Curing Acute Heart Failure? Does Oxygen Biotherapeutics have the answer?
Oxygen Biotherapeutics Announces the Acquisition of Rights to Market Levosimendan
What is Oxygen Biotherapeutics
Oxygen Biotherapeutics, Inc. (OXBT:NASDAQ), formerly known as Synthetic Blood International, Inc., is dedicated to transforming patient care by developing advanced oxygen-based therapies using Oxycyte®, the company's perfluorocarbon (PFC) therapeutic oxygen carrier, and other solutions. The company believes Oxycyte has the potential for use in multiple indications, including traumatic brain injury, decompression sickness, skin care, and wound treatment. On October 31, 2013, Oxygen Biotherapeutics had a share price of $3.04 and a market capitalization of $15.36 million. According to the latest quarterly report, Oxygen Biotherapeutics had a net cash position of $0.647 million illustrating the strength of the company's balance sheet.
Why Buy Oxygen Biotherapeutics now?
On October 21, 2013, Oxygen Biotherapeutics entered into an asset purchase agreement with Phyxius Pharma. Oxygen Biotherapeutics purchased the license to market Levosimendan in North America for $4.8 million in common stock and preferred shares convertible into 3.4 million shares of common stock. Levosimendan is a drug focused on preventing and treating cardiac surgery patients at risk of developing low cardiac output syndrome. Orion Corporation (ORINF:PNK), a Finnish pharmaceutical company, developed Levosimedan. In the United States, Levosimedan is in phase III trials with Fast Track status and an agreed study protocol under the Special Protocol Assessment (NYSE:SPA). The FDA provided guidance that a single successful trial will be sufficient to support approval of Levosimendan in this indication. Levosimendan is already approved in 53 countries to treat acute decompensation heart failure (ADHF).
Why is Levosimendan an attractive acquisition for Oxygen Biotherapeutics?
Levosimendan is a drug to treat ADHF. Acute heart failure (AHF) is the primary reason for hospitalization among patients above 65 years of age and increasing in prevalence. The AHF market is characterized by the presence of high mortality and rehospitalization rates. An increasing patient population, ballooning healthcare costs, and poor prognosis rates leads to a huge potential for Levosimendan to improve society. According to Global Industry Analysts, Inc., (GIA) , the global market size for AHF treatments will reach $4.8 billion in 2017. Oxygen Biotherapeutics' management estimates Levosimendan's current addressable market in the US is $600 million. From 2008 - 2012, Orion Corporation's cumulative Levosimendan sales in foreign markets equals $236 million.
In addition to the huge market potential relative to Oxygen Biotherapeutics' current size, there is very little competition from other AHF therapies. GIA stated "The treatment for AHF has not undergone any major change in the past few decades." "Furthermore, the number of pipeline drugs presently undergoing clinical trials is not particularly encouraging when compared to the targets under clinical development for other cardiovascular incidences." "In the years to come, it is estimated that any drug which can showcase promising results in terms of improved efficacy, safety, and mortality can reap huge benefits. Also, growing ageing population, resulting in increased incidence levels coupled with the launch of promising drugs are all expected to strengthen the growth prospects in the marketplace."
GIA continued by saying "the US continues to remain the largest and the fastest growing regional market." The lack of competition and the growing US AHF market will allow first movers with a strong product an opportunity to gain substantial market share with very high margins.
An additional benefit of the acquisition is Phyxius' CEO John Kelley will become the CEO of Oxygen Biotherapeutics. John Kelley is an industry veteran with 40 years experience with some of the largest companies in the industry. Mr. Kelley was formerly President, COO, and Director of The Medicines Company (MDCO:NASDAQ). Mr. Kelley currently serves on the Board of Directors of Acorda Therapeutics (ACOR: NASDAQ). Oxygen Biotherapeutics' current Interim CEO and CFO, Michael Jebsen will remain serving as the CFO.
Also joining Oxygen Biotherapeutics are Doug Randall and Douglas Hay. Doug Randall will serve as the head of business and commercial operations. Mr. Randall is the former VP, Commercial Operations at The Medicines Company and was previously VP of Diabetes Marketing and VP of Primary Care Sales at Sanofi Aventis (ANY:NYSE).
Douglas Hay, PhD, will join as head of regulatory affairs. Dr. Hay was former VP of Global Regulatory Affairs at The Medicines Company and previously VP of Regulatory Roles at Shire (SHPG:NASDAQ) and Bristol Myers Squibb (BMY:NYSE). These three individuals add significant expertise and depth to the management team allowing Oxygen Biotherapeutics to make the most of the opportunity in the AHF market.
What is value of this opportunity?
The Focused Stock Trader valued Oxygen Biotherapeutics using scenario analysis. To have value Levosimendan needs to gain FDA approval. As a reminder, Levosimendan has Fast Track status with the FDA. Between March 1998 and September 2011, 62% of drugs under the Fast Track Development program were approved. Given the FDA has provided guidance that a single successful trial will be sufficient to approve Levosimendan, an agreed study protocol under the Special Protocol Assessment (SPA), and Levosimendan is already approved in 53 countries, The Focused Stock Trader increased the probability of approval to 75%.
If Levosimendan is not approved then we assume Oxygen Biotherapeutics' share price reverts to a price slightly above its price prior to acquisition as the strength and depth added to management increases the company's value. Before the acquisition Oxygen Biotherapeutics' was hovering around $1.50 and adding a $0.25 premium for management estimated share price is $1.75.
Assuming Levosimendan gains FDA approval, The Focused Stock Trader uses a base case and a bull case. We then assign probabilities of each event and obtain an expected value. Both scenarios, assumes Oxygen Biotheraputics' management is correct and the addressable market is $600 million.
Under the base case, Levosimendan gains a 5% market share in the $600 million US AHF market. This leads to Oxygen Biotherapeutics generating total sales of $31.20 million. A 5% market share seems to be very conservative. First, over the past 4 years Orion Corporation, the developer of Levosimendan had cumulative sales of Orion Corporation generated Levosimendan sales of $236 million with a compound annual growth rate of 22%. With the US being the largest and fastest growing AHF market, based on Levosimendan strength in foreign markets, Oxygen Biotherapeutics should be able to generate annual sales of at least $50 million. Second, as stated by GIA, there is very little competition, as AHF drugs have not progressed over the past few decades and the product pipeline is pretty dry, leaving a gap in the market for Oxygen Biotherapeutics to exploit.
Under the bull case, Levosimendan gains a 25% market share in the $600 million US AHF market. This leads to total sales of $151.20 million. In this scenario, Levosimendan takes a leading position within the AHF market. Given regulatory barriers to entry, the lack of recent AHF drug developments, and the lack of product pipeline; any drug which shows relative strength should easily command a large portion of the market.
To get to a company valuation based on sales, The Focused Stock Trader analyzed the median EV/Sales of the biotechnology industry over the past cycle. EV/Sales is a widely used valuation metric for companies not generating profits but with a tremendous opportunity in front of them. It is also widely used when valuing biotechnology and pharmaceutical companies. Looking at the median valuation over the past five years the median EV/Sales ratio has fluctuated between a low of 4.35x at the beginning of 2009 to a high of 7.27x at the beginning of 2012 with an overall average of 5.90x.
Under the base case, an average EV/Sales multiple of 5.9x is applied to $31.20 million in sales. Full dilution is assumed. Oxygen Biotherapeutics' target Enterprise Value is $184 million leading to a target share price of $21.71.
Under the bull case, full dilution is assumed. A peak EV/Sales multiple of 7.27x is applied to $151.2 million in sales, Oxygen Biotherapeutics's target Enterprise Value is $1.1 million leading to a target share price of $130.01.
The table below illustrates each scenario with the probability of each scenario in the first column.
Overall, using very conservative estimates and placing a very high probability on the base case, out weighted average approach leads to a target share price of $32.96, which represents 984% upside.
Technical Analysis by Harry Boxer (TheTechTrader.com)
Oxygen Biotherapeutics- (OXBT) was in a dramatic downtrend for the last 2 years ,but has recently experienced an historic price/ volume surge as the stock exploded from $1.50 to nearly $3.50 in just a couple sessions on more than 32 million shares .That's more than 5 times its entire float!! We believe this strong thrust often initiates a major new uptrend. The Tech Trader believes Oxygen Biotherapeutics should continue to make substantial further progress over the next few weeks and months. There appears to be some near term resistance just under $4 but our next targets beyond that are $6 shorter term and then $9 on an intermediate basis.
If the potential opportunity is so large, why would Phyxius owners give away the rights to market Levosimendan?
With Levosimendan being such a large opportunity why would Phyxius Pharma dilute their ownership stake in the license? Phyxius Pharma is a privately held company so ownership information is not readily available. Assuming the founders of Phyxius Pharm retained full ownership, they are gaining 3.4 million shares of Oxygen Biotherapeutics, assuming full dilution this represents 60% of Oxygen Biotherapeutics or a dilution of 40% stake.
The first potential reason for diluting their ownership stake in this opportunity is the cost of phase III drug trials can be very expensive. According to a recent survey by Cutting Edge Information, "the average per-patient trial costs in Phase IIIa, the cost increased from $25,280 to $47,523 and in Phase IIIb, cost jumped from $25,707 to $47,095.The Focused Stock Trader does not believe costs will be that significant due to Levosimendan's FDA Fast Track status and an agreed study under the Special Protocol Assessment. Oxygen Biotherapeutics is a publicly traded company with a net cash position. This offers a large capacity for financing these trials through share issuance or debt which will be less dilutive to the shareholders of Phyxius Pharma then if they were private.
Second, an IPO can be very expensive.Companies IPO for a number of reasons including to finance growth or to give the owners a readily available market value of their stake. According to a recent PWC study, the average cost of an IPO is almost $5 million dollars before accounting for the underwriter discount of 5-7% of gross proceeds. If Phyxius Pharma were to IPO rather than sell the license they would potentially be giving up more than 40% of the opportunity after taking into account dilution and fees.
Oxygen Biotherapeutics has a long history of losses at the net income and cash flow level as Oxygen Biotherapeutics products are still in development. From 2000-2012, Oxygen Biotherapeutics had cumulative net losses of $96.9 million and cumulative negative free cash flow of $47.7 million. This is a major benefit for anyone with a highly profitable market opportunity as these cumulative net losses come with loss carryforwards that can offset potential income and reduce taxes. If Levosimendan is profitable before 2015 and there are no further losses prior to profitability, the first $76.3 million of income is sheltered from taxes. At 35% tax rate this leads to an additional value of $26.7 million.
Oxygen Biotherapeutics has a great opportunity but it is not without risks for investors. The biggest risk is the acquisition of the license from Phyxius Pharma is not completed. This risk poses very minimal threat as Oxygen Biotherapeutics does not require shareholder approval for the deal so it is highly unlikely the deal will fall through on Oxygen Biotherapeutics side. Phyxius Pharma is very unlikely to pull out of the deal as well as the founder and CEO is moving over to become the CEO of Oxygen Biotherapeutics. Further evidence of the deal proceeding is illustrated through the recent prospectus filed with the SEC on November 1st, 2013. This prospectus covered the convertible preferred shares which are part of the financing of the acquisition. If the deal falls through Oxygen Biotherapeutics' stock price will revert to its price prior to the announcement of the deal, which is $1.50.
The next risk is Levosimendan is not approved by the FDA. The risk is discussed and quantified in the valuation section. As a reminder, Levosimendan has Fast Track status with the FDA. Between March 1998 and September 2011, 62% of drugs under the Fast Track Development program were approved. Given the FDA has provided guidance that a single successful trial will be sufficient to approve Levosimendan, an agreed study protocol under the Special Protocol Assessment (SPA), and Levosimendan is already approved in 53 countries, The Focused Stock Trader increased the probability of approval to 75%. If Levosimendan is not approved then we assume Oxygen Biotherapeutics' share price reverts to a price slightly above its price prior to acquisition as the strength and depth added to management increases the company's value. Before the acquisition Oxygen Biotherapeutics' was hovering around $1.50 and adding a $0.25 premium for management estimated share price is $1.75.
The next risk is the risk of dilution. The deal for Levosimendan licensing rights includes the potential conversion of3.4 million shares of common stock. Share equal to 15% of Oxygen Biotherapeutics' common stock prior to closing of the deal was used in the financing the deal. This dilution is taken into account in all of The Focused Stock Trader s valuation assumptions as the conversion criteria are not stringent. Just fewer than 11% of convertible preferred stock will be converted at the closing of the deal and the remaining 89% is converted as Levosimendan meets milestones which add value to Oxygen Biotherapeutics, either through FDA approval or market capitalization levels. The criteria for the potential conversion of the preferred stock are listed in the table below.
There is also the risk that new drugs are introduced into the North American AHF market. If these drugs have similar efficacy or have better efficacy, this increased competition could affect Oxygen Biotherapeutics' ability to gain share in the North American AHF market. This competition could also decrease profitability in the US AHF market. As mentioned above, GIA does not see any significant drugs coming through the development pipeline focused on the AHF market.
Oxygen Biotherapeutics' products are currently in the development stage and therefore loss making. Oxygen Biotherapeutics products are averaging losses of over $12 million per year over the last three years. These products may continue to be loss making and require additional capital to continue with the FDA approval process. This may cause further dilution to existing shareholders.
One may wonder why OXBT'S stock suffered when the trials from their Traumatic Brain Injury (NYSE:TBI) treatment were put on hold with the shares dropping from a high of $50.00 in 2011 to under $1.00 in 2013. The TBI treatment used Perflourocarbon (PFC). Other Companies were using large amounts of PFC'S for plasma replacement and created challenges. OXBT only uses small amounts and only in the case of TBI. The testing is still commencing overseas and OXBT has received a significant amount of funding from the U.S. Military as TBI is a problem in battlefield conditions.
Oxygen Biotherapeutics acquisition of the rights to market Levosimendan in North America from Phyxius Pharma provides them with a tremendous opportunity in a $600 million market. Levosimedan is in phase III trials with Fast Track status, an agreed study protocol under the Special Protocol Assessment (SPA) and approved in 53 other countries. Past evidence shows this leads to a very high probability of FDA approval. The acquisition also provides Oxygen Biotherapeutics with a stronger and deeper management team to take advantage of the AHF opportunity in front of them.
Disclosure: I am long OXBT. 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.
Additional disclosure: I was assisted in compiling all the information for this detailed report by Marc Melendez