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05 July 2017 | Insights

Bionomics: A Case Of When, Not If.

Ticker: BNO

Share Price: ASX:  A$0.41

Market Capitalization: A197.5m

Cash: A$50m

Debt:US$15m

 

Summary

  • A review of the pipeline and deep value opportunity in Bionomics Ltd with particular focus on their anxiety compound BNC210.
  • A look at their successful phase 2 anxiety results which I believe will trigger a substantial licensing deal with Merck & Co.
  • A new substantial shareholder hits the register and pays above market prices to take a stake.
  • An analysis of the blockbuster potential of Bionomics’ anxiety compound and how you can trade the stock.
  • The case for Merck and Co to buy Bionomics rather than licensing another compound.

 

Bionomics is an Australian clinical stage bio-pharmaceutical company that has focused on two scientific areas that present blockbuster drug opportunities for investors:

Central Nervous System:

BNC210: BNO’s lead candidate is in development for the treatment of anxiety disorders and conditions with co-morbid anxiety including depression and Post-Traumatic Stress Disorder (PTSD). BNC210 has met primary endpoints in six phase 1 trials showing evidence of target engagement and ability to reduce panic attack symptoms and in a phase 2 trial in General Anxiety Disorder (GAD) patients. A Phase 2 PTSD trial is ongoing in Australia and the US.

BNC 375 program: Is an Alzheimer’s candidate which achieved a pre-clinical US$506m deal with Merck & Co (MRK) (known as MSD in Australia). $20m upfront with $486m in milestone payments and royalties. Merck recently initiated a Phase I trial which prompted a US$10m milestone payment to Bionomics.

Pain: Beyond the clinical programs, in 2013, Bionomics announced an option and license agreement to Merck on one of BNO’s pain programs for US$172m in fees and milestone payments plus royalties on product sales.

Oncology:

BNC105: Undergoing Phase II trials. BNC105 is a vascular disrupting agent for the treatment of blood cancer and solid tumours. It is currently undergoing a $2.5m trial as a combination therapy with Merck’s Keytruda in treatment-unresponsive melanoma. A retrospective analysis is being funded and conducted by Novartis to assess whether bio-markers can identify patients that will respond to treatment in renal cancer. An investigator-initiated clinical trial of BNC105 in combination with ibrutinib (Imbruvica; Abbvie-peak sales forecast $7b) has been initiated by the Norris Cotton Cancer Centre for chronic lymphocytic leukaemia.

BNC 101: BNC101 is a monoclonal antibody that targets cancer stem cells. Currently undergoing a phase 1 trial in patients with colon cancer

The wider Bionomics pipeline displayed below:

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A shift in company message refocuses shareholders to partnering interest

Recent presentations from Bionomics have shifted investor focus to a potential licensing transaction of BNC210. The company recently commissioned US market research assessing the market opportunity for BNC210 and the unmet need for a non-benzodiazepine (i.e. non-addictive and non-sedative), non-SSRI/SNRI (i.e. fast acting) drug. The market research included interviews with over 30 Key Opinion Leaders (KOL) and 7 payors providing significant coverage of the US market. Based on relatively conservative metrics it was assessed that the total addressable market for BNC210 is around US$20 billion p.a. in the US alone.  A licensing deal of US$1 billion+ being achieved appears quite rational when the sales projections and advantages of their compound are presented to big pharma.

 

When presenting Bionomics to new investors I think it is important to understand the history of the last few years and provide a reason for why the share price has languished. In late 2015 Bionomics raised $12m at a 20% discount from US institutions at A$.408 issuing 40.2m warrants at the same time which are exercisable at A$.5938. The company’s rationale was that this money would go towards establishing a Phase 2 PTSD trial for BNC210. This raise came only months after securing a A$9m investment from Merck at A$0.5938. The vast disparity in raise prices and significant length of the warrants (5 years) shocked investors who over the next year saw the share price reach a low of A$0.23.  During this time the company engaged Greenhill’s to conduct a review of the board structure and bring additional skills to the board. This eventually resulted in the resignation of the Chairman and the retirement of another board member. The board was bolstered with the addition of three new directors, a focus for the renewal was corporate finance and advisory skills.

A recovery in the share price began when the successful Phase 2 GAD trial results were released to the market in September 2016. Having listened to the trial results conference call it was clear that the lead investigator and the Bionomics team were thrilled with the findings.

“These exciting Phase 2 data herald a potential paradigm shift for the treatment of anxiety disorders,” commented Professor Allan Young, Director of the Centre for Affective Disorders at King’s College London and Principal Investigator of the study.

How BNC210 works

BNC210 works in the brain by targeting a ligand-gated ion channel. It’s widely recognised that Bionomics are world leaders for their understanding of how ion channels operate. Once in the brain BNC210 attaches to the alpha 7 nicotinic receptor at a site, known as an allosteric site, which is different from where the agonists bind to activate the receptor (acetylcholine and nicotine). It is a negative allosteric modulator, essentially BNC210 down regulates the effects of acetylcholine and because it is specific for the alpha 7 receptor, the greatest percentage of reduction of acetylcholine activation in the brain is approximately 40%. I see this is a significant advantage of the compound as it limits the ability for significant reactions occurring in the brain from overdosing.

GAD phase 2 trial results

The phase 2 trial was a single centre, double-blinded, placebo and lorazepam-controlled, 4-way cross-over, conducted in 24 patients with untreated General Anxiety Disorder. The objective of the study was to evaluate the capacity of BNC210 to engage brain systems relevant to anxiety while resting and in response to anxiety-related tasks. The co-primary endpoints were change in cerebral perfusion measured by arterial spin labelling and change in task-related brain activity, specifically in the amygdala as measured by functional Magnetic Resonance Imaging (fMRI) during the Emotional Faces Task (EFT).

The results of the study showed that BNC210 induced statistically significant changes in cerebral perfusion (300mg and 2000mg BNC210, p<0.05) indicating that the drug is in the brain and engaging neural circuits. Performance of the EFT by GAD patients activated the left and right amygdala (p<0.001) and BNC210 significantly reduced this activation (the amygdala is responsible for flight or fight reactions) (300mg BNC210, p<0.05). Lorazepam also suppressed amygdala activation during performance of the EFT but did not reach statistical significance (1.5mg lorazepam, p=0.069).

 

A secondary endpoint of the trial was to determine the effect of BNC210 on defensive behaviour using the Joystick Operated Runway Task (JORT) which uses a force-sensing interface to obtain an objective measure of the intensity of threat avoidance motivation. BNC210 administration was associated with a significant decrease in the intensity of threat avoidance behaviour (300mg BNC210, p=0.007; 2,000mg BNC210, p=0.033). BNC210 outperformed lorazepam in this regard (1.5mg lorazepam, p=0.165)

 

It is important to point out that no sedative effect, no signs of addiction and no cognitive decline has been recorded for BNC210. It currently appears to have no significant side effects whatsoever.  An important finding in the results was that the 300mg arm had higher efficacy than the 2000mg arm. The success of the GAD phase 2 trial results provided increased confidence at Bionomics that the PTSD trial was the right course of action to build value for the drug. The 192 patient PTSD trial will have four arms, one being placebo and three treatment arms- 150mg, 300mg and 600mg given twice a day in a liquid formulation. Whilst Bionomics has run pre-clinical trials that showed that there was a reduction in PTSD symptoms in animals there are often times where human trials don’t correspond.

What has occurred since the result

Despite the significant Phase 2 GAD trial result last September, the registry has undergone a good deal of churn without a dramatic increase in share price. On the 6th of June 2017 20m shares were crossed bringing some life to the relatively dormant trading of the previous few months. In that transaction, the company’s largest individual shareholder and long term agitator, Laurence Freedman crossed a large block of his holding to BVF Partners, a +$1b US-based specialist biotech fund with a very impressive track record. It is important to note that the crossing of shares occurred at a premium to the last traded price of A$0.35, with a total of 22m shares transacting at A$0.40. This is a very positive outcome and the register is much stronger as a result. Importantly, BVF Partners have continued to buy shares bringing their significant holding to 10.21% with 49.1m shares. I anticipate that the stock is being closely monitored by a number of other institutional investors.

What’s the deal!

It is rare for Australian biotech’s to achieve deals of more than USD$500m. Having achieved this for their pre-clinical Alzheimer’s compound it appears unlikely that the CEO will accept an offer less than this amount for a successful phase 2 compound. It is important to understand that the Alzheimer’s compound uses the same ion channel and works on the same alpha 7 nicotinic receptor as BNC210. With Merck having already done two deals with Bionomics and holding a 4.5% share in the company, it would appear that they are the most likely to sign on the dotted line for BNC210.  The Key Opinion Leader meetings which were held in London and New York last month were attended by a number of large pharmaceutical companies who hold a strong interest in the compound. The presentation released along with this meeting provides a thorough in-depth analysis of BNC210.

Bionomics has the ability to use the upcoming PTSD trial results as significant leverage when negotiating on BNC210. With only two drugs, both antidepressants (Paxil and Zoloft) approved for the treatment of PTSD, sufferers are poorly served as those drugs have not been able to address the full range of PTSD symptoms. It is very likely that the FDA will grant breakthrough designation status upon successful phase 2 data. A phase 3 PTSD trial may only need 500-600 patients who are dosed for just 12 weeks before getting results. This could cost as little as A$25-A$30m. As for the Alzheimer’s compound, I am confident that with the significant amount of work that has been done on the compound in the two years since licensing, that the compound will pass its phase 1 trial. A commencement of a phase 2 trial should result in a milestone payment in excess of US$10m being paid to Bionomics. I estimate that the expected timeline for this possible payment to be the end of CY18. The company is currently burning approximately A$4-7m a quarter whilst conducting the Phase 2 PTSD and Phase 1 cancer stem cell/colon cancer trial. If they don’t achieve any milestone payments or additional deals I expect the company to hold approximately A$22-26m at the completion of their PTSD trial in Sept quarter 2018.

For junior biotech’s looking to achieve the best deal possible with a large pharma, it is well known that it’s imperative that a company displays to their suitor that they can go it alone. With the success of the Phase 2 GAD results I find it more likely that Merck and others will see the possibility for Bionomics to go it alone as too high a risk and will prefer to lock down the drug before the PTSD trial results. Of course, a significant metric could be built into the deal should the PTSD trial results be successful.

Trial timelines, expected outcomes and risk

Bionomics should be releasing interim safety data for their phase 1 cancer stem cell targeting drug BNC101 in the next few weeks. Although there may be some early signs of efficacy provided in the data it is primarily a safety trial and isn’t expected to move the share price significantly unless the drug has been shown to be unsafe.   It is expected that BNC105 trial results could be released towards the end of this year or early in 2018. I am quite excited about these trial results as they will potentially validate a failed phase 2 trial for BNC105 from 2014. The company has done extensive work on biomarkers that may correspond to progression free survival. They found Ferritin and IL-8 as two baseline biomarkers that correlate with an improved progression free survival (PFS) in patients. Eighty nine percent of patients expressing elevated plasma levels of Ferritin and lower plasma levels of IL8 at baseline were disease progression free (PFS) at 6 months.  The phase 2 PTSD trial will read out in the September quarter next year. BNC210 is the highest value compound in the company and therefore holds the largest risk if the drug fails to meet the primary endpoint.  PTSD is a very difficult indication with many significant facets to the condition that need to be overcome. The fact that there are only 2 drugs available for the condition and that in the last 10 years there have only been 4 companies with drug candidates that attempted trials in the US, shows how hard the condition is to tackle. Of them three have failed and one company Tonix Pharmaceuiticals Holdings “TNXP” is proceeding with a phase 3 trial for a drug that aims to reduce sleep disturbances.  The failure rate is obviously very high and lines up reasonably well with a report published by the Biotechnology Innovation Organization which analyzed Clinical Development Success Rates from 2006-2015.

The fact that only 9.6% of drugs make it from Phase 1 to approval provides pause for thought. What is even more astounding is the difficulty of the two scientific areas that Bionomics are creating drugs in; Psychiatry and Oncology at 6.2% and 5.1% respectively.

With this in mind the focus for investors must become finding ways of de-risking their investment along the development timeline. Similarly Bionomics is also aiming to de-risk their pipeline by partnering. Failure to do so will present significant pressure to the share price over time in the event of a failed trial. It is likely that if the PTSD trial was to fail and the company doesn’t achieve a deal on BNC210 before the results that the share price will be considerably lower as the implied value of the anxiety program will be damaged.

How to trade it

Bionomics’ enterprise value is A$165m. A visit to the company’s website will find a range of research reports which provide a 12 month target price of between 88c and $2.60.

I see little point of providing an extensive DCF as for me the opportunity for investors is based on the risk reward of a deal occurring within the next year. An appropriate strategy might be to buy a speculative holding with the view that a deal can be reached with a big pharma for BNC210 in the next 3 to 6 months. If this occurs and the share price moves up considerably, take out the principal and let the profits run. As previously mentioned there are of course significant risks when taking drugs through the clinic. And despite the strong safety record of Bionomics’ CNS drugs, there is still a significant possibility that for a variety of reasons they won’t make it through the clinic. Nevertheless I don’t see this as a factor in the next 12 months and find it highly likely that big pharma will do a deal.

My current estimate is that if successful, BNC210 could reach commercial sales in 4-5 years. If a tenth of the sales highlighted by their external research are achieved and if Bionomics secured a 15% royalty, their yearly revenue would be approximately US$300m p.a. Assuming a profit of A$300m, at 15x earnings Bionomics would be valued at nearly A$9 per share. This doesn’t include the significant milestone payments that would be accrued through to commercialization or a valuation for their Alzheimer’s drug candidate or extensive pipeline.

Another highly possible outcome is that Merck decides to make an offer for the whole company rather than licensing another drug from Bionomics. If a deal metric for BNC210 was to have a US$75-100m upfront payment with and a further payment for a successful PTSD trial, ongoing milestones and royalties, they may prefer to offer $1.20 (approx A$600m) and try and take the entire pipeline. This makes significantly more sense, especially when factoring in their strong relationship with Bionomics (Merck attend a symposium each year in Adelaide, Australia to discuss CNS matters), their 4.5% shareholding and ongoing development in two of Bionomics drug candidates. Personally, having held the stock for some years this would be a disappointing outcome if shareholders were to be so short sighted and accept such an offer.

 

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Disclosure of interest:
The author of this document holds shares in Bionomics. Baker Young Stockbrokers Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.