Aradigm: Inhaled Drugs Company A Speculative Play
by Richard Daverman, PhD
Centient Biotech Investor
Editor’s note: we published this look at Aradigm a few weeks back, but since then, we’ve talked with Aradigm’s CEO, Igor Gonda, and we are now presenting the analysis with his comments added in.
Aradigm (ARDM.OB) has fallen on hard times. After the company’s inhaled drug for asthma failed a Phase II trial in November last year, its shares sank below $1. The Nasdaq exchange had already kicked the company down to the Pink Sheets because its net worth did not meet the minimum requirements for the exchange, and the company was running low on cash besides.
Igor Gonda, PhD and CEO of Aradigm since August 2006, said that a further problem was a convertible preferred stock issue that had a $42 million liquidation preference. In case of bankruptcy, the converts had a good chance of absorbing all the remaining assets, scaring off investors and making it difficult for the company to raise much-needed new cash.
All in all, Aradigm was not a very inviting prospect. But we have seen a couple of brokerage house reports touting the stock, and they present a compelling story.
For one thing, the convertible preferred stock had one very interesting provision in its covenant. If Aradigm raised more than $25 million, the recap would force the conversion of the preferred shares. This had the effect of removing the liquidation preference that was overhanging the common shares. So that is exactly what Aradigm set out to do.
Early in 2007, Aradigm raised $36.1 million by selling 33 million shares at $.95 each. Before the recapitalization, the company had just 14 million shares outstanding, so the secondary must have caused extremely mixed emotions in previous investors. The money was welcome, because what else was Aradigm going to do? But the dilution must have been painful. So far, investors in the secondary have done very well: the price of Aradigm is now $1.20 per share.
Nevertheless, after the secondary, analysts estimate the company will have about $53 million in cash at the end of Q1 of 2007, and the stock price gives Aradigm a market cap of $70 million. That makes the ongoing business worth just $17 million, if you are willing to overlook its debt.
Seen this way, the $17 million buys quite a bit.
Aradigm concentrates on developing inhaled forms of existing medications. It has a proprietary hand-held device, AERx, which it uses in most of its prospective products to deliver the drugs.
Aradigm derives a large part of its credibility in the bio/pharma world from its partnership with Novo Nordisk for an inhaled form of insulin, a product still in development. Novo Nordisk is the number one diabetes drug company in the world, though it is not as dominant in America as it is elsewhere. Also, according to Gorda, Novo Nordisk was not originally a great believer in inhaled insulin. It started the project with Aradigm primarily as a defensive move against Pfizer. Now, presumably, it sees things differently.
Because of its late start, the Aradigm/Novo Nordisk inhaled insulin drug is behind the Pfizer (PFE)/Nektar (NKTR) inhaled insulin product, Exubera, which hit the market in early 2006. Exubera has not met analysts’ projections for its revenue, mainly because insurance companies have been unwilling to pay more for inhaled insulin than they pay for injected forms of the drug. And the cost is three times greater, creating a hurdle exacerbated by the fact that insulin is taken chronically. The onus has fallen on Pfizer to prove the easier-to-use inhaled drug will improve compliance with insulin-regulation regimens and lower costs for payors down the road.
CEO Gonda points out that Pfizer tested Exubera against injected insulin, but not against glycemic control drugs that are more commonly used in type 2 diabetes patients. Pfizer’s strategy was logical enough, and may have been necessary for FDA approval. But Gorda thinks the bigger market for inhaled insulin products will be in type 2 diabetes patients. As their disease progresses, they find it difficult to control their blood sugar with glycemic control drugs, but resist moving to injected insulin. So, in his analysis, part of the problem is that Pfizer did not position the drug in its natural market. Novo Nordisk is conducting tests showing the effectiveness of their inhaled product in this population as well as patients who inject insulin.
Another problem with Exubera, according to Gonda, is that the drug uses a sugar molecule to transport the insulin. The sugar molecule causes bronchoconstriction, so patients with compromised lung function are prohibited from taking the drug, which cuts out about 40% of the patient population. Before any patient can begin use of Exubera, he or she must pass a lung function test.
And this slightly different patient population takes care of the higher-cost argument as well, as CEO Gonda pointed out. The glycemic control drugs are five times the cost of injected insulin, so the costs of inhaled insulin, by comparison, are relatively tame.
Novo Nordisk has AERx iDMS, the name for the inhaled insulin product, in Phase III trials, though it won’t report the results until another two years out, and approval would be a year after that, in 2010, if all goes well. By that time, the inhaled insulin space will be crowded, not only with Exubera, but competing products from other companies as well, including Lilly (LLY) and MannKind (MNKD).
Insulin is, of course, a large market, and Novo Nordisk is a major player in diabetes medications (as are the other participants). In its clinical trial, AERx iDMS showed that it was the equivalent of rapid-acting injected insulin in most measurements, but AERx iDMS had the competitive advantage of providing longer-lasting control of glucose. That is a plus for AERx iDMS, though it was not a head-to-head test with other inhaled forms of the drug, which is where much of the competition will be.
Aradigm and Novo Nordisk have been partners on the drug since 1998, and as Aradigm has needed cash to support its other programs, it has gradually ceded its rights to Novo Nordisk in exchange for cash. While once Aradigm was doing much of the development work, all of that eventually went to Novo Nordisk. In July of last year, Aradigm traded one of its royalty percentage points for $8 million, bringing its revenues on the drug down from 6% to 5%. Novo Nordisk also paid $12 million for patents on the drug (Aradigm kept the patents for non-glucose related disorders), and Aradigm received a $7.5 million loan that is secured entirely by eventual royalties from AERx iDMS.
After Novo Nordisk took over the patents, it filed suit within three weeks against Pfizer and Nektar, saying that Exubera violated its patent rights. Aradigm will receive one-third of any settlement (minus legal costs), should Novo Nordisk prevail in this matter. Nobody is saying a victory is a sure thing, and nobody – neither Aradigm nor the analysts following the stock – is including any windfall settlements in their financial projections for the company. But it is an intriguing prospect, and one more way for investors to profit in the company.
If AERx iDMS could eventually achieve revenues of $500 million, Aradigm would see royalties of $25 million annually. And $500 million is not a lot for an insulin medication, especially if it costs three times as much as today’s injected insulin, and even if the market is split between four major players. Gonda said he expects Aradigm’s revenues from the drug to peak in a range between $40 million and $70 million.
Because Aradigm sold 1% of its royalties for $8 million, the remaining 5% have an implied value of $40 million. Gonda stresses that the $40 million figure is a discounted cash flow figure, so every year, its value goes up.
In unpartnered programs, the lead drug for Aradigm is ARD-3100 or LipoCipro, a liposomal reformulation of ciprofloxacin, aimed at cystic fibrosis. Patients with cystic fibrosis are vulnerable to pulmonary infections; many of them eventually die from an infection that they can’t overcome. Cipro, in liquid and oral forms, is already used for this disease. The inhaled formulation is effective at a much lower dose, which has the effect of lowering the chance a patient will develop resistance to the antibiotic. And a high dose of the drug is more prone to cause side effects.
LipoCipro will begin a Phase II trial in Q2 of 2007 and, if that goes well, a Phase III in 2008. That puts approval, even if things go according to plan, in 2010.
The same drug, though known under a different name, ARD-1100, is under investigation for use against anthrax as a weapon against bioterrorism. The Canadian government, a partner on the drug, brought ciprofloxacin to Aradigm, asking for their help in developing an appropriate delivery device. Aradigm signed on and began developing the drug for cystic fibrosis as well.
ARD-1100 is currently in pre-clinical development. The idea is that ARD-1100 would be used as a prophylactic, administered to people who may be in danger of contracting anthrax. Because of its emergency use, it will have to prove safety only in animals, and the timeline for approval (and purchase by governments for stockpiling) is much shorter than usual. The upshot is that the product could begin to generate revenues next year.
A fourth drug for Aradigm is ARD-1500, an inhaled formulation of Remodulin, United Therapeutics’ (UTHR) approved medication for pulmonary arterial hypertension (PAH). ARD-1500, which is still in pre-clinical development, is partnered with United Therapeutics and uses Aradigm’s proprietary AERx delivery device. Although United Therapeutics has other inhaled forms of Remodulin under study, ARD-1500 has the advantage of less-frequent dosing. It requires only once or twice a day treatments, which is half that of its competitors. Ventavis, an inhaled PAH drug that CoTherix shepherded through the approval process, must be administered six to nine times each day. Despite that drawback, Actelion paid $420 million to acquire CoTherix and the only approved inhaled treatment for PAH in November 2006.
Also in preclinical development is AERx Nicotine, an inhaled form of nicotine that is designed to help smokers quit smoking. The idea is to reduce the dosage over time as a way of tailing off the habit. Gonda said that the inhaled formulation provides a smoker with the same sort of “lightheaded” high as a cigarette, unlike a nicotine patch. This increases compliance.
Aradigm’s ARD-1300 is an inhaled form of hydroxycloroquine that is aimed at asthma and other respiratory disorders, including chronic obstructive pulmonary disease, severe acute respiratory syndrome (SARS) and rhinitis. This drug is the one that failed its Phase II trial last fall as an asthma treatment. Partnered with APT Pharmaceuticals, the two companies are deciding whether they want to continue to develop the drug.
Last year, Aradigm sold off its needle-free injection platform, known as Intraject, and its lead product Intraject Sumitriptan, a product that targets quick relief of migraine. The product was sold to Zogenix for $4 million, and Aradigm will receive a small (between 3% and 5%) royalty from revenues. Sumitriptan goes off patent in 2009, and sales are expected to begin thereafter. Sumitriptan is known as an effective drug for migraine, but the oral formulations - the preferred method of delivery at home - do not act as fast as the injected versions. Using the needle-free injection device provides the benefit without the drawback.
Gonda said that Aradigm hated to lose the program, but it was sold just before the company raised cash in its deal with Novo Nordisk, a time when Aradigm needed to do something to stay in business. The program was costing Aradigm $1 million a month because of a contract manufacturing deal. If Intraject Sumitriptan wins approval, it will mean a milestone for Aradigm. Once separated from Aradigm, the product generated considerable interest from VCs. Clarus Ventures was the co-lead in a financing that put $60 million into Zogenix to fund the development of Intraject Sumitriptan, implying considerable validity for Zogenix.
Under the new program, Aradigm burns about $7 million per quarter or $28 million per year, which means that it has less than two years of cash left. It will need to replenish is stores before that time, unless it can sign some lucrative licensing deal for one of its unpartnered programs, because none of these developmental projects is on any cusp of becoming a revenue producer.
Gonda has been in place as CEO since August of 2006, though he has been on the board of Aradigm for much longer than that. He characterized the changes in Aradigm over the past year as much more than a change in direction or a sharpening of its focus. To him, the changes constitute nothing less than a restart, because the company is moving from being involved with drug delivery to a full-fledged drug development company.
Still, despite the threat of more dilution, all of this development activity is a lot to have going on in a company that Wall Street seems intent on disrespecting. Would Aradigm be worth (pre-money) $17 million if it were to approach Wall Street through an IPO?
The $17 million valuation of the ongoing businesses is a bit or a teaser, because the cash is leaking out at close to $2 million a month. That means a company would have to take Aradigm over right now to get the company for that valuation. That’s not likely.
But the $17 million ongoing business valuation underscores the fact that an investor willing to take on some risk could simply buy some shares of Aradigm on the reasonable expectation that some subset of its development programs will ultimately succeed.
If that happens, the investor can expect a decent payback from Aradigm.
Source: CentientInvestor.com
____________________
Centient Biotech Investor
Editor’s note: we published this look at Aradigm a few weeks back, but since then, we’ve talked with Aradigm’s CEO, Igor Gonda, and we are now presenting the analysis with his comments added in.
Aradigm (ARDM.OB) has fallen on hard times. After the company’s inhaled drug for asthma failed a Phase II trial in November last year, its shares sank below $1. The Nasdaq exchange had already kicked the company down to the Pink Sheets because its net worth did not meet the minimum requirements for the exchange, and the company was running low on cash besides.
Igor Gonda, PhD and CEO of Aradigm since August 2006, said that a further problem was a convertible preferred stock issue that had a $42 million liquidation preference. In case of bankruptcy, the converts had a good chance of absorbing all the remaining assets, scaring off investors and making it difficult for the company to raise much-needed new cash.
All in all, Aradigm was not a very inviting prospect. But we have seen a couple of brokerage house reports touting the stock, and they present a compelling story.
For one thing, the convertible preferred stock had one very interesting provision in its covenant. If Aradigm raised more than $25 million, the recap would force the conversion of the preferred shares. This had the effect of removing the liquidation preference that was overhanging the common shares. So that is exactly what Aradigm set out to do.
Early in 2007, Aradigm raised $36.1 million by selling 33 million shares at $.95 each. Before the recapitalization, the company had just 14 million shares outstanding, so the secondary must have caused extremely mixed emotions in previous investors. The money was welcome, because what else was Aradigm going to do? But the dilution must have been painful. So far, investors in the secondary have done very well: the price of Aradigm is now $1.20 per share.
Nevertheless, after the secondary, analysts estimate the company will have about $53 million in cash at the end of Q1 of 2007, and the stock price gives Aradigm a market cap of $70 million. That makes the ongoing business worth just $17 million, if you are willing to overlook its debt.
Seen this way, the $17 million buys quite a bit.
Aradigm concentrates on developing inhaled forms of existing medications. It has a proprietary hand-held device, AERx, which it uses in most of its prospective products to deliver the drugs.
Aradigm derives a large part of its credibility in the bio/pharma world from its partnership with Novo Nordisk for an inhaled form of insulin, a product still in development. Novo Nordisk is the number one diabetes drug company in the world, though it is not as dominant in America as it is elsewhere. Also, according to Gorda, Novo Nordisk was not originally a great believer in inhaled insulin. It started the project with Aradigm primarily as a defensive move against Pfizer. Now, presumably, it sees things differently.
Because of its late start, the Aradigm/Novo Nordisk inhaled insulin drug is behind the Pfizer (PFE)/Nektar (NKTR) inhaled insulin product, Exubera, which hit the market in early 2006. Exubera has not met analysts’ projections for its revenue, mainly because insurance companies have been unwilling to pay more for inhaled insulin than they pay for injected forms of the drug. And the cost is three times greater, creating a hurdle exacerbated by the fact that insulin is taken chronically. The onus has fallen on Pfizer to prove the easier-to-use inhaled drug will improve compliance with insulin-regulation regimens and lower costs for payors down the road.
CEO Gonda points out that Pfizer tested Exubera against injected insulin, but not against glycemic control drugs that are more commonly used in type 2 diabetes patients. Pfizer’s strategy was logical enough, and may have been necessary for FDA approval. But Gorda thinks the bigger market for inhaled insulin products will be in type 2 diabetes patients. As their disease progresses, they find it difficult to control their blood sugar with glycemic control drugs, but resist moving to injected insulin. So, in his analysis, part of the problem is that Pfizer did not position the drug in its natural market. Novo Nordisk is conducting tests showing the effectiveness of their inhaled product in this population as well as patients who inject insulin.
Another problem with Exubera, according to Gonda, is that the drug uses a sugar molecule to transport the insulin. The sugar molecule causes bronchoconstriction, so patients with compromised lung function are prohibited from taking the drug, which cuts out about 40% of the patient population. Before any patient can begin use of Exubera, he or she must pass a lung function test.
And this slightly different patient population takes care of the higher-cost argument as well, as CEO Gonda pointed out. The glycemic control drugs are five times the cost of injected insulin, so the costs of inhaled insulin, by comparison, are relatively tame.
Novo Nordisk has AERx iDMS, the name for the inhaled insulin product, in Phase III trials, though it won’t report the results until another two years out, and approval would be a year after that, in 2010, if all goes well. By that time, the inhaled insulin space will be crowded, not only with Exubera, but competing products from other companies as well, including Lilly (LLY) and MannKind (MNKD).
Insulin is, of course, a large market, and Novo Nordisk is a major player in diabetes medications (as are the other participants). In its clinical trial, AERx iDMS showed that it was the equivalent of rapid-acting injected insulin in most measurements, but AERx iDMS had the competitive advantage of providing longer-lasting control of glucose. That is a plus for AERx iDMS, though it was not a head-to-head test with other inhaled forms of the drug, which is where much of the competition will be.
Aradigm and Novo Nordisk have been partners on the drug since 1998, and as Aradigm has needed cash to support its other programs, it has gradually ceded its rights to Novo Nordisk in exchange for cash. While once Aradigm was doing much of the development work, all of that eventually went to Novo Nordisk. In July of last year, Aradigm traded one of its royalty percentage points for $8 million, bringing its revenues on the drug down from 6% to 5%. Novo Nordisk also paid $12 million for patents on the drug (Aradigm kept the patents for non-glucose related disorders), and Aradigm received a $7.5 million loan that is secured entirely by eventual royalties from AERx iDMS.
After Novo Nordisk took over the patents, it filed suit within three weeks against Pfizer and Nektar, saying that Exubera violated its patent rights. Aradigm will receive one-third of any settlement (minus legal costs), should Novo Nordisk prevail in this matter. Nobody is saying a victory is a sure thing, and nobody – neither Aradigm nor the analysts following the stock – is including any windfall settlements in their financial projections for the company. But it is an intriguing prospect, and one more way for investors to profit in the company.
If AERx iDMS could eventually achieve revenues of $500 million, Aradigm would see royalties of $25 million annually. And $500 million is not a lot for an insulin medication, especially if it costs three times as much as today’s injected insulin, and even if the market is split between four major players. Gonda said he expects Aradigm’s revenues from the drug to peak in a range between $40 million and $70 million.
Because Aradigm sold 1% of its royalties for $8 million, the remaining 5% have an implied value of $40 million. Gonda stresses that the $40 million figure is a discounted cash flow figure, so every year, its value goes up.
In unpartnered programs, the lead drug for Aradigm is ARD-3100 or LipoCipro, a liposomal reformulation of ciprofloxacin, aimed at cystic fibrosis. Patients with cystic fibrosis are vulnerable to pulmonary infections; many of them eventually die from an infection that they can’t overcome. Cipro, in liquid and oral forms, is already used for this disease. The inhaled formulation is effective at a much lower dose, which has the effect of lowering the chance a patient will develop resistance to the antibiotic. And a high dose of the drug is more prone to cause side effects.
LipoCipro will begin a Phase II trial in Q2 of 2007 and, if that goes well, a Phase III in 2008. That puts approval, even if things go according to plan, in 2010.
The same drug, though known under a different name, ARD-1100, is under investigation for use against anthrax as a weapon against bioterrorism. The Canadian government, a partner on the drug, brought ciprofloxacin to Aradigm, asking for their help in developing an appropriate delivery device. Aradigm signed on and began developing the drug for cystic fibrosis as well.
ARD-1100 is currently in pre-clinical development. The idea is that ARD-1100 would be used as a prophylactic, administered to people who may be in danger of contracting anthrax. Because of its emergency use, it will have to prove safety only in animals, and the timeline for approval (and purchase by governments for stockpiling) is much shorter than usual. The upshot is that the product could begin to generate revenues next year.
A fourth drug for Aradigm is ARD-1500, an inhaled formulation of Remodulin, United Therapeutics’ (UTHR) approved medication for pulmonary arterial hypertension (PAH). ARD-1500, which is still in pre-clinical development, is partnered with United Therapeutics and uses Aradigm’s proprietary AERx delivery device. Although United Therapeutics has other inhaled forms of Remodulin under study, ARD-1500 has the advantage of less-frequent dosing. It requires only once or twice a day treatments, which is half that of its competitors. Ventavis, an inhaled PAH drug that CoTherix shepherded through the approval process, must be administered six to nine times each day. Despite that drawback, Actelion paid $420 million to acquire CoTherix and the only approved inhaled treatment for PAH in November 2006.
Also in preclinical development is AERx Nicotine, an inhaled form of nicotine that is designed to help smokers quit smoking. The idea is to reduce the dosage over time as a way of tailing off the habit. Gonda said that the inhaled formulation provides a smoker with the same sort of “lightheaded” high as a cigarette, unlike a nicotine patch. This increases compliance.
Aradigm’s ARD-1300 is an inhaled form of hydroxycloroquine that is aimed at asthma and other respiratory disorders, including chronic obstructive pulmonary disease, severe acute respiratory syndrome (SARS) and rhinitis. This drug is the one that failed its Phase II trial last fall as an asthma treatment. Partnered with APT Pharmaceuticals, the two companies are deciding whether they want to continue to develop the drug.
Last year, Aradigm sold off its needle-free injection platform, known as Intraject, and its lead product Intraject Sumitriptan, a product that targets quick relief of migraine. The product was sold to Zogenix for $4 million, and Aradigm will receive a small (between 3% and 5%) royalty from revenues. Sumitriptan goes off patent in 2009, and sales are expected to begin thereafter. Sumitriptan is known as an effective drug for migraine, but the oral formulations - the preferred method of delivery at home - do not act as fast as the injected versions. Using the needle-free injection device provides the benefit without the drawback.
Gonda said that Aradigm hated to lose the program, but it was sold just before the company raised cash in its deal with Novo Nordisk, a time when Aradigm needed to do something to stay in business. The program was costing Aradigm $1 million a month because of a contract manufacturing deal. If Intraject Sumitriptan wins approval, it will mean a milestone for Aradigm. Once separated from Aradigm, the product generated considerable interest from VCs. Clarus Ventures was the co-lead in a financing that put $60 million into Zogenix to fund the development of Intraject Sumitriptan, implying considerable validity for Zogenix.
Under the new program, Aradigm burns about $7 million per quarter or $28 million per year, which means that it has less than two years of cash left. It will need to replenish is stores before that time, unless it can sign some lucrative licensing deal for one of its unpartnered programs, because none of these developmental projects is on any cusp of becoming a revenue producer.
Gonda has been in place as CEO since August of 2006, though he has been on the board of Aradigm for much longer than that. He characterized the changes in Aradigm over the past year as much more than a change in direction or a sharpening of its focus. To him, the changes constitute nothing less than a restart, because the company is moving from being involved with drug delivery to a full-fledged drug development company.
Still, despite the threat of more dilution, all of this development activity is a lot to have going on in a company that Wall Street seems intent on disrespecting. Would Aradigm be worth (pre-money) $17 million if it were to approach Wall Street through an IPO?
The $17 million valuation of the ongoing businesses is a bit or a teaser, because the cash is leaking out at close to $2 million a month. That means a company would have to take Aradigm over right now to get the company for that valuation. That’s not likely.
But the $17 million ongoing business valuation underscores the fact that an investor willing to take on some risk could simply buy some shares of Aradigm on the reasonable expectation that some subset of its development programs will ultimately succeed.
If that happens, the investor can expect a decent payback from Aradigm.
Source: CentientInvestor.com
____________________
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