limitations of this small company.
On a daily business, AQS is constantly working on in-licensing more products to its portfolio, and it is likely for us to see more news during the upcoming months.
Looking at the current chart, we see the stock hitting an all-time low at the end of 2018 and showing an uptrend since:
It looks like many investors seem to have started to understand the potential of Zepto only recently, also with the publication of the unexpected additional medical benefits. Together with the announcement of the Trokendi XR studies start, this seems to have stopped the downtrend.
Risks and things to look out for
We are looking at a non-profitable penny stock in a high-risk sector. It should be obvious that this stock is not for risk-averse investors. If you invest in a company like Aequus, you need to be in the position to handle the full loss of your investment in the worst case.
In addition to the general risks that you need to be willing to accept, these are the points I recommend to look out for during the upcoming months:
- On the financing side, a new equity financing is likely to happen in the near future in order to cover for daily operations and fund upcoming studies. I anticipate this financing to be moderate, but it will nevertheless increase dilution.
- Aequus has a track record of announcing events and fail on timely delivery, which is not unusual in this sector. The good news is that the company also has a track record of delivering at the end. Often late, but it does deliver. The most prominent and extreme example is the Supernus products, which were announced in 2016 to be ready for market during 2017. The failure to deliver on these products resulted in a loss of trust in the company to be able to execute. During the past 12 months, however, Aequus demonstrated its capability to deliver by licensing and introducing Zepto, licensing the dry eye products, advancing AQS-1303 and, finally, announcing the Trokendi XR study.
- While I'm personally confident that the company will deliver this time, it is certainly wise to closely observe the execution of the announced events for 2019. Investors do not have a lot of trust and patience with Aequus at the moment. Failure to deliver for some more months will likely bring the share price down again towards its all-time low.
- There is quite a lot of excitement out there around Zepto and its revenue potential. There are, however, no hard facts available yet that Zepto revenue is indeed on the path to lift Aequus to profitability this year. I will have a close look at the Q4/2018 and Q1/2019 revenue growth to stay on top of the developments.
Disclosure: I am/we are long AQSZF. 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.