June 23, 2020 | Company Profiles
Botanix Pharmaceuticals is a company that Track Record News reported on 2 May 2020 under the title “successful biotechnology entrepreneur with an AUD60m exit, starts next biotechnology venture.”
This article is a detailed break-down of Botanix Pharmaceuticals (“Botanix”), which listed on the Australian Stock Exchange (ASX) in 2015 under the ticker BOT.
The objective of this article is to demonstrate how already-successful management teams overcome challenges during the course of executing on complex business projects that they have successfully executed before, and how, this is often overlooked by public markets.
Botanix is dedicated to developing next generation therapeutics for the treatment of serious skin diseases. The management team is harnessing the untapped potential of a synthetic active pharmaceutical ingredient known as cannabidiol (CBD) which is currently being studied for the treatment of epilepsy, pain, arthritis and schizophrenia amongst other indications.
Management is preparing for the first human trials utilizing synthetic cannabidiol in a proprietary drug delivery system (“Permetrex™”) for direct skin delivery of the therapy.
Botanix has an exclusive licence of Permetrex™, which allows management to overcome existing challenges in the dermatology space (as management has successfully done before) and bring products to market in a quarter of the time and at a quarter of the cost (average 12 years and USD1bn to get a product FDA approved).
Botanix currently has 2 products progressing through clinical trials.
It’s acne product is progressing to a pending Phase 3 Trial, which has a 61.5% chance of being approved as a new drug by the FDA. In terms of how valuable the acne product is, comparable successful dermatology products (at a similar Phase) have been acquired for amounts varying from USD790m to USD5.2bn.
Also, Botanix is actively progressing another product, an antimicrobial platform, into a Phase 2 Trial, which based on early data is more effective than the leading product that generates annual revenues of USD228m. At Phase 2, this product has a 24.4% chance of being approved by the FDA.
On the 1st of August 2019, management raised US$40 million at 21 cents from specialist US based biotechnology venture funds and institutional investors, with new shares outstanding at 946,506,191, which equaled a Market Capitalisation of $198.7m.
It is now trading at 4.4 cents (an AUD40m Market Capitalisation/Enterprise Value of approximately AUD5m), which is approximately a 70% reduction from its 12 month high of 29 cents (as at 23 June 2020).
Who is the Founder of Botanix?
Matthew Callahan is the Founder of Botanix, his latest biotechnology business in the dermatology industry.
Matthew Callahan is a serially successful entrepreneur. In particular, he has a proven track record in the life science industry and is responsible for more than 4 Food Delivery Association (FDA) product approvals. You can read more about his track record of success here.
Matt’s decision to solve the unmet patient needs in dermatology using the combination of Permetrex™ and synthetic CBD is data-driven (which is explained in detail further below).
What is Permetrex™ and how does it work?
All products made by Botanix utilise synthetic CBD in conjunction with Permetrex™ skin delivery technology.
PermetrexTM is a dermal delivery formulation technology that allows 10 to 20 times more of the active ingredient to get through the skin to better treat the disease.
BOT has exclusive rights to this technology, developed by Dr Eugene Cooper, for all drugs that treat dermatological conditions.
It can be likened to pouring petrol onto concrete. What happens when you pour petrol on concrete is that during the evaporation process the petrol is pushed into the concrete, which causes a permanent stain (unlike water). The diagram below explains how the combination of CBD and Permetrex™ works to push the CBD beneath the skin and into the dermis, which overcomes both of the problems that competitors cannot.
What is the evidence to support Botanix’s belief in using CBD to treat skin diseases?
Matt discovered that there was significant scientific evidence supporting CBD’s effectiveness in treating and preventing skin disease. It is a data-driven philosophy that is driving Botanix.
Below are a list of scientific papers on Cannabidiol (CBD) & Antibiotic research:
However, no well-controlled Food and Drug Administration (FDA) regulated human clinical studies have ever been conducted with CBD to treat skin disease.
Also, no products with CBD have ever been approved to treat skin disease.
Natural extract forms of CBD have been proposed as treatments for a range of diseases and are currently being studied in numerous advanced clinical trials conducted by other pharmaceutical companies, to treat epilepsy, pain and arthritis (amongst other indications).
Upon further investigation Matt realised that using natural extracts will be very difficult to get FDA approval because there are more than 80 different types of cannabinoids and the FDA considers each one a separate drug.
How is Botanix avoiding the prohibitive cost and time required to get natural forms of CBD approved?
Matt realised that if you create products that utilise a pure and very high quality manufactured synthetic form of one of the chemicals found in natural cannabis extracts, that being CBD, then you avoid the huge timelines and costs because you only need to get one drug approved instead of showing how all of the 80 work together and separately.
Botanix’ products utilise a synthetic form of the natural plant extract which has never been studied in FDA regulated clinical trials for skin disease.
So, Matt worked out a way to overcome the challenges with the impurity and variability of the CBD drug substance that hamstrings competitors, but he still had to work out a way to effectively deliver CBD across and into the skin.
For those interested in delving more deeply, Botanix has a number of patents that can be found here.
What is the process to get a product approved by the FDA and what is the likelihood at each stage?
The four stages and their respective likelihood of successful approval are provided below:
The probabilities of success were derived from the largest study of clinical drug development success rates to date. It was conducted by the Biotechnology Innovation Organization (in conjunction with Amplion and Biomedtracker), which analysed almost 10,000 transitions in the Biomedtracker database over a ten-year period from January 1st 2006 to December 31st 2015. It is the largest study of clinical drug development success rates to date.
Out of 10,000 transactions, the likelihood of FDA approval at each stage are:
Phase 1: 16.3%
Phase 2: 24.4%
Phase 3: 61.5%
New Drug Application (NDA): 88.4%
What products is Botanix working on?
Dermatitis, psoriasis and rosacea products (suspended products)
In Q1 2020 Botanix completed an atopic dermatitis Phase 2 study, which failed to meet its primary end points. The reason it failed is because dermatitis is not related to an infection like Acne and the Antimicrobial developments are, it is an inflammatory disease. As a result, the clinical development for psoriasis has also been suspended along with dermatitis.
Further, the rosacea study is also on hold (suspended) due to COVID-19.
Acne and antimicrobial product (active products)
As of 23 June 2020, Botanix is focusing on 2 breakthroughs, namely:
What is the acne product (BTX 1503) and why is it their primary focus and flagship product?
Botanix is pursuing the acne product because there has been no new acne drug approved by the FDA in more than 20 years.
As a result, there remains unmet patient and treatment need, including:
Essentially, the only way to effectively treat skin disease is to take oral medicine. Topical creams fail to deliver the medicine to the infection that sits well-below the skin (in the dermis) because no one has come up with an effective way to get the drugs in topical creams to penetrate deep enough below the skin. The drugs just sit on the skin after they have been rubbed in, so they are ineffective at solving the problem. This means the only way to get the drug to the infected area is orally.
However, the leading oral product, Accutane has a ‘Psychiatric Disorders’ warning, including serious long term side effects including depression, psychosis and, rarely, suicidal ideation, suicide attempts, suicide, and aggressive and/or violent behaviors.
In addition to failing to meet optimal safety profile, these oral products still fall to address itch, redness etc.
What does a topical solution that is safe and effective look like?
Matthew Callahan discovered that CBD can be used to effectively treat and prevent skin disease. However, challenges with the impurity and variability of the CBD drug substance, and the difficulty of delivering it into the dermis effectively, had significantly stunted CBD’s development as a potential solution.
Botanix’ approach of utilising a pure manufactured synthetic form of CBD combined with a novel skin delivery technology, Permetrex™, are focused on solving both of these challenges.
How big is the opportunity in acne and why is this important?
The acne market is a multiple billion dollar revenue market, where successful dermatology products have recently been acquired for amounts ranging from several hundred million to several billion USD. This means that a successful Phase 3 Trial should see a positive valuation re-rating to valuations similar to comparable acquisitions due to the attractiveness of the billion dollar revenue opportunity for large and established pharmaceutical companies. Below I have outlined the revenue opportunity and recent comparable acquisitions across the various stages of product development.
In the acne market there are competitive products with tolerability and safety concerns, as well as antimicrobial resistance challenges, which have generated significant annual sales (e.g. Solodyn’s peak gross sales were approximately USD$1bn). BTX 1503 appears to achieve similar, if not better results than existing products based on current trial data, without any adverse side effects.
Acne and comparable product acquisitions
I have outlined 4 recent comparable acquisitions (1 for each stage of product development) in the topical dermatology space, which range from several hundred million to billions in USD:
(Data source: www.pharmamedtechbi.com)
Interestingly, Vince Ippolito (now Chairman of Botanix as of May 2019) was the Executive Vice President of Anacor Pharmaceuticals, where he played a key role in the company’s sale to pharmaceutical giant Pfizer for a mind blowing USD5.2bn (Phase 3 example above).
Someone of Vince’s calibre, and experience in multi-billion dollar acquisitions wouldn’t join Botanix unless he saw an opportunity similar to Anacor.
Vince was quoted in a The Green Fund article stating:
“The Botanix team had made a tremendous amount of progress in a very short period of time with really very little resources. They had done all of the background work to really give them a great deal of confidence moving forward with clinical programs in both acne and atopic dermatitis, and they did this really on a shoestring budget.”
“It impressed me that the company worked in such a diligent fashion, but moved quickly and really respected the resources of the investors that they raised the money from.”
“And as I peeled the onion back beyond that, I became very intrigued with the topical delivery system [Permetrex] which the company had acquired for dermatologic skin conditions.”
In summary, the acne product is progressing into a Phase 3 Trial, which gives it a 61.5% chance (on average) of being approved as a new drug with the FDA. Comparable dermatology products with successful Phase 1 and 3 Trials that have been acquired range from USD790m to USD5.bn. Also, one of the leading acne product’s peak gross sales was approximately USD$1bn. Therefore, given the significant increase in likelihood of success and enormous comparable acquisitions, if the Phase 3 Trial for acne is successful Botanix’s share price is reasonably expected to rise rapidly.
What happened in the Phase 2 Trial for acne to cause such a sharp share price drop?
The reason for severe drop in share price in October 2019 was a failure to meet the primary endpoint in the company’s recent Phase 2 Trial for acne, which was carried out in both Australia and the USA. The primary endpoint was an absolute change from Baseline to Week 12 in inflammatory lesions. Statistical significance (p<0.05) was not reached for the primary endpoint due to the very high vehicle response from the USA sites only.
So, based on the Australian sites, the Phase 2 Trial was a success but because of the very high vehicle response in the USA, the results as a whole failed to show an absolute change from Baseline to Week 12 in inflammatory lesions (statistical significance is the industry measure for absolute change).
The “vehicle” was the formula that contained only Permetrex™ (no CBD). Essentially, the vehicle in the USA had similar results to the formula that had 5% CBD with Permetrex™ across the Australian and USA sites (a 40% change, respectively).
However, upon further investigation, management produced more detailed analysis around their decision to proceed to a Phase 3 trial. This analysis found that on the reduction in total lesions (i.e. both inflammatory and non-inflammatory), the 5% CBD formulation is statistically significant over the vehicle (p=0.033). This means that the Stage 2 Trial was successful because the reduction in total lesions is a clinically meaningful endpoint that dermatologists use to assess the effectiveness of medication. This is the reason Botanix is progressing to Stage 3 Trials.
In terms of difference in the vehicle only responses between Australia and the USA, 11 Permetrex™ batches were developed in two different sites (countries) and multiple suppliers in formulation inputs were used. This was the reason for the very high vehicle response in only the USA sites (the USA vehicle had 2 to 4 times the response of the Australian vehicle).
For the Phase 3 Trial, the Permetrex batches will be manufactured in bulk in the same lab by a global specialty chemicals company. Management’s actions will ensure there is no inconsistency between jurisdictions, which caused the skewed vehicle response in Phase 2 and subsequent failure to meet the primary endpoint.
Also, different CBD substances were used in Australia and the USA due to DEA regulations prohibiting the import and export of CBD. This has now been changed, so Botanix will use the world’s largest and most experienced synthetic CBD manufacturer called Purisys.
Therefore, Botanix may be an opportunity for the savvy investor to take advantage of the market misinterpreting the Phase 2 acne results and potentially capitalise on significant positive re-ratings if the upcoming acne and antimicrobial trials are successful.
Why is Botanix also aggressively pursuing the microbial platform (BTX1801)?
In 2019, following the Phase 2 acne results, they announced development of a new antibacterial platform (BTX 1801) to treat post-surgical infections which are resistant to antibiotics.
“Never has the threat of antimicrobial resistance been more immediate and the need for solutions more urgent,” says Dr Tedros Adhanom Ghebreyesus, Director-General of the World Health Organisation.
For example, Methicillin-resistant Staphylococcus aureus (MRSA) is a bacterium that causes infections in different parts of the body. It’s tougher to treat than most strains of staphylococcus aureus, or staph, because it’s resistant to some commonly used antibiotics. The symptoms of MRSA depend on where you’re infected.
How effective is BTX 1801 based on Phase 1 data?
Phase 1 data for BTX 1801 states it can kill MRSA bacteria within 10 minutes of exposure. On the back of this data, Botanix is going into a Phase 2a study for their antimicrobial platform in Q2 2020.
In May 2020, Botanix announced that the FDA has granted BTX1801 Qualified Infectious Disease Product (QIDP) designation status. This means the product has an additional 5 years exclusivity, eligibility for fast track status and priority FDA review.
This makes BTX1801 the first CBD based program to receive the designation globally, which is an endorsement of its Phase 1 data.
How valuable could the antimicrobial platform be?
BTX1801 is addressing a problem that, in the U.S. alone, antibiotic resistance adds $20 billion to $35 billion in direct health care costs each year.
Roivant Sciences and iNtRON Biotechnology announced that they have entered into a global licensing agreement for SAL200, a novel investigational biologic for the treatment of infectious diseases caused by antibiotic-resistant staphylococci. This licensing deal is worth a total of USD667.5M inclusive of milestone payments, with royalties on net sales in the low double digits.
Also, Roche made a deal with Forge worth USD190.5 million to work on a new antibacterial drug to fight antibiotic-resistant gram-negative bacteria.
Lastly, studies by Botanix have shown that BTX 1801 is more effective than the market leading decolonisation agent, mupirocin, at decolonising MRSA, which generates US$228 million a year in revenues.
BTX 1801 might be another potential billion dollar product for Botanix (alongside BTX 1503) due to the significant and increasing revenue generation opportunity it would achieve if successful. It is for this reason that Botanix is seriously pursuing the antimicrobial product.
In summary, BTX 1801 is progressing into a Phase 2 Trial, which gives it a 24.4% chance (on average) of being approved as a new drug with the FDA. So, similar to the acne product, if the Phase 2 Trial is successful, Botanix’s share price is reasonably expected to rise rapidly.
How has the market reacted to Botanix since it listed on the ASX in 2015?
On the 1st of August 2019, Botanix raised US$40 million at 21 cents from specialist US based biotechnology venture funds and institutional investors, with new shares outstanding at 946,506,191, which equals a valuation of $198.7 million.
It is now trading at 4.4 cents (an AUD40m market capitalisation/Enterprise Value of approximately AUD5m), which is approximately a 70% reduction from its 12 month high of 29 cents (as at 23 June 2020).
The complications around the statistical significance of the acne product and the failed dermatitis study, Botanix is trading at a huge discount to the price and valuation that leading specialist biotechnology investors paid less than 12 months ago.
This means Botanix is currently trading at a fraction of the valuations of similar products to BTX 1503 that have been acquired (USD790m for Phase 1 Exicure product) and with no valuation given to the microbial platform.
What opportunity does Botanix present for investors?
If the Phase 3 Trial for Acne and Phase 2 Trial for the antimicrobial platform are successful, a significant positive share price re-rating would be reasonably expected given that Botanix is trading at practically the cash it has in the bank.
It appears that the management team are confident that the data-driven nature of their product selection will result in positive trial outcomes for acne. I share the company’s confidence, having gone through the data with a fine tooth comb myself, to make a determination that, on balance, the likelihood of BTX 1503 Phase 3 Trial being successful is very high. I believe the Phase 3 Trial will show statistical significance over the vehicle based on increasing statistical significance (p=0.033) and consistent manufacturing going forward (elimination of the risk of skewed responses that were seen in Phase 2).
As a result, this situation creates an opportunity for the savvy investor to potentially take advantage of the confusion caused by the recent Phase 2 acne trial and the antimicrobial platform, which seems to not be valued by the market at all.
Disclaimer: I own shares in Botanix Pharmaceuticals.
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