Could this be the next CSL?

Over the last few years, Paradigm Biopharmaceuticals (PAR) has grown from an unknown small cap to a $600 million dollar drug developer. With trials and approvals moving along at a steady pace, Scott Williams from Fiftyone Capital thinks Paradigm has a very bright future indeed.

"Our view is that Paradigm could be the next big Australian biotechnology success story - think CSL type success."

Scott is so confident in Paradigm's future success that when the position hit the maximum position size in the fund, rather than selling it, they spun the position out into a separate fund to allow investors to retain exposure.

Livewire readers are clearly excited about the company's prospects too, with the stock coming in at #6 in our 2020 'most tipped small caps' list.

With the company reporting its annual result today, I took the chance to talk with Scott about the opportunity.

How long have you held the stock?

We first bought the stock in April of 2018 and have added to the position since that time.

How big is your position in the stock currently?

The position we held in PAR actually got so large that it breached our maximum single stock position limits within the main fund (20% for any single stock). While we would normally reduce positions like this as they appreciate in value to stay within the portfolio risk limits, we have extremely high conviction in this position. As a result, after discussing with the board and investment committee, we instead opted to set up a secondary fund to hold this position for our investors.

As we have written about extensively on Livewire and to our investors, our view is that Paradigm could be the next big Australian biotechnology success story - think CSL type success. We would be kicking ourselves if we sold down now if it ended up going to >$100 per share. 

This way, if clients don’t want the risk they can reduce their individual exposures to their own risk limits and move back into the main fund.

What attracted you to the stock?

Where do I start? In a nutshell, they have a safe and highly effective drug to treat many potential indications. The lead indication is osteoarthritis (OA), which is one of the most common diseases without any real effective treatment. It progressively gets worse eventually resulting in joint replacement.

We think Paradigm's drug is going to become the leading treatment for OA once commercialised. This is because it gives significant pain reduction, improved function and most importantly slows the progression of the disease.

Outside of the company and doctors, we have probably spoken to the largest number of people who have used the drug - it's been available under Australian Special Access Scheme (SAS) and American Expanded Access Program - and the feedback has been very consistent.

To give you an idea of the potential, there are probably 100m people in the developed world with OA who could use this drug. It needs to be taken yearly, which means it has a huge addressable market and repeat revenue. At $5k per treatment and just 10% of that market it would be over $25b in revenue. CSL does around $9b and is valued over $100b. Hence why we think Paradigm is the most asymmetric investment opportunity we can see.

And this is without even talking about the other indications/diseases they are tackling with the same molecule! I won’t even start here because the potential is actually mind-boggling and most investors have barely even understood the potential for the OA indication, let alone the rest of the business. Let's just call it ‘blue sky upside’ that we think is very achievable… or a moonshot and we are NASA!

What have been the key developments for PAR during the reporting period?

The company recently released data on the ex-NFL players that continued to show excellent pain reduction. These were the best results released to date. They have a very busy back half of the year and we are expecting a lot more updates about the upcoming clinical trials.

The company is funded for the trials and we expect the cash burn to start increasing as they make more critical hires and ramp up for the forthcoming clinical trials. The company has limited expenses and really sinks most of its capital into R+D (drug development) which is one of the things that attracted us to the business in the first place.

We are very excited for the next couple of years as this dream hopefully becomes a reality and the drug reaches commercialisation.

We are also very hopeful that the TGA will approve Zilosul ahead of phase 3 being completed (meaning first revenue in Australia). We aren’t expecting any major surprises in the report but do look forward to more updates on timelines.

What do you expect from the company in FY21?

Starting the OA trial in the US is the big-ticket item. We are expecting the dosing study to be underway and maybe even finished in FY21 (although more likely CY21). If this shows statistical significance as we are expecting, it could give a very significant re-rating in the stock.

Realistically, if the company passes the dosing and is also recruiting/running the phase 3 registration concurrently, then it would give a very high level of confidence they could pass the phase 3 study as endpoints would be same and dose would be known from the dose study. 

With that data/evidence, investors and likely big pharma would be very interested in the potential for this drug. At this point we would expect potential offers from big pharma that could easily exceed >US$5b for the asset. 

The company should also have peer-reviewed papers released soon along with the study for MPS. We are also hopeful that the TGA provisional approvals will be underway, meaning first revenue. 

All in all with a market cap barely even A$600m there is a lot of upside potential in the next year and beyond!

Could you explain your expected timeline for Pentosan Polysulfate Sodium (PPS) to complete clinical testing and begin producing revenues?

The thing about biotech is they take a long time to get to market, but once they do, if the drug is highly sought after it continues to grow. Exponentially, we think, in PAR’s case. The SAS program in Australia has already seen people go crazy to get access to the drug. People in pain tend to do anything to fix it, and OA is so debilitating and common that word of mouth would see sales accelerate like wildfire.

In terms of timeline, we are hopeful the trials would all be starting in Q1 CY21 and if the TGA does grant provisional approval for Australia that it could be producing first revenue from sales before the end of 2021. There is a chance there are partnership deals or inbound pharma interest which would also give revenue, but obviously in a large lump sum.

Our preference is to try to retain as much of the assets as possible given the amount of evidence showing the drug is likely to be successful in a clinical trial. Given the company is funded, we see little reason to partner unless the terms are very favourable and/or it allows more acceleration in other programs. We think the market drastically underestimates the potential for the company and how quickly future revenues and profits can grow. We are patient, and look forward to the day when we are receiving dividends for our patience!

Could a buyout also be an option?

Johnson and Johnson just bought Momenta, another drug development company, for US$6.5b. Momenta have a drug that has just passed a phase 2 and is moving into phase 3, similar to PAR. They also have a drug that could be used in multiple indications, similar to PAR. 

I think Johnson and Johnson is probably the best fit for PAR, given that they already use PPS in a registered drug in the US.

Blockbusters get big dollars.

Want more earnings season Q&As like this?