Pharmos: called a BUY by the SmallCaps Online LLC: (not without risk but interesting)
Pharmos Corporation (NASDAQ: PARS)
Two Marketed Products with Growing Revenues; Two Products
in Late-stage Clinical Trials; Diverse, Risk-Reduced Strategy
Focused On Ophthalmology, Neurology and Cancer; Reiterating
BUY Recommendation
Market Data:
Exchange Symbol..................PARS (NASDAQ)
Price of Common Stock (2/10/00)..........$3.13
Stock Price at Initiation (11/10/99).....$1.16
30-Day Average Trading Volume..........846,400
Common Shares Outstanding.........47.6 million
52-Week High/Low...................$4.01/$1.06
PARS Corporate Information
Address........99 Wood Avenue South, Suite 301
.............................Iselin, NJ 08830
Telephone.......................(732) 452-9556
Chairman & CEO................Haim Aviv, Ph.D.
President & COO..........Gad Riesenfeld, Ph.D.
VP, Finance & CFO...............Robert W. Cook
Summary Investment Considerations
Pharmos Corporation ("PARS") is an emerging pharmaceutical company focused
on the modification of existing molecules in order to reduce side effects and
enhance efficacy of existing drugs. PARS has initially targeted the ophthalmic,
neurological and cancer markets. PARS? first two products, Lotemax© and
Alrex©, were launched in June 1998 and are marketed by Bausch & Lomb
("B&L") in the U.S. Lotemax is a topical, site-specific steroid used to treat a broad
range of eye inflammations including post surgical inflammation. Alrex is specially
developed to treat ophthalmic allergies, and is indicated for the treatment of
seasonal allergic conjunctivitis. LE-Tobramycin (LE-T), PARS? third ophthalmic
drug for the treatment of inflammations of the eye where a risk of bacterial
infections exists, is about to begin its final clinical trial. In neurology, PARS is
nearing the end of a second Phase II trial for its novel neuroprotective and
anti-inflammatory product dexanabinol. Dexanabinol?s initial indication is for
traumatic brain injury (TBI), with later indications including stroke and other
neurological disorders. Currently there are no approved treatments available to
reduce the damage of TBI.
PARS? management has shown the ability to secure strong corporate partners;
PARS partnered with B&L for the marketing of its three ophthalmic products
while retaining high royalty revenues and co-marketing rights (beginning in June
2000). B&L paid for 50% of the development costs associated with LE-T, for
which PARS expects to file an NDA by 3Q00. PARS is actively seeking a
corporate partner for its Dexanabinol program. We are initiating coverage with
a BUY rating, and recommend purchase of PARS shares for those
investors tolerant of the risks associated with small-cap equity
investments.
I. Ophthalmic Program ? Growing Revenues, Strong Corporate
Partner in Bausch & Lomb ("B&L")
Lotemax is marketed globally by B&L as a treatment for post-operative eye
inflammation. The US market is estimated at $75 million, and the European
market is estimated to be roughly $65 million. Alrex was launched in the
U.S. in June 1998 for the treatment of eye allergies, a $150 million market
opportunity. PARS filed for Lotemax approval in the U.K. in December
1999 and we anticipate additional European Lotemax and Alrex fillings in
Europe during 1H 00.
LE-T: PARS plans to commence a final clinical study on LE-T for the
treatment of ocular inflammation where a risk of infection exists during 1H
00. B&L, who will market LE-T in the U.S., Europe, Canada and other
countries, is covering 50% of the clinical development costs. The US market
is estimated to be $125 million, with Europe and Canada adding $100 million.
II. Dexanabinol in Clinical Trials for Two Indications ? PARS
Actively Seeking Corporate Partner
Dexanabinol is a non-psychotropic synthetic version of cannabis developed
to treat a broad range of neuro-inflammatory conditions. Dexanabinol has
completed enrollment for its Phase II trial for the treatment of damage
caused by TBI, an over $500 million market, and should begin an
international Phase II/III trial in 2000.
In a double-blind, placebo-controlled Phase II trial, patients treated with
Dexanabinol achieved higher recovery rates than placebo, with significantly
lower incidence of both elevated intracranial pressure and low blood
pressure.
III. Proven Management Team ? Risk Reduced Strategy
Management has shown the ability to effectively guide two drugs through
clinical trials, the FDA regulatory process and bring them to market. With
two marketed products with growing revenues, a pipeline with products in
late stage clinicals, a strong partner in B&L and other partnering
opportunities, we believe PARS offers investors a compelling, risk-reduced
opportunity in the emerging pharmaceutical sector, and we are initiating
coverage with a BUY recommendation and a 12-month price target of $7 to
$9 per share.
Corporate Overview
Pharmos Corporation ("PARS") is a diversified biotechnology company with
several distinct market opportunities. In ophthalmology, PARS has two products on
the market (marketed through Bausch and Lomb) and another product that could
be submitted for FDA approval this year. These products address moderately-sized
markets and generate significant revenue for PARS. Continued expansion into
these markets and introduction of the products abroad should continue to provide a
increasing revenue stream for clinical development of earlier stage, neurology
products. PARS is also developing treatments that could significantly reduce the
damage suffered after traumatic brain injury. The ability to prevent further damage
through treatment, potentially improving a patient?s ability to fully recover, is
currently unavailable. Therefore, we feel that if these drugs successfully complete
clinical trials, PARS would tap into a significant unmet medical market. PARS is
also developing drugs through rational drug design which improve upon existing
drugs by potentially removing serious side effects caused by entry in the central
nervous system or the brain. Many drugs have side effects caused by interactions
at these locations and we feel there is a large potential market for several of these
drugs. Although this development program is very early, we feel that PARS?
ophthalmology products coupled with potential revenues from the neurology
program should provide ample funding for these early development programs.
PARS is an uncommon biotechnology investment, combining marketed products
generating good revenue with the potential for explosive revenue growth should the
Company?s other products succeed. At current valuations, we feel PARS is a very
attractive holding for risk-adverse biotechnology investors.
Opthalmology
PARS has two ophthalmologic products on the market already and one that should
be submitted for FDA approval later in 2000. All three of these contain the
corticosteroid Loteprednol Etabonate, a proprietary anti-inflammatory agent. Unlike
many topical corticosteroids, LE is broken down rapidly into an inert compound and
flushed out of the body. This makes it a safer drug, particularly for ophthalmologic
indications where traditional corticosteroid therapy (such as prednisolone) often
raises the pressure within the eye. Each of these products is targeting a
well-defined niche market and is enjoying strong growth into these markets. PARS'
marketing partner for these products is Bausch and Lomb (BOL), a recognized
leader in eye care, and we expect that these products will enjoy continued market
expansion in the U.S. Worldwide expansion is also likely as marketing approval has
been obtained for Lotemax and Alrex in Argentina and is pending in Brazil, Mexico,
South Africa and China. The U.K. application for Lotemax was submitted in
December 1999 and we expect additional Lotemax and Alrex application
submissions in Europe during the first half of 2000..
Lotemax: Lotemax is a 0.5% solution of LE that is used for a variety of
inflammatory eye conditions. One of these indications is the post operative
reduction of swelling after cataract or laser surgery?s, one area that is likely to see
continued growth as the U.S. population ages. It was recently announced that
Lotemax is now the number two brand anti inflammatory eye drug in the U.S.,
clearly indicating the strength of the PARS/BOL partnership in this field.
Furthermore, the FDA gave Lotremax the broadest labeling of any steroid on the
market that is used for ophthalmic purposes. We feel these factors should help
Lotremax continue to build market share.
Alrex: Alrex is PARS second LE drug, a 0.2% solution used for the treatment of
eye allergies. Many skin allergies are effectively treated by corticosteroids but
because of the typical side effects of ophthalmic steroids, they are contraindicated.
Alrex has the distinct advantage of being the only FDA approved corticosteroid for
the swelling, itching and irritation of seasonal allergic conjunctivitis (eye allergies
triggered by pollens).
LE-T: PARS has a third ophthalmic product under development which combines
the corticosteroid found in Lotemax and Alrex with the FDA-approved antibiotic
tobramycin. This combination treatment is targeting inflammation of the eye where
infection is suspected. Based on the success of the other TE products and the use
of an already approved antibiotic, we expect LE-T to experience no significant
difficulties with the FDA. PARS is finishing clinical trials for this drug and should
submit an NDA to the FDA in the latter half of 2000. If approved, this product,
coupled with growth in PARS other two ophthalmologic agents, should ensure
robust revenue growth over the next few years.
Neurology
Traumatic Brain Injury: Traumatic Brain injury (TBI) is a leading cause of
disability and death among young people, mainly as the result of automobile
accidents. The process by which brain damage occurs after injury is actually quite
complex and much of the severe or fatal damage may actually occur after the
initial trauma. When trauma occurs, cells within the brain are destroyed and the
contents of the cells are released. Among these cellular components are chemicals
called free-radicals which are toxic to nearby cells, and neurotransmitters (such as
glutamate) which overstimulate neighboring cells and also cause them to die. This
process generates a wave of cellular death radiating out from the site of the injury.
Compounding this problem, the immune system reacts to the damaged brain by
sending in specialized proteins called cytokines to fight off infections, just as it
would if you had a cut on your skin. This process leads to swelling of the affected
area and results in more damage as pressure within the brain increases. All of
these factors work against a patient's chance of recovery and is the primary reason
so many people die within days of their injuries. Those that do survive often have
permanent disabilities. Therefore, therapeutics which are found to reduce cellular
death after TBI should offer improved chances for recovery. Unfortunately,
doctors currently have little to offer patients.
Dexanabinol: PARS is developing HU-211, or dexanabinol, as a potential therapy
for patients with acute brain damage such as TBI or stroke. The drug is related to
the active ingredient in marijuana, but has none of the psychotropic or addictive
effects. It has been shown that the drug blocks the receptor (the
N-methyl-D-asparate or NMDA receptor) that is overstimulated by
neurotransmitters of neighboring cells. Therefore, one of the routes by which brain
injury progresses can be slowed. Remarkably, it was also shown that dexanabinol
can block the production of TNF ?, one of the primary cytokines involved in the
inflammatory response against the damaged tissue. There is also some evidence
that the drug can reduce the toxicity of free radicals that are released from dying
cells. Therefore, dexanabinol has three potential mechanisms by which it can
protect neurons after brain injury. By acting on the immediate damage caused by
released chemicals as well as the secondary effects of the inflammatory response,
we feel that dexanabinol has great potential for reducing the damage caused by
traumatic brain injury. Preclinical results in animal models of stroke, cardiac arrest
and multiple sclerosis suggest that this drug may have applications in other diseases
where neuroprotection is indicated.
Phase II Trials: PARS is completing a Phase II trial on dexanabinol for the
treatment of traumatic brain injury. 100 patients with brain injury have been
enrolled in one of three cohorts, corresponding to three different dosages of
dexanabinol. The results from the first two cohorts (the two lowest dosages) have
been announced while the third cohort should be ready for analysis early in 2000.
So far, the results have been very encouraging. Although the mortality was only
slightly lower in patients receiving dexanabinol, the pressure inside the brains of the
treated patients was significantly reduced. An elevated level of pressure is typically
associated with a higher level of neurological damage and so reduction of this risk
factor is a very important result. This was observed in the follow up studies where
patients receiving dexanabinol generally recovered to a better extent than placebo
treated patients. This effect was pronounced early in the patients recovery (three
months) where 40% were considered to have had a "good outcome" (based on
their ability to achieve a normal quality of life) as compared to only 19% in the
placebo group. We feel that these results are extremely encouraging given the
limited treatments available to patients with TBI. Should the higher dosing indicate
similar results we would expect a Phase III trial to begin in the near future.
Phase I for Stroke: PARS is also evaluating dexanabinol for the treatment of
stroke. After a patient suffers a stroke, cells near the site of the blocked blood
vessels die since they no longer receive enough blood. As they die, neighboring
cells and neurons are also damaged through the same cascade of biochemical
events seen in TBI. It seems reasonable that dexanabinol would also be useful for
reducing the amount of neuronal damage after a stroke. Since the drug has already
proven to be useful in the Phase II studies in TBI, we are excited about the
prospects in stroke.
Oncology
Tamoxifen analogs: PARS is expanding its drug development platform to include
certain oncological indications. Several classes of drugs (including corticosteroids,
the active ingredient in PARS ophthalmologic products) have side effects
associated with entry of the drug into the central nervous system (CNS) or the
ability to cross the blood-brain barrier (BBB). These side effects generally limit the
drug?s clinical usefulness. PARS is using rational drug design and medicinal
chemistry to alter these drugs so that they retain their potency but are no longer
able to cross the BBB or enter the CNS. Towards this end, PARS is studying
several tamoxifen analogues to identify compounds with improved pharmacokinetic
profiles. Tamoxifen is a common cancer drug used to breast cancer and is also
used as a prophylactic agent in women at high risk for the disease. However,
several significant side effects limits the drug full potential. PARS has found
several tamoxifen analogues that retain anticancer activity in preclinical models
without accumulating in the CNS. Similar analogues are being sought for
corticosteroid use and systemic anethetics which might be used to treat neuropathic
pain. We feel this is an interesting approach which could potentially be applied to a
number of existing drugs that suffer from side effects specific to CNS entry or
BBB crossing.
Drug Delivery: Related to the Company?s efforts in improving Tamoxifen, a more
general program of improved drug delivery is under development. Using
submicroemulsion (SME), a proprietary emulsion developed by the Company, it is
hoped that more efficient drug delivery can be obtained. The Company has filed
nearly a dozen patents on this technology and has a collaboration with Chiron
related to delivery of peptide and protein therapeutics. The SME has been
successfully completed Phase II clinical testing. PARS has also developed a drug
delivery technology called Emulsome, a hybrid between emulsion and Lypasome
technologies. We feel this program complements PARS drug design efforts and, if
successful, could be as significant as the design program for cancer. PARS is
actively seeking corporate partnerships for this program and we believe we could
see an agreement signed by the end of the year.
Management
Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Chief Scientist and a
Director of the Company and co-founded in 1990, Pharmos Corporation, a New
York corporation ("Old Pharmos"), which merged into the Company in October
1992 (the "Merger"). Dr. Aviv also served as Chairman, Chief Executive Officer,
Chief Scientist and a Director of Old Pharmos prior to the Merger. Dr. Aviv was
the co-founder in 1980 of Bio-Technology General Corp. ("BTG"), a publicly-traded
company engaged in the development of products using recombinant DNA, its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific Consultant until August 1993. Prior to that time, Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the principal stockholder of Avitek Ltd., a stockholder of the Company. Dr. Aviv is
also an officer and/or significant stockholder of several privately held Israeli
biopharmaceutical and venture capital companies.
Gad Riesenfeld, Ph.D., was named President and Secretary in February 1997,
and has served as Chief Operating Officer since March 1995. He served as
Executive Vice President from December 1994 to February 1997, Vice President
of Corporate Development and General Manager of Florida Operations from
October 1992 to December 1994, and was employed by Pharmos from March
1992 until the Merger. Prior thereto, he was engaged in consulting relating to the
commercialization of intellectual property, primarily in the pharmaceutical and
medical fields. From March 1990 through May 1991 Dr. Riesenfeld was a
Managing Director of Kamapharm Ltd., a private company specializing in human
blood products. Prior to that, from May 1986, he was Managing Director of Galisar
Ltd., a private company involved in extracorporeal blood therapy.
Robert W. Cook was elected Vice President Finance and Chief Financial Officer
of Pharmos in January 1998. From May 1995 until his appointment as the
Company's Chief Financial Officer, he was a vice president in GE Capital's
commercial finance subsidiary, based in New York. From 1977 until 1995, Mr.
Cook held a variety of corporate finance and capital markets positions at The
Chase Manhattan Bank, both in the U.S. and in several overseas locations. He was
named a managing director of Chase in January 1986. Mr. Cook holds a degree in
international finance from The American University, Washington, D.C.
Financial Discussion and Valuation Analysis
Based on our discussions with management and a review of the market
opportunities for PARS? marketed products and products in development, we have
generated an earnings model and forecast out to the year 2005. We have provided
information pertaining to the targeted indications for Lotemax, Alrex, LE-T, and
Dexanabinol, and believe our assumptions (as to market size, growth, penetration
and pricing) are sufficiently conservative and consistent with comparable company
estimates.
With respect to license fee revenues, we have included a potential U.S. partnership
agreement for Dexanabinol. We assumed an initial license fee payment of $5
million in 2000 with additional $10 million license fee payments in 2001 and 2002.
Although we feel that these assumptions are feasible, we believe the Company
may wish to wait until 2001 to partner Dexanabinol at which stage the interim
Phase III data should be available. As a result of the recent financing (announced
February 10, 2000) in which PARS raised $7.3 million, the Company may be able
to finance the Phase III trial through 2001 without the need to raise additional
capital. We have not included revenues from potential international partnerships,
which believe to be at least as significant as any potential US agreement.
Valuation: From our assumption pages, we developed a six-year income statement
forecast. Using these data, we generated valuation analyses using a discounted
cash flow method, a terminal P/E multiple method and a terminal EBITDA multiple
method. We believe we have been sufficiently punitive in our discount rates and
are comfortable with the range of multiples being used. Regardless of the valuation
methodology, PARS? share price appears to be significantly undervalued at its
current level. We believe we have been conservative with respect to PARS? ability
to penetrate the traumatic head injury market, and have not included potential
milestone payments from any international marketing partners. We believe PARS
to be currently undervalued and are setting a 12-month price target in the
range of $7 to $9 per share.
Risk Considerations
This section of the document is provided to remind potential investors to
undertake a prudent level of due diligence prior to making an investment
in the securities of Pharmos Corporation. For a complete description of
risks and uncertainties to PARS? business, see the "Risk Factors" section
in PARS? SEC filings, which can be accessed directly from the SEC Edgar
filings at www.SEC.gov on the Internet. Other potential risks include:
Market risk: Investors should consider technical risks common to many
small-cap or micro-cap stock investments, including liquidity levels, small
float, risk of dilution, dependence upon key personnel, dependence upon
single products or technologies, and the strength of competitors that may be
larger, better capitalized and hold dominant market positions.
Business risk: PARS has limited experience in the development,
manufacturing, marketing, and the distribution of pharmaceutical products.
Many of its products are in the early stages of development. Additionally,
PARS may license rights to other products to other companies. There can
be no assurance that these licensing agreements will be completed, or that
the market will accept any products under development.
Regulatory risk: There is no guarantee that future PARS products will be
approved by the US FDA or international regulatory bodies for marketing in
the US or abroad.
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