Pharmaxis Limited

Company Overview: Pharmaxis Limited (ASX: PXS) is a pharmaceutical research company with approved products in various markets around the world, and a drug discovery program dedicated to finding new treatments for patients in areas of high unmet clinical need in inflammatory and fibrotic disease. The company was established in 1998 and listed on the Australian Securities Exchange in 2003 with its head office, manufacturing and research laboratories in Sydney, Australia.

PXS Details 

Multiple Near Term Opportunities: Pharmaxis Limited (ASX: PXS) is a pharmaceutical research company with approved products in various markets around the world, and a drug discovery program dedicated to finding new treatments for patients in areas of high unmet clinical need in inflammatory and fibrotic disease. As on 09 October 2020, the market capitalization of the company stood at ~$32.94 million. The Pharmaxis investment proposition is different and is not limited to just one opportunity. The drug development team of PXS has delivered four new drugs to the clinic in the past five years and has created a strong pipeline of drugs built around its amine oxidase chemistry platform to treat inflammatory and fibrotic conditions. The company has carved out an important area of research, attracting interest from global pharma companies.

During FY20, revenue from sales of the goods went up by $1.35 million to $7.02 million, and net loss of the company went down by $6.1 million to $13.94 million. In the same time span, net operating cash outflows stood at $13.2 million and reported a cash balance of $14.7 million. The company has the ability to recover the carrying value of its assets and meet its commitments. PXS also had an R&D tax incentive of $4.9 million expected to be received in the second half of 2020. During FY20, the company reported total borrowings of $8.15 million. Biomedical Translation Bridge program has awarded $1 million to PXS to work on its drug discovery for the treatment of the Duchenne Muscular Dystrophy.

The company has a decent product pipeline with multiple near-term opportunities and is a key player in the race for NASH treatment. The company made a profitable entry in the US market with Bronchitol and is expecting to turn the business cash flow positive. The company is partnering to target its LOXL2 anti fibrotic program and is likely to start its Phase 2a study in myelofibrosis for Pan-LOX cancer program. The company is expecting potential milestones of $380 million in the coming years and has started Phase 3 milestones ~$60 million.  

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Pharmaxis Limited. BVF Partners L.P is the largest shareholder in the company, with a percentage holding of 20.46%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, gross margin of the company stood at 88.4%, higher than the industry median of 68.2%. This shows that the company is well managing its costs and is capable of converting its revenue into profits. In the same time span, current ratio of the company was 3.59x, higher than the industry median of 1.83x. This indicates that the company retains a decent liquidity position and is can pay off its current liabilities using its current assets.

Key Margins (Source: Refinitiv, Thomson Reuters)

FDA Grants Orphan Drug Status for PXS Anti Fibrotic Drug: The company has recently announced that the US FDA has granted orphan-drug designation for its oral pan LOX inhibitor PXS 5505 for the treatment of myelofibrosis. The compound has cleared pre-clinical safety and has shown significant reductions in myelofibrosis and other cancers. The US FDA has given Pharmaxis permission to proceed with a phase 1/2 clinical trial for the treatment of myelofibrosis in adults. The study is expected to conclude in 2022. The company is also exploring if PXS-5505 can be progressed in other fibrotic diseases and cancers.

US$7 million Bronchitol Launch Milestone Brought Forward: PXS has recently announced an accelerated timeline for the payment of an initial tranche of a US$10 million. It stated that the exclusive distributor of Bronchitol in the US as well as eleven countries, Chiesi will pay US$7 million of the milestone upon US approval of Bronchitol by the Food and Drug Administration, who have advised a Goal Action Date of 1 November 2020 and another US$3 million will remain payable on shipment by Pharmaxis of commercial launch stock in the first quarter of 2021. This will provide the company an opportunity to investigate different ways of structuring its business and funding drug development activities.    

Boehringer Ingelheim discontinues development of BI 1467335 for Diabetic Retinopathy: Boehringer Ingelheim and PXS announced the discontinuation of the development of AOC3 inhibitor BI 1467335, which was used for the treatment of patients with moderate-severe non-proliferative diabetic retinopathy. This was mainly because BI 1467335 met its endpoint in ocular safety with the treatment being well tolerated and the risk of dose dependent drug interactions of the compound in NPDR patients identified in another Phase I study.

Key Risks: The company may face a material uncertainty that may throw doubt on its ability to continue as a going concern. The Group may not be able to realize its assets and discharge its liabilities in the normal course of business. The Group’s activities expose it to a variety of financial risks including, market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The performance of the company is also subject to the success of clinical trials.

Future Expectations and Outlook: The company’s product pipeline is focused on its expertise in the chemistry of amine oxidase inhibitors. Despite the global pandemic, the activities of the company were not significantly impacted and completed the phase 1b trial of its systemic pan-LOX inhibitor. However, the reduction in international flights has made it difficult to transport its products overseas markets in suitable temperature controlled aircraft.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is focused on maximizing risk and reward ratio for its shareholders and is now close to completing a transformation to profitability. The company is prioritizing to build value in the company’s drug portfolio with deep conviction in the targets. New drug discovery platform and partnership deals are likely to provide PXS with significant future cash flows from milestone payments and sales royalties. As per ASX, the stock of PXS is inclined towards its 52-weeks’ low level of $0.053, proffering a decent opportunity for the investors to enter the market. The stock of PXS gave a return of 5.06% in the past three months and a return of 3.75% in the last one month. On the technical front, the stock of PXS has a support level of ~$0.065 and a resistance level of ~$0.111. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the decent trading levels, the achievement of its milestones and growth opportunities, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.085, up by 2.41% on 09 October 2020.

PXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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