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Sirona Biochem (Ticker: OTCPK:SRBCF) is a nano/micro-cap company with a cosmetic and pharmaceutical program. Their proprietary fluorination platform for creating more stable carbohydrate-based drugs was what initially caught our interest. But drug development is a slow and expensive business. They currently only have one compound, a sodium-glucose co-transporter 2 (SGLT2) inhibitor, for diabetes in their drug pipeline. This molecule is currently being developed by Wangbang/Fosun, a Chinese pharmaceutical company. The SGLT2 inhibitor program is looking to begin phase 1 clinical trials soon. Due to its early stage nature, we will ignore their pharmaceutical arm in the upcoming discussion.
Note that as Wangbang continues development work in China, it may trigger milestone payments (up to $9.5M by Phase 3). However, it will be a long time before Sirona sees any of this. Instead, a look at their cosmetic programs shows a much more interesting opportunity.
Figure 1. Sirona pipeline from their 2019 Investor Presentation
Sirona currently has two main cosmetic programs – skin lightening and anti-wrinkle. Skin lightening, our main focus, is the more advanced of the two.
Skin lightening is in a global uptrend and extends well beyond the medical market. Historically, in the US, skin lightening was designed to even out blemishes/hyperpigmentation problems, wherein some patches of skin are darker than the surrounding skin (e.g. dyschromia). While generally harmless, hyperpigmentation could potentially take an emotional and psychological toll.
However, beyond hyperpigmentation disorders, there is a growing trend to try and look “whiter”, wherein people have a desire to look more “fair”. Whether it’s due to culture, personal aesthetics, a mix of the two, or some other reason altogether, there is an increasing interest ex-US for aesthetics-related skin whitening treatments.
Figure 2: Breakdown of the skin lightening market from Sirona's 2019 Investor Presentation.
This demand is particularly strong in Africa and Southeast Asia. A World Health Organization bulletin from 2011 mentioned that from a low of 25% in Mali to a high of 77% in Nigeria, many women in Africa reported that they used skin whiteners on a regular basis. Similarly, 40% of women in Southeast Asian countries (e.g. Korea, Taiwan, China) reportedly use skin lighteners. These numbers have likely gone up since the report came out, given the growth in the skin lightening market. As an interesting aside, a vitiligo treatment for Asian patients faced recruitment challenges after it was found to have a darkening effect.
Given the growing demand for skin whiteners, the number of options have been proliferating; however, some of the more prevalent agents include mercury, corticosteroids, and hydroquinone, the gold standard.
Hydroquinone has a rather long and controversial history. It has been in use for several decades and is the only FDA approved treatment for depigmentation, either alone or in combination (fluocinolone acetonide 0.01%, HQ 4%, tretinoin 0.05%). However, hydroquinone has already been banned in Europe, Japan, and Australia, with the number of countries continuing to ban or restrict its usage increasing over time. Part of the driver behind this is that chronic application of hydroquinone can lead to skin related disorders, such as exogenous ochronosis, which is defined by paradoxical darkening of the skin and is difficult to treat. In addition, there have been reports of carcinogenicity in rodents; however, this has yet to be demonstrated in humans over the course of hydroquinone’s long history of usage across a number of industries.
While citing the above as a probable cause for concern, in 2006, the US FDA had proposed a ban on over the counter (OTC) hydroquinone sales; however, after some industry furor, this eventually ended with treatments containing 2% hydroquinone, or less, being available OTC, while higher concentrations require a medical prescription.
Even with so much going against hydroquinone, its use is still extremely prevalent. In 2017, Ghana banned hydroquinone in bleaching creams, with the acting chief executive of the Ghana FDA quoted as having said:
The bleaching agent in most bleaching creams is hydroquinone and the Ghana standard now is, there should be zero percent hydroquinone in bleaching creams.
However, this does not stop it from being used. A study from 2014 that looked at 30 different whitening creams sold on the open market in Southern Nigeria found that essentially all of them had hydroquinone; however, concentrations cap out at roughly 2%. Similarly, a recent analysis of 51 brands by the Rwanda Standards Board found that only 4 products satisfied legal requirements for mercury and hydroquinone. But this problem extends beyond Africa. For example, in the UK, where hydroquinone is regulated, there is still a black market for hydroquinone-based whitening creams. This is also true for many other countries in Europe.
The prevalence of banned substances in skin whitening creams comes down to two factors: economics and efficacy. Given the growth in the whitening market, an increasing number of compounds with possible depigmentation properties are being identified on an ongoing basis. These generally fall under 1 of 6 mechanisms of action, which will not be discussed herein. More importantly, per a 2006 NY times article:
Some of the most effective agents are also risky — and are often the least expensive, like mercury-based ingredients or hydroquinone, which in Thailand sells for about $20 per kilogram (2.2 pounds), compared with highly concentrated licorice extract, which sells for about $20,000 per kilogram.
Source: NY Times article
While price is a driver, effectiveness is just as important. In general, there is a paucity of proof of clinical efficacy for many putative agents. A survey of 207 patients with hyperpigmentation disorders who had used OTC lightening creams found that the majority of subjects reported that no improvement was observed. Granted, data validity (e.g. recall bias, single center design, etc) may be questioned, but it is interesting to note. Likewise, due to a lack of standardization, concentrations of active ingredients can vary significantly between formulations, which could contribute significantly to the final outcome. Overall, hydroquinine is cheap and clinically effective, but has a less than appealing side effect profile.
Sirona has demonstrated that its current lead compound, TFC-1067, is safe and effective for skin lightening, as compared to hydroquinone. To provide some history, in 2014, Sirona had licensed TFC-849, a predecessor, to Obagi/Valeant. However, this deal eventually fell through as, on top of being bought out, Obagi had difficulties creating a workable formulation.
During this time, Sirona had been pushing forward with a different proprietary skin lightener, TFC-1067, which looks to be a florinated variant of arbutin that does not break down into hydroquinone. We assume this compound was easier to work with in comparison to TFC-849, as they managed to scale it up and get it into a workable formulation that could be used for clinical testing.
Figure 3. Share price data around time the time when Sirona announced successful completion of their clinical trial for TFC-1067.
Subsequently, TF-1067 entered into a dyschromia clinical trial in the US in late 2018. In mid-April 2019, Sirona announced that the trial was a success and that their formulation was more effective then the gold standard, 2% hydroquinone (OTC limit), at evening color and just as effective in lightening. Unsurprisingly, this led to an uptrend in share price.
Afterwards, on May 15, Sirona announced results from an independent study (denoted by the sudden spike in price in the above chart) ran by a potential distributor in China (later revealed to be Tinyi). As the study was performed independent of Sirona's input, the distributor had not opted for a double-blinded study against a comparative compound. Regardless, out of the 60 subjects, 90% had reported a whitening effect within 4 weeks and, more importantly, no safety concerns were raised.
More recently, Sirona announced that they had worked through some technical limitations to acquire the toxicology data necessary to clinically test TFC-1067 at 0.4%, which is set to take place in Q2 2020. Moreover, TFC-1067 was a non-irritant in all 12 tested subjects. This could have important implications, as the whitening effect would likely be much quicker while still being safe.
On the point of cost, estimates from 2015 suggested that $0.10 CAD of TFC-1067 was sufficient for a 100 mL vial (final concentration of 0.1%). Their clinical studies, on the other hand, appears to have used 0.2%, which would translate to $0.20 CAD of TFC-1067/vial. This would be roughly equal to $0.15 USD per vial at current exchange rates (~1.34 CAD/USD). However, TFC-1067's cost basis has likely been reduced, given that they are working on scaling and manufacturing efficiencies as of May 2019.
As a reference, assuming hydroquinone is priced at $10 USD/kg and used at a concentration of 2-4%, this would translate to a cost of $0.02 – 0.04 USD for a 100 mL vial (2-4g w/v). While TFC-1067 is slightly more expensive, it's non-irritant profile more than makes up for it.
Note that Sirona has also been looking into enhancers to improve the effectiveness of their formulation's effect, which is currently a work in progress.
Sirona has opted for the patent and license strategy as its commercial route of choice, and has been showing signs of success of late. In February 2019, Sirona had announced that they had advanced patent protection in a number of key countries. In October 2019, Sirona signed a non-exclusive deal with Rodan + Fields, a multi-level marketing skin care company based in the US. However, it's important to recall that the bulk of the market is ex-US/Europe.
With respects to the Chinese market, Sirona signed a term sheet with Tinyi Trading, a distributor in China, in October 2019. This gives Tinyi distribution rights in Asia, along with exclusive rights in China. The definitive agreement will be signed in Q1 2020 after finalizing additional information. As for Japan, Sirona has had a consultant on the job since October 2018, but the progress to date is not entirely clear. Beyond this, the July 2019 letter to shareholders mentioned that Sirona is currently in communications with a number of other potential partners.
Overall, the licensing strategy is probably the best option for Sirona. A NY Times article from 2006 reported that 62 new skin whitening products were introduced to the Asia Pacific region in the previous year, while the average over the previous 4 years was 56 items. This has likely increased over time given the boom in the whitening industry.
With the intense competition between small/medium local businesses and multinational players, including the likes of Estee Lauder, Unilever, L'Oreal, Shiseido, and many other familiar/affiliated brands, it's unlikely that Sirona would have had the expertise and experience required to navigate the foreign markets had they opted to go it alone. Instead, they now have to catch the eyes of skin care distributors and brands, which, while difficult, is arguably seeing some signs of initial success.
While not the focus of this article, Sirona also has a potential anti-wrinkling/aging compound that may be of interest, but it is difficult to assess considering it only passed a preliminary safety assessment in May 2019. In 2018, Sirona had made a statement that their LIP-01 compound could cause fibroblasts to differentiate into lipofibroblasts, which could produce a plumping effect to fill out wrinkles. To quote the press release:
The effects of compound LIP-01 on the skin cells suggest that this compound can contribute to improving the quality of dry skin and reduce the signs of aging. Our goal is to develop LIP-01 as a non-invasive treatment for wrinkles by a mechanism very different from dermal fillers and Botox.
Source: Sirona press release
LIP-01 looks like it would be worthwhile to keep an eye on, considering the anti-wrinkle/aging market is several folds larger than the skin lightening market. However, we largely consider it as a bonus if it works out, and will re-evaluate our position pending further news.
Sirona’s financial state could be worse. We will be referring to the Management's Discussion and Analysis for the period ending July 31, 2019. This can be found on Sedar.
Their cash position was $2.9M, boosted in part by a strategic equity investment of $1.5M in July, which is the highest it's been in the past 2 years (vs. a low of $60K in January 2019). If their recent burn rate of ~$1.3M is maintained, they would have runway for ~2 quarters. The question is would they be able to close more partnerships before the need for more equity comes up.
On the other hand, there are currently ~25M warrants and 6M options that can be exercised at <$0.20, for an aggregate ~$5M. For reference, there are ~222M oustanding shares and ~262M shares at full dilution as of November 2019. The overall situation isn't stellar, but could be worse.
It is difficult to value Sirona since there is little to no details regarding much of its pipeline. We will first begin with TFC-1067.
To start, Sirona's market size estimate of $23B for the skin lightening market in 2020 seems a little optimistic and likely on the higher end of the spectrum, which seems to have a very large range. Some reports suggest $31B by 2024, $24B by 2027, or $23B by 2023, while others are much lower, such as $9B by 2024, or $8B by 2026. Going for a middle of the road number between $31B and $8B, we will assume that the global market is worth ~$20B USD by 2025. Thereafter, the lightening market can be subdivided into creams/lotions, masks, cleansers, and other products. One report seems to suggest that 50-60% of skin lightening products in China are creams, which we will assume is extrapolatable to the global market.
Assuming that TFC-1067 is a cream only, this would imply a global market size of $10B in 2025 USD. At 10% penetration, there would be $1B USD in sales. With royalties of 5-10% on sales (median royalty rate is ~5% of sales), that would translate to revenues of $50-100M USD. Depending on how one would like to think about multipliers, a market cap of $200-500M may seem reasonable some point in the far future. Note that this does not take into consideration how the cost of manufacturing and distribution would be divided.
The problem with our ball parking approach is that there are too many other factors to account for and appropriately discount. This would include the number and breadth of partnerships, execution risks, market acceptance/trends, time required, potential long-term complications associated with TFC-1067, and additional dilution. For example, there is a growing preference for all natural (no synthetic compounds) products, which may provide some head wind for TFC-1067.
On the note of dilution, there is currently a combined 30M warrants and options with an exercise price <$0.20. While they will very likely be exercised, it is unclear when. This would translate to at least 250M outstanding shares, plus what may come from further equity sells, strategic or otherwise.
If shares reach 300M, then with a market cap of $200-500M, the price per share would be $0.66 - 1.67 USD. As a reference, at the time of writing, Sirona was roughly $0.42 CAD/$0.32 USD, which gives it a market cap of ~$90M CAD or ~$70M USD.
Aside from TFC-1067, it can be argued that LIP-01 adds to Sirona's value; however, it's unclear how much, if any it could eventually contribute. The lack of any meaningful information aside, the program is still in the safety/dose identification phase, so it will likely be 1-2 years before it can be properly assessed.
Likewise, it's difficult to decide what to make of their fluorination platform, since we have not seen anything aside from the Wangbang partnership, which is still fairly early in the drug development process. While commercialization of the platform may not have been Sirona's main focus, the lack of companies approaching them to take advantage of the technology offers some pause and makes it difficult to assess the commercial prospects of the platform.
Lastly, in the recent letter to shareholders, it was mentioned that there were some projects that are currently being kept confidential for IP reasons. This makes it impossible to evaluate.
Overall, Sirona is fairly valued given the risks involved. However, we intend to continue holding a position, as the execution so far has been decent. Likewise, we are hoping the pipeline plays out.
It is quite difficult to gauge TFC-1067's place in the overall skin whitening landscape, given the amount of new extracts and compounds being trialed and sold; however, recent developments may lend some additional credence.
Prior to the clinical test results being known, Sirona had released an update to shareholders in February 2019 which mentioned that the unnamed Chinese distributor they were working with was considering a strategic equity investment pending clinical outcomes. Given how many products the distributor must be seeing on a regular basis, it can be argued that there was something unique about TFC-1067 that caught their attention.
Interestingly, in July, Sirona announced a strategic equity investment for Asian investors to initiate a position and to strengthen ties to the region (July 9, 2019 filing can be found on sedar.com). While the placement was oversubscribed, there did not appear to be any mention of who the participants were. However, we speculate that there was some level of involvement with the cited distributor.
Sirona will likely be a volatile play, but there is potential present. The skin whitening market is a rapidly growing segment in the Asian markets. While there are a number of options available on the market, the effective and economical options, such as hydroquinone and mercury, have also tended to include unpleasant side effects. Sirona has reportedly managed to create a synthetic compound, TFC-1067, that is not only safe but is also effective.
However, much of the value has already been captured in the current share price, after considering additional risks. That being said, the management team has been performing well, and so we will continue to hold our position and ride it out; however, this is only because we have recovered our initial cost following the surge back in the first half of the year. For anyone considering a new position, the focus will be on how comfortable they feel with management's execution and future pipeline ambiguities.
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Disclosure: I am/we are long SRBCF. 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.