Commercialisation deal for China and SE Asia
Update | 4 March 2021
Commercialisation deal for China and SE Asia
Update | 4 March 2021
Share this note
Futura Medical has struck an innovative deal with Atlantis Group to market its MED3000 topical gel for erectile dysfunction throughout China and South East Asia. Atlantis, and its associated companies, will fund any registration studies and commercialisation costs in the region, with the resulting profits being split 50:50. Atlantic will also invest £2.0m in Futura Medical through £1.5m as Convertible Loan Notes and £0.5m in warrants, with a conversion price of 20p and exercise price of 22p respectively. The collaboration addresses market access to the largest target population for MED3000. Updating our model to reflect this deal, our new valuation is £181.5m, equivalent to 73.1p per share (71.3p fully diluted), from £153.8m, 60.9p a share, previously.
|Year-end: December 31||2018||2019||2020E||2021E|
|Adj. PBT (£m)||(7.2)||(11.1)||(3.1)||(3.3)|
|Net Income (£m)||(5.9)||(8.9)||(2.5)||(2.8)|
|Adj. EPS (p)||(4.5)||(4.4)||(1.0)||(1.1)|
4 March 2021
|Shares in issue||245.6m|
|12 month range||7.16-24.49p|
Futura Medical is an R&D driven small pharma company, with a novel DermaSys transdermal delivery platform. The lead programme, a topically applied gel (MED3000), is approaching regulatory approval as a medical device for ED (erectile dysfunction) in Europe and the US.
+44 (0) 20 3637 5043
+44 (0) 20 3637 5041
Table of Contents
Futura Medical has struck a 50:50 profit share deal with subsidiaries and associated funds of Atlantis Group for commercialisation of MED3000, its topical gel for erectile dysfunction (ED), in China and South East Asia. The deal sees Atlantis, through another subsidiary, invest £1.5m as CLNs immediately with warrants for a further £0.5m. Atlantis believes a number of Asian countries can be accessed based on a European OTC approval, but will fund the costs of studies and registration for OTC approval in China (expected to be c £4m). The market opportunity is significant, with the highest incidence of ED males worldwide. We had consciously excluded non-US and non-Europe regions from our valuation; for context we model, using conservative assumptions, OTC sales of $225m in Europe and $250m in the US. We reiterate our view that, whilst not without risks, our current valuation of £181.5m, 73.1p per share, fails to reflect the likely prospects.
Futura Medical has struck a commercialisation deal where it will retain half of the profits from commercialising MED3000, its proprietary topical gel for erectile dysfunction (ED), in China and regions within South East Asia. The deal consists of several elements, including direct investments, funding and the commercialisation collaboration, with subsidiaries of the Atlantis Group.
The first element sees HT Riverwood Multi-Growth Fund, a fund managed by Atlantis Investment Management, invest up to £2m in cash, £1.5m of which will be received immediately, into Futura Medical. The £1.5m be in the form of convertible loan notes (CLN), with a three-year conversion period and a price of 20p (a 25% premium to the 30-day closing share price). The CLNs carry no interest for six months then have a 2% coupon through to conversion. Futura Medical can request a mandatory conversion when it receives European regulatory approval for MED3000 as a Class 2B Medical device or the share price trades at or above 30p for one month. The £0.5m is linked to warrants issued to HT Riverwood that have a four-year life and an exercise price of 22p. The conversion terms of the £1.5m CLNs are such that they are essentially equity.
The second element is a commercialisation collaboration with Pride Century Ventures, a vehicle owned by Co-High Investment Management, that will have the rights to exclusively develop and commercialise MED3000 across China and South East Asia. Futura Medical and Co-High will split the resulting profits of the Joint Collaboration equally. Co-High is a 60% owned subsidiary of the Atlantis Group. Co-High is well-connected in the region and has identified a number of local partners for specific geographies. These partner profits will form part of the Joint Collaboration and will be included in the profit split. The market opportunities in the regions covered by the deal are significant and it is interesting to note that Futura Medical has struck a profit share arrangement rather than a royalty licensing deal with an upfront payment.
The third element covers the financing of the commercial operations, in particular the costs of registration studies for China. Co-High will be responsible for all costs relating to the development, registration, and marketing of MED3000. Co-High management, and its local partners, believe that market access as an OTC product for a number of countries can be achieved based on the OTC registration in Europe. Approval in China, the largest commercial opportunity, will require a pivotal study and is expected to cost c £4m. Chinese approval would open up the remaining countries in the region. The study will likely only need to demonstrate that MED3000’s safety and efficacy is replicated in Chinese males, suggesting approval could be achieved within 18 months. Futura Medical would provide reasonable technical support for OTC product development and eventual commercialisation.
The Atlantis deal, through their majority-owned subsidiary Co-High, is innovative and addresses the key difficulty of how a small Western company can realise the optimal value for its assets when it lacks the know-how, connections (both business and political), and local infrastructure. These are the skills that Co-High and its affiliates provide. The market dynamics in China and South East Asia region are complex, especially so when dealing with a sexual health medical product available through multiple OTC channels. It will be interesting to see if other regions will be addressed through similar profit-sharing structures.
Looking at Latin America and the Middle East regions, it could be argued that the complexities and differing social and market access challenges, even between neighbouring countries, are similar to those in South East Asia. Nonetheless, we would expect these regions to be addressed through more traditional upfront payment and royalty deals. Europe is interesting but, as we have said before, the variations in attitudes and social norms are such that it is probably best addressed with three or four regional players that know their marketplace intimately. Interestingly, the rapid evolution of multi-channel marketing for OTC healthcare products in the US means that, despite being a single country, the varied channel characteristics mean a similar overarching deal could work well.
However, in our view, any such distribution or licensing agreement is unlikely to happen before the regulatory status is clear. We believe the regulatory filings for MED3000 are the key near-term determinants of Futura Medical’s prospects.
In Europe MED3000 has been submitted for approval as a Class 2B medical device. The positive interactions with the designated EU Notified Body has seen the Technical Documentation (essentially the efficacy, safety and quality data from the clinical trials and supporting pre-clinical evidence) and the Quality Management System (QMS) documentation submitted, with the latter having received a positive audit opinion. The Technical Dossier has been accepted and is currently under formal review, which, in our view, would support a regulatory approval around mid-2021. Anecdotal evidence suggests that COVID-19 impacts have been minimal and the agency has been working very effectively with little, if any, backlog.
In the US MED3000 will be filed as a medical device with a De Novo Classification, as there is no similar predicate device to allow a 510(k) submission. Three pre-submission meetings with the FDA (February, July, and October 2020) clarified the OTC route to market and the need for an additional six-month clinical trial to demonstrate longer term efficacy. The details and scope of this small study, together with the development of the OTC label and patient leaflet, were discussed at a meeting in February 2021, with management awaiting the formal meeting minutes. The clinical study report (CSR), and additional clinical, safety, stability, and manufacturing information are similar to the European requirement and the package has already been collated.
The indications are that the patient numbers required for this supplementary study will modest, with active cooperation to determine the ‘least burdensome design’. Developing the OTC label and associated patient information leaflet is a crucial process that seeks to minimise all risks; for example, consumer panels are employed to establish wording that is clear and unambiguous. Although multifaceted, the procedure is not expected to be a time limiting step. Management appears confident that a US OTC approval will be granted relatively smoothly.
Assuming a smooth regulatory pathway, MED3000 would be the first clinically proven ED product that is approved OTC in Europe and the US. Its rapid onset of effect, undoubted safety, and ease of use suggest MED3000 would offer an attractive, clearly differentiated (not ‘me too’), and competitive clinical profile compared not only to the market leading class of PDE5 inhibitors, but other classes of competing ED therapies. Management has conducted market research analyses that suggest sales of $500m three years post-launch, rising to $584m by year five and $661m by year ten.
Our assumptions and expectations were detailed in our June 2020 Outlook report and, despite our conservative approach, we arrive at five-year sales for MED3000 of $225m in Europe and $250m in the US. As mentioned earlier, we have consciously ignored non-Europe and non-US markets until there was greater visibility on how they would be accessed. China and South East Asia represent the largest potential user group in terms of volume, but the monetary value is likely to be tempered by lower pricing. We have, again using conservative assumptions, modelled on five-year sales of $143m for the region, with half of profits (equivalent to a 12.5% royalty based on a 25% net margin assumption) accruing to Futura Medical. We remind that using more aggressive assumptions, notably on having motivated and commercially astute partners, could result in materially faster adoption curves and higher peak sales (Exhibit 3).
We use a DCF model to value Futura Medical. The key value driver is MED3000 and we examine its sales potential and launch timings in the US, European and now China & SE Asian markets. We assume that MED3000 has a high likelihood of being approved as an OTC medical device in Europe in the near-term, whereas in the commercially important US market we have been more cautious with our success probabilities and timings.
We have assumed that Futura Medical receives payments from partners that are equivalent to a royalty rate of 20%, although in reality they will likely be a combination of small upfront payments, sales milestones, and tiered royalties on sales. In China and SE Asia we have assumed a 50% profit contribution, equivalent to a 12.5% royalty. The risk adjustments used reflect the remaining regulatory risks and inherent commercial and execution sensitivities for each market. These are summed and netted against the costs of running the operation and net cash.
The effect of updating our model (Exhibit 4) sees our previous valuation for Futura Medical of £153.8m, or 60.9p per share, rise to £181.5m, or 73.1p per share (71.3p on a fully diluted basis).
The specifics of our Europe and US assumptions, and other details of our model, are covered in our last Outlook note (available on our website).
Trinity Delta Research Limited (“TDRL”; firm reference number: 725161), which trades as Trinity Delta, is an appointed representative of Equity Development Limited (“ED”). The contents of this report, which has been prepared by and is the sole responsibility of TDRL, have been reviewed, but not independently verified, by ED which is authorised and regulated by the FCA, and whose reference number is 185325.
ED is acting for TDRL and not for any other person and will not be responsible for providing the protections provided to clients of TDRL nor for advising any other person in connection with the contents of this report and, except to the extent required by applicable law, including the rules of the FCA, owes no duty of care to any other such person. No reliance may be placed on ED for advice or recommendations with respect to the contents of this report and, to the extent it may do so under applicable law, ED makes no representation or warranty to the persons reading this report with regards to the information contained in it.
In the preparation of this report TDRL has used publicly available sources and taken reasonable efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee or warranty as to the accuracy or completeness of the information or opinions contained herein, nor to provide updates should fresh information become available or opinions change.
Any person who is not a relevant person under section of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom should not act or rely on this document or any of its contents. Research on its client companies produced by TDRL is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. The report should be considered a marketing communication for purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. TDRL does not hold any positions in any of the companies mentioned in the report, although directors, employees or consultants of TDRL may hold positions in the companies mentioned. TDRL does impose restrictions on personal dealings. TDRL might also provide services to companies mentioned or solicit business from them.
This report is being provided to relevant persons to provide background information about the subject matter of the note. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information that we provide is not intended to be, and should not in any manner whatsoever be, construed as personalised advice. Self-certification by investors can be completed free of charge at www.fisma.org. TDRL, its affiliates, officers, directors and employees, and ED will not be liable for any loss or damage arising from any use of this document, to the maximum extent that the law permits.
Copyright 2021 Trinity Delta Research Limited. All rights reserved.