Beyond Air: Buy The Stock Ahead Of March 5 Analyst Day
Summary
- Beyond Air’s first-ever analyst day, to be held March 5, will highlight the value of its LungFit nitric oxide (NO) platform and the potential of its clinical pipeline.
- LungFit PH (pulmonary hypertension) Pre Market Approval (PMA) submission is expected to be completed around the end of April and is on track for a 4Q20 launch.
- LungFit BRO (bronchiolitis) pilot study enrollment is expected to be completed by the end of February with data reported around midyear.
- LungFit NTM (non-tuberculous mycobacteria) proof of concept (POC) study will be initiated to evaluate its at-home program around midyear.
- Coronavirus (COVID-19) highlights the need for novel therapies for the treatment of bacterial and viral lung infections.
Beyond Air (NASDAQ:XAIR) is a medical device and biopharmaceutical company that is developing LungFit, a portable nitric oxide (NO) generator and delivery system that generates NO from ambient air. NO was approved for persistent pulmonary hypertension of the newborn (PPHN) in the U.S. by the FDA in 1999 and for PPHN and cardiac surgery in the EU in 2001. LungFit has several advantages over current standard of care, cylinder based delivery systems, and has the potential for broader use in indications currently being evaluated in two clinical trials. Beyond Air’s market valuation is disconnected from any reasonable estimate of intrinsic value, given the potential for LungFit PH to be launched in the fourth quarter of 2020 in the United States and the potential of its mid-stage clinical pipeline.
Source: Beyond Air February 2020 Corporate Presentation
LungFit PH is a Game Changer for the Treatment of Pulmonary Hypertension
Pulmonary hypertension is currently treated with NO delivered from cylinders. Hospitals that offer cylinder based NO for PH must have the ability to safely store pressurized cylinders, which each weigh about 75 pounds, and also have the ability to purge systems to avoid the buildup of dangerous NO2. Furthermore, a typical NO cylinder delivery system includes two cylinders and a cart that collectively weigh approximately 175 pounds. In addition to the requirements imposed on hospitals, the providers of NO cylinder based systems, Mallinckrodt (MNK) and Praxair, a wholly owned subsidiary of Linde plc (LIN), are required to have extensive and costly service networks to refill and deliver cylinders.
The NO for PH market is currently dominated by Mallinckrodt’s INOmax, which was acquired from Ikaria for $2.3 billion in 2015. According to Mallinckrodt’s public financial filings, sales of INOmax for the 12-month period ending Sept. 30, 2019 were $567 million.
Beyond Air’s LungFit produces NO from ambient air using its travel suitcase size generator that weighs 32 pounds, or 65 pounds on a cart. Unlike Mallinckrodt and Praxair cylinder systems, LungFit does not require safe storage and only needs a small cartridge to operate. Replenishing the cartridges can be accomplished by UPS or FedEx delivery. LungFit PH is a disruptive technology that should dominate the PH market within three to five years. The portability of the machine will expand the market by allowing smaller hospitals to offer NO therapy. Currently, only approximately 800 large hospitals with NICUs are capable of carrying cylinder based systems.
Source: Beyond Air February 2020 Corporate Presentation
LungFit BRO Has the Potential to Meaningfully Reduce Hospital Length of Stay for Young Children and Infants
Unlike FDA approved NO for PH, which delivers as much as 80 parts per million (PPM) NO to patients, the treatment of bronchiolitis with 160 PPM NO is not yet an FDA-approved indication. To date, Beyond Air has completed two pilot bronchiolitis trials totaling 110 subjects. A third pilot study began in 4Q 2019 and will read out 2H 2020. The first two pilot studies have produced encouraging data on reduction in length of hospital stay, suggesting NO therapy can reduce total cost of care for this seasonal lung infection that is currently treated with oxygen and hydration. The company plans to start a pivotal bronchiolitis study during the 2020/2021 winter season and potentially launch in 2022. Beyond Air believes LungFit BRO is a $1.2 billion worldwide commercial opportunity.
Source: Beyond Air February 2020 Corporate Presentation
LungFit NTM is a Promising Therapy for Nontuberculous Myobacteria Lung Infections
NTM lung infection is a disease with limited treatment options. Cystic Fibrosis and COPD patients are examples of populations that are at risk of infection and often become resistant to antibiotics. LungFit NTM is an at-home NO therapy that can potentially improve the lives of patients who too often eventually succumb to respiratory failure. So far, Beyond Air has treated 13 patients for NTM lung infection with NO at 160 PPM concentration added to background antibiotic therapy. These treatments have demonstrated very good safety and promising results, including one patient who was culture negative at day 51 and day 81. Other patients experienced a reduction in bacterial load and an ability to increase their walking distance. Therapy was limited to 21 days, as longer-term treatment was not feasible in the inpatient hospital setting. Beyond Air is planning to initiate a multi-centered, 12-week, self-administered, at-home pilot study of NO at 250 ppm in patients with NTM lung infection by mid-calendar year 2020. It is important to note that NO at high concentrations, for example above 160 ppm, not only vasodilates blood vessels but likely kills bacteria and viral lung infections. LungFit is the only high concentration NO generator and delivery system currently in development to our knowledge. Beyond Air believes worldwide sales potential for NTM is $2.5 billion and estimates a 2024 launch if successful.
Source: Beyond Air February 2020 Corporate Presentation
COVID-19 Highlights the Need to Develop Novel Therapies for Both Bacterial and Viral Lung Infections
Approximately 35% of bronchiolitis is caused by viruses other than RSV and some are deemed coronavirus. Steve Lisi, Beyond Air’s CEO, indicated on the 2Q 2020 quarterly conference call that he believes LungFit is effective in treating certain types of coronavirus based on data generated from the first two BRO pilot studies. Beyond Air didn’t perform its own virus genotyping in the first two pilot studies or the third pilot that is in progress, but in some cases hospitals did their own genotyping and shared data with Beyond Air. We believe Beyond Air will incorporate coronavirus genotyping in its pivotal phase 3 study that is to take place during the 2020/2021 winter season and is currently performing in vitro studies on certain strains of coronavirus.
Lisi is not alone in his belief that NO may be an effective coronavirus therapy. An NCBI abstract came to a similar conclusion. Researchers stated in that abstract "Most interestingly, we found that NO inhibits the replication of SARS-CoV by two distinct mechanisms. Firstly, NO or its derivatives cause a reduction in the palmitoylation of nascently expressed spike (S) protein which affects the fusion between the S protein and its cognate receptor, angiotensin converting enzyme 2. Secondly, NO or its derivatives cause a reduction in viral RNA production in the early steps of viral replication, and this could possibly be due to an effect on one or both of the cysteine proteases encoded in Orf1a of SARS-CoV."
Here is the abstract: Dual effect of nitric oxide on SARS-CoV replication: viral RNA production and palmitoylation of the S protein are affected.
If NO is proven effective in treating coronavirus and is eventually proven to be effective in the treatment of a wide range of bacterial and viral lung infections, LungFit could be widely used and is especially desirable in quarantine situations due to its portability.
Termination of Commercial Licensing Agreement for LungFit PH for use in the Hospital Setting in the United States and China.
On Jan. 24, 2019 Beyond Air announced that it licensed to Circassia Pharmaceuticals its NO generator and delivery system for PPHN in the hospital setting in the U.S. and China. Beyond Air subsequently announced on Dec. 18, 2019 that this license agreement was terminated by Beyond Air for material breach. While the particular breach Circassia committed has not been made public, we believe it is highly likely that Beyond Air had strong legal grounds for the termination given Circassia’s recent poor operating performance and management turnover.
On Dec. 5, 2019 Circassia announced that its chief executive officer and co-founder, Steve Harris, was retiring following 13 years leading the business. On Jan. 9, 2020 Circassia announced that its chief financial officer, Julien Cotta, was stepping down following eight years in the role. We are taking the view that where there’s smoke there’s fire.
Terminating the Circassia license agreement has allowed Beyond Air to seek a new partner. On the Q3 2020 quarterly conference call, held Feb. 10, 2020, Beyond Air’s CEO stated “discussions with potential commercial partners are ongoing for the U.S. market as well as for the ex-U.S. markets.” We believe that LungFit PH is seeing much interest from potential licensing partners, given that it is only a couple of months away from filing the PMA in the U.S. and on track for a launch by year end. Our best guess is that Beyond Air should be able to secure a license deal to receive anywhere from $25 million to $50 million up front and approval milestones in addition to 20%-25% royalties. We expect future licensing agreements for BRO and NTM to take place once the LungFit system has been shown to be commercially viable and clinical trials have been completed.
Substantial Insider Buying and Ownership is Bullish for Shares
On June 3, 2019 Beyond Air raised $8 million from a PIPE by issuing 1.6 million shares at $5.00 per share. The PIPE included broad participation by insiders, including a 58,253 share purchase by Steve Lisi and a 9,709 share purchase by President, COO Avniel Amir.
On Dec. 12, 2019, the company announced the closing of a 2.6 million share public offering at $3.66 per share. Once again, insiders bought on the offering, with Lisi purchasing 190,437 shares and Amir purchasing 8,152 shares. Mr. Lisi also made open market purchases in the fourth quarter of 2019.
Lisi currently owns 815,763 shares outright and Amir owns 470,476 shares outright. Management has demonstrated its conviction in the company through its participation in these two recent equity raises and its substantial share ownership.
Cash Runway Sufficient to LungFit PH Approval
Beyond Air had approximately $15 million in cash and marketable securities on its balance sheet as of Dec. 31, 2019. With a cash burn rate of around $2.1 million per quarter, the company will not need to raise equity capital before the anticipated year-end 2020 approval of LungFit. We expect a licensing deal replacing the terminated Circassia license to provide an additional $30 million in cash from upfront and near term milestone payments no later than two months post LungFit PH FDA approval. Should Beyond Air decide to opportunistically raise additional equity capital, we believe it will be at much higher prices since its current $15 million in cash and anticipated $30 million from a new license agreement is sufficient to fund planned clinical studies for indications outside PH.
Beyond Air Shares are Grossly Undervalued
We are estimating that LungFit will take 80% of the PPHN market in roughly five years and are conservatively building in some price erosion, offset by market expansion due to the convenience of a cylinder based system. An 80% share of a $600 million market would generate approximately $480 million in annual sales. LungFit PH’s high margin, razor/razor blade model deserves a 3X multiple on $480 million in sales. Assigning a 50% probability to this outcome yields roughly $720 million (3 X $480 X .50) in value five years out. Using a 15% discount rate over five years results in $360 million of value in today’s dollars for LungFit PH.
Beyond Air has roughly 14 million shares outstanding and carries no debt, yielding a value per share of approximately $26 for LungFit PH alone.
Considering that LungFit BRO will be completing a pivotal trial roughly a year from now and the size of the BRO, NTM and COVID-19 markets, we conservatively value Beyond Air’s pipeline at $100 million, or an additional $7 today.
We admit it’s difficult to value emerging companies, especially companies with mid-stage clinical pipelines, and we understand that our value estimate is far away from the current price. We’ve also witnessed, firsthand, recent explosive price performance of some biotechnology and medical-equipment companies coming out of the recent bear market for small and microcap healthcare technology. For this reason, we are not deterred by the 80% discount to our $33 price target. Rather, we are comforted by the margin of safety shares afford investors. We are aggressive buyers of XAIR.
Analyst’s Disclosure: I am/we are long XAIR.
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