Futura Medical: focus shifts to execution

Futura Medical reported FY20 results that highlight achievement of several key milestones, the most notable being MED3000’s regulatory approval in Europe, with CE Marking expected by end-May. This single outcome materially de-risks the investment case, removing a major uncertainty and paving the way for commercialisation discussions for a number of geographies to proceed at pace. In the key US market, the FDA has clarified that it requires a single 100-patient study, FM71, examining efficacy and safety over six months. We assume FM71 costs to be between £2.5m and £3.0m, suggesting additional funding is needed. Assuming a H221 start, smooth progress and successful results could see US approval for MED3000 by mid-2023. The market opportunity for a clinically proven OTC ED treatment is significant, although we consciously employ conservative assumptions in our model, with sales of $225m in Europe and $250m in the US. Our view is that, whilst not without risks, Futura Medical’s share price does not reflect the likely prospects.

The imminent CE Mark for MED3000, expected by end-May, means that Futura Medical’s major sensitivities in the European markets, now shift from regulatory to execution risk. The designated EU Notified Body certification as a Class 2b approved medical device means that MED3000 will be the first clinically proven ED treatment that is available OTC (over the counter, ie without a prescription) across the European Union. There are number of other geographies, including countries in the Middle East, Africa, the Far East, and Latin America that allow “fast track” reviews.

We expect several commercialisation agreements addressing these regions to be struck in the coming six months. We believe management aims to focus on maximising longer term returns rather than seeking sizeable upfront payments that could address its funding requirements to undertake the FM71 study required for FDA approval. The recent Atlantis commercialisation deal covering China and most countries within South East Asia (March 2021 Update) has foregone sizeable upfront and milestone payments in return for 50:50 profit split. Whilst we would anticipate most of the Middle East and Latin America markets to be addressed through traditional upfront payment and royalty deals, we expect Europe to be covered through three or four regional players that know their marketplace intimately. It is here, and the US, that we may see more flexible profit-sharing deal structures.

In the US, the fourth meeting with the FDA has confirmed MED3000 will be reviewed as a De Novo classification with a small confirmatory clinical trial and a Human Factors Study as its remaining requirements. 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 Human Factors Study is a straightforward non-clinical study that assesses how easily a patient understands the label and directions for use; this is an important factor with an OTC product to ensure that it is not inadvertently misused by patients. A fifth pre-submission meeting with the FDA is planned for H221 to define and confirm the details of the OTC application.

FM71, the confirmatory clinical trial, will involve c 100 patients, 20 of whom are to be African American (from a US medical centre) and the remainder recruited from the same study centres as FM57. It will examine a mix of mild, moderate, and severe ED patients over a six-month period, compared to a three-month duration for FM57, to reassure the FDA that efficacy does not diminish over a longer period. Management is confident this will be successful as FM57 showed that efficacy improved during the three-month period. The primary endpoints are the same as FM57, but speed of onset is also being examined to support a rapid onset claim. The size and format of the FM71 study suggests a cost of $3.5m to $4.5m (£2.5m to £3.2m). If funding is in place a H221 start is likely, which assuming smooth progress with completion by Q222, and successful results, could see US OTC approval for MED3000 by mid-2023.

Initial new patents covering MED3000 were filed in the UK in December 2019 with additional filings made in August and October 2020. An initial examination by the Patent Office supports the patentability of MED3000 and forms the basis of a Patent Cooperation Treaty (PCT) application filed in October 2020. The PCT currently has 153 contracting countries, which means that management (and its commercial partners) have until Q222 to decide in which countries it will seek patents. These national applications, if successful, will grant MED3000 protection through to 2040.

The market opportunity for the first clinically proven ED product approved for OTC use could be significant. 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. Market research analyses conducted by management suggest sales of $500m three years post-launch, rising to $584m by year five and $661m by year ten.

Exhibit 1: User benefits of MED3000

Source: Trinity Delta, Futura Medical

Our assumptions and expectations for MED3000 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. 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. Clearly, using more aggressive assumptions, notably on having motivated and commercially astute partners, could result in materially faster adoption curves and higher peak sales (Exhibit 2).

Exhibit 2: OTC availability opens a large untapped ED market

Source: Futura Medical. Note: 1 – Cello Healthcare Consulting research amongst physicians in the US, France and Germany, commissioned by Futura; 2 – Corona G., Andrology, 2016, 4, 1002–1009; 3 – Frederick L., J Sex Med, 2014, Oct, (10):2546-53; 4 – Nguyen Sex Med Rev. 2017 Oct, vol 5, 508-520; 5 – MSP 2018: Data for 75 countries, IQVIA IMS Health; 6 – Ipsos research commissioned by Futura 7 – Directors’ belief based on market research conducted on Company’s behalf by Ipsos

Valuation and Financials

We value Futura Medical using a DCF model. MED3000 is the key value driver, and we examine its sales potential and launch timings in the US, European, and 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. 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).

We assume 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 modest upfront payments, sales milestones, and tiered royalties on sales. In China and SE Asia we assume 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.

Futura Medical’s end-December cash balance of £1.02m was subsequently boosted in March 2021 with a £2m investment (£1.5m in convertible loan notes, CLNs, and £0.5m in warrants which were exercised by HT Riverwood Fund in April 2021) in connection with the MED3000 China and SE Asia collaboration. The CLNs have a three-year conversion period, a price of 20p, and carry a mandatory conversion when MED3000 receives European approval as a Class 2b device for ED or the share price is above 30p for a month.

Exhibit 3: Futura Medical risk-adjusted DCF model

Source: Trinity Delta    Note: Assumptions include a 12.5% discount rate; a 1.3 $/£ FX rate, and 10% tax rate from 2026 with the benefit of the UK patent box

The effect of updating our model (Exhibit 3) sees our prior Futura Medical valuation of £181.5m, or 73.1p per share (71.3p fully diluted), rise to £190.3m, or 76.6p per share (74.4p on a fully diluted basis). Our financial forecasts are presented in Exhibit 4.

Exhibit 4: Summary of financials

Source: Company, Trinity Delta    Note: Adjusted numbers exclude exceptionals. The funding requirement is shown as short-term debt in FY21e, until transaction type, source and size are confirmed.