AFT Pharmaceuticals: A Licensing Deal For Pascomer

AFT Pharmaceuticals: A Licensing Deal For Pascomer

AFT Pharmaceuticals (ASX:AFP) has reported a North American licensing deal for Pascomer, a topical formulation of rapamycin being developed for facial angiofibromas in tuberous sclerosis complex (TSC), to private US-based Timber Pharmaceuticals. Timber will fund clinical development and provide AFT with over US$10m in upfront, development and regulatory milestones, as well as over US$10m in sales milestone payments and royalties. An Investigational New Drug Application has been approved by the FDA. The first of two 120-patient clinical studies is expected to start shortly, with results in 2020.

AFT Pharmaceutical Revenue

AFT Pharmaceutical Revenue

An attractive orphan market

According to the US National Institute of Neurological Disorders and Stroke, TSC affects between 25,000 and 40,000 Americans and one to two million people worldwide. Angiofibromas, which can be highly disfiguring, affect around 80% of patients with TSC. Current therapies are typically surgical, such as chemical peeling, excision and laser surgery.

Evidence of rapamycin efficacy

Oral rapamycin was first approved in 1999 for immunosuppressant use. Initial evidence of its potential efficacy in angiofibromas occurred in a patient who initiated oral rapamycin because of renal transplantation and her facial angiofibromas improve markedly. A review of recent studies indicates that compounded topical formulations of rapamycin have improved lesions in 94% of subjects although there is no topical formulation available commercially.

A low-risk development plan for AFT

The licensing agreement with Timber allows AFT to retain some of the upside potential of Pascomer but without having to yield near- to medium-term profitability to fund its development. Timber will have full responsibility for R&D investment, while AFT will collect high-margin royalties if Pascomer is successfully developed.

Valuation: NZ$495m or NZ$5.09 per share

We are maintaining our valuation of NZ$495m or NZ$5.09 per share. To be conservative, we are not including Pascomer development in our estimates due to its early stage but we will revisit this as the programme progresses. Also, the company reiterated its operating profit target is between NZ$9m and NZ$12m for FY20.

Valuation

Valuation

Share Price Performance

Share Price Performance

Business description

AFT Pharmaceuticals is a specialty pharmaceutical company that operates primarily in Australasia but has product distribution agreements across the globe. The company’s product portfolio includes prescription and over-the-counter drugs to treat a range of conditions and a proprietary nebuliser.

Pascomer for facial angiofibromas in TSC

AFT has announced it has licensed Pascomer, which is being developed for facial angiofibromas in TSC patients, to Timber Pharmaceuticals for over US$10m in upfront, development and regulatory milestones, as well as over US$10m in sales milestone payments and royalties.

TSC is a multisystem, autosomal dominant genetic disorder resulting from a mutation in one of two tumour suppressor genes, TSC1 (encoding hamartin) or TSC2 (tuberin). TSC is characterised by benign tumours, known as hamartomas, in various organs, most commonly the skin, brain, kidneys, heart and lungs. A hamartoma is composed of an overgrowth of mature cells and tissues, which normally occurs in the affected tissue. TSC affects both sexes and all ethnic groups, affecting as many as 25,000-40,000 individuals in the US and one to two million individuals worldwide, with an estimated prevalence of one in 6,000 newborns according to the US National Institute of Neurological Disorders and Stroke. Angiofibromas, which can be highly disfiguring, affect around 80% of patients with TSC.

Pascomer is a topical version of rapamycin (marketed as Rapamune by Pfizer (NYSE:PFE)), an immunosuppressant used for prophylaxis of organ rejection in patients receiving kidney transplants. It is also approved for the treatment of lymphangioleiomyomatosis, a progressive disease often associated with TSC that results in lung destruction. Rapamycin is an inhibitor of mammalian target of rapamycin (mTOR), which has many functions in protein synthesis and cell growth and is aberrantly activated in patients with TSC, making it a logical target for development in the treatment of this disease.

Initial evidence of rapamycin’s potential efficacy in angiofibromas occurred in a patient who initiated oral rapamycin because of renal transplantation and her facial angiofibromas improve markedly.1 As rapamycin is a potent immunosuppressive, systemic exposure for the sake of improving facial angiofibromas is not ideal and there have been several small studies of topical rapamycin in this indication.

According to one review, 94% of the 84 patients treated with a topical rapamycin in various studies showed improvement in their lesions.2 In the one randomised, double-blind, placebo-controlled study (with 23 subjects) in the review, 73% of the subjects who received treatment reported a subjective improvement in their angiofibromas compared to 38% in placebo although the p value was not significant (p=0.18), likely because of the size of the study.3 Importantly, although a variety of different topical formulations were used, rapamycin was detected in only three patients out of the 74 tested for serum rapamycin levels, indicating a lack of systemic exposure. However, one of the issues with the various topical formulations used in these studies is that stability is limited. AFT believes it has developed a formulation using a proprietary dermal delivery technology that would be stable and hence commercially viable.

For intellectual property, there are no unexpired patents related to Rapamune in the FDA Orange Book so AFT appears to be free to operate. We do not know the extent of the patent estate for Pascomer but at the very least it will be eligible for orphan drug exclusivity, which is seven years in the United States and 10 years’ worth of data exclusivity in the EU (although we would expect patent coverage to go well beyond that due to the proprietary nature of the formulation).

As part of the agreement, Timber will cover the clinical trial costs associated with clinical development. An Investigational New Drug Application has already been approved by the FDA with the first of two 120-patient clinical studies expected to start shortly in eight centres in the US (the Mayo Clinic), Australia, New Zealand, Spain and the UK. Results are expected in 2020.

Valuation

We are maintaining our valuation of NZ$495m or NZ$5.09 per share as Pascomer development is too early stage to include in our estimates. We will revisit this as the programme progresses.

Exhibit 1

Exhibit 1

Financials

We are maintaining our financial estimates as the precise size of the upfront payment is undisclosed. Also, the company has reiterated its operating profit target of between NZ$9m and NZ$12m for FY20.

Financial Summary

Financial Summary