A Blueprint For Valuing Paradigm Biopharmaceuticals (ASX: PAR)

This post is not financial advice, and you should click here to read out detailed disclaimer.

An Introduction by Claude Walker

Edit 28 February, 10:24am: The author of this post has informed me that they are selling their Paradigm shares. They have already sold some and they will probably sell more. This is largely due to the changed investing conditions resulting from the likely coronavirus pandemic.

I’ve long been curious about investing in bio-tech companies. After all stocks like Paradigm, Avita, and Polynovo have seen soaring share prices off the back of little or non-existent revenue. That’s a good indication the market is very excited about their prospects, and a huge gain for the people who were quicker to spot the potential.

So the question on my mind is how should I be valuing these inherently risky companies, where outcomes are at least quasi-binary. At its simplest, the question is whether a biotech’s new treatment will become a popular method, or not. But of course, figuring out a valuation for these kind of stocks can be quite different from calculating future free cashflows from an already profitable or at least revenue generating company.

A friend of mine, let’s call him Richard Moreland, sent me this treatise below on November 1, 2019. I should also note that Paradigm’s share price has gained a whopping 46% in the few months since. It seems clear that, at least in terms of highlighting the rational case for undervaluation, Richard was ahead of the curve. I wish I had published the piece the day I received it and I wish I had bought shares back then.

While one cannot pat all the fluffy dogs, you don’t have to lose the lesson when you miss an opportunity. So I present Richard Moreland’s notes on Paradigm Biopharmaceuticals below. They are a fantastic example of how one might take a logical approach to valuing a relatively high-risk, high reward stock market opportunity in the biotech sector. As always, I cannot stress enough that this column is about independent investors sharing their investment diary entries. What you read below is not a recommendation and it is certainly not advice.

Happily, Richard is currently working on a few updates to this article which will go live on the afternoon of February 17.

Paradigm Biopharmaceuticals Limited

Paradigm Biopharmaceuticals Limited (ASX:PAR) is a biotechnology company repurposing Pentosan Polysulfate Sodium (PPS) for the treatment of arthritic conditions.

When considering an investment in a biotechnology company, there are broadly four questions you want to answer:

1. (safety) is the drug safe?
   
   
2. (efficacy) is the drug effective?
   
   
3. (commerciality) is the drug superior to current standards of care?
   
   
4. (intellectual property) what is the intellectual property position of the company?

A negative answer to any of the above questions can be fatal to an investment thesis.

In this note, we will introduce Paradigm and PPS.  We will then consider each of the above questions in turn.  We will then discuss some other important points.  Finally, we will turn our mind to valuation.

About Paradigm

Paradigm is repurposing PPS (in an injectable form) for the treatment of arthritic conditions.  The primary indications (uses) are knee osteoarthritis with concurrent bone marrow edema lesions (BMEL) (drug marketed as ZILOSUL®), mucopolysaccharidosis (MPS), and arthritogenic alphaviruses, namely Ross River virus (RRV) and Chikungunya virus (CHIKV).  However, PPS may be indicated to treat any form of arthritis or inflammation of the joints (for example, chronic lower back pain) which would substantially increase Paradigm’s addressable market.

Drug repurposing is a strategy for identifying new indications (uses) for approved drugs that are different to the original indication.  The benefits of this strategy include lower risk, lower cost, and shorter development timelines.  The key risk of this strategy is an inferior intellectual property position (because the drug is off-patent).

Senior management have experience commercialising drugs and industry relationships, with the Chairman, CEO, and CFO being ex-Mesoblast.  The Chairman also has relevant experience with CSL.

About PPS

PPS is a semi-synthetic drug manufactured from beech-wood hemicellulose by sulphate esterification of the xylopyranose hydroxyl groups.  If that sounds complicated, it is because it is.  This is a source of competitive advantage, which will be discussed later.

PPS is a non-addictive, non-opioid, non-steroidal drug.

In relation to treatment of patients with knee osteoarthritis, being the lead indication, PPS has been found to:

• inhibit the secretion/production of neurotropic protein beta-Nerve Growth Factor (NGF) in bone cells (known as osteocytes, which are the principal cell type in the subchondral bone (layer of bone below cartilage in a joint)).  NGF is associated with pain (i.e. PPS reduces pain);
  
  
• inhibit proinflammatory mediator tumor necrosis factor alpha (TNFα) which is thought to stimulate the localised production of cartilage-degrading enzymes, such as matrix metallopeptidase (MMP) family member-13 (MMP-13) (i.e. PPS reduces cartilage degradation);
  
  
• have anti-inflammatory effects (PPS has been found to improve or resolve inflammatory symptoms (i.e. pain and reduced joint function) of patients with osteoarthritis, MPS, and RRV);
  
  
• reduce or resolve BMELs;
  
  
• reduce joint effusion (the presence of increased intra-articular fluid or swollen joint); and
  
  
• improve blood circulation in the subchondral bone.

PPS may be classified as a disease modifying osteoarthritic drug (DMOAD) because it appears to not just treat the symptoms of osteoarthritis but also the underlying pathology (causes) of osteoarthritis.

PPS is a weak anti-coagulant.  PPS has 1/15^th to 1/20^th of the anti-coagulant activity of Heparin.  This may somewhat limit the addressable market, as some osteoarthritic patients will be on blood thinners and PPS may not be recommended for them.

Current usage of PPS

PPS is currently used to treat humans for interstitial cystitis (inflammation of the bladder) and bladder pain syndrome.  PPS is also used to treat horses and dogs with osteoarthritis.  PPS also has fibrinolytic, lipolytic, and anticoagulant properties and is used for the treatment of thromboembolic prophylaxis in Europe.  In Germany and Hungary, PPS is also approved in oral and injectable form for the treatment of peripheral arterial occlusive disease. 

About the arthritic conditions

Osteoarthritis is a joint disease that results from breakdown of joint cartilage and underlying bone.  Knee osteoarthritis is a disorder characterized by bone changes around the knee joint, progressive loss of joint cartilage, joint space narrowing, and eventual total joint failure. Knee osteoarthritis results in knee pain, significant physical disability, and reduced quality of life.  BMELs are changes that occur in the subchondral bone and are detected by Magnetic Resonance Imaging (MRI).  The MRI signals related to the BMEL are thought to arise from an increase in concentration of blood and interstitial fluids in areas of trabecular microfractures and collapse within the bone marrow.  Increasing evidence supports the notion that BMELs play an important role in the pathogenesis of knee osteoarthritis.  BMELs are also described as bone bruising, bone marrow contusions, or bone marrow lesions and are frequently associated with a traumatic injury.  Results of epidemiological studies suggest that there are approximately 12 million patients in the United States, 50 years of age and older, with symptomatic knee osteoarthritis, of whom an estimated approximately 7 million have BMELs.  Many millions more, in the United States and around the world, have osteoarthritis of other body parts.

MPS are a family of disorders caused by inherited (genetic) defects in the catabolism of sulphated components of connective tissue known as glycosaminoglycans (GAGs).  MPS has many symptoms with varying degrees of severity.  Many patients suffering from MPS experience pain associated with joint inflammation.  PPS for treatment of MPS is an orphan indication (the indication is for a rare condition which it would be uneconomic to develop a drug for without government assistance/incentives).  Readers who are familiar with Clinuvel Pharmaceuticals (ASX:CUV) will understand the potential of drugs for orphan indications (although, it should be noted that CUV’s drug is a primary therapy for the relevant condition, whereas PAR’s drug would be an adjunct therapy, and therefore likely less valuable).

Arthritogenic alphaviruses are a group of arboviruses that cause inflammatory musculoskeletal disease in humans with debilitating symptoms, such as arthralgia, arthritis, and myalgia.  This group includes RRV and CHIKV.  There are an estimated 10,000 cases of RRV in Australia per year.  There are millions of CHIKV cases per year.

Paradigm’s clinical studies for the arthritic conditions

Paradigm has successfully completed:

• Phase 2b clinical studies investigating PPS to treat knee osteoarthritis with concurrent BMEL;
  
  
• Phase 2a clinical studies investigating PPS to treat MPS; and
  
  
• Phase 2a clinical studies investigating PPS to treat RRV.

Safety

If a drug is found to be unsafe, it has no realistic chance of approval or commercialisation.

We can have a high degree of confidence that PPS is safe for the following reasons:

• PPS has been safely used in humans for 27 years.  PPS is the active drug in the oral medication ELMIRON® (a treatment for interstitial cystitis), which received FDA approval in 1996;
  
  
• PPS has been safely used in more than 500 patients treated under the Therapeutic Goods Administration (TGA) Special Access Scheme;
  
  
• PPS has received approval from the Federal Drug Administration (FDA) for expanded access to investigational new drug for treatment (approval for compassionate use).  Note this is not the same as “FDA approval” as that term is commonly used but Paradigm stated that “FDA clearance means validation of Paradigm’s safety data, the finished product’s quality and confirmation of an unmet medical need”.  Note further than more than 99% of such applications are approved;
  
  
• PPS’s safety profile has been further validated in clinical studies (including those conducted by Paradigm) and treatment of animals; and
  
  
• PPS is cleared from the plasma within 12 hours and from body tissue within a few weeks of administration.  In relation to blood coagulation, PPS is cleared from the body within 5 hours (relevant as PPS is a weak anti-coagulant).

Efficacy

If a drug has a strong safety profile, the next question is whether the drug is effective.  If the drug is not effective, although it may be approved, it will have little chance of commercial success.

Evidence for the efficacy of PPS in the treatment of arthritic conditions includes:

• Phase 2b clinical study of 112 patients investigating PPS to treat knee osteoarthritis with concurrent BMEL.  The studies showed clinically meaningful and statistically significant:
  
  
  • reductions in pain (measured using the knee injury and osteoarthritis outcome score (KOOS) method, the Numerical Rating Scale (NRS), and the Patient Global Impression of Change (PGIC) method) in the treatment group compared with placebo at varying day intervals, and up to 165 days;
    
    
  • reduction in cartilage degradation demonstrated by reduction in the levels of two key biomarkers (COMP and ADAMATS-5) associated with cartilage degradation in knee osteoarthritis.  COMP at day 53 showed -11.9% from baseline in the PPS group compared with +2.1% in placebo.  ADAMTS-5 at day 53 showed -5.3% from baseline in the PPS group compared with +10% in placebo;
    
    
  • improved knee function (as measured by activities of daily living (ADL)) in the treatment group compared with placebo up to 165 days;
    
    
  • reductions in BMEL grade, volume, and area (as measured by MRI scans) in the treatment group compared with placebo;
    
    
• Paradigm has released data on 205 patients treated with PPS for knee osteoarthritis with concurrent BMEL under the TGA Special Access Scheme with an average pain reduction of 51.3% (this compares with ~15% reduction with opioids).  25-30% is considered clinically meaningful.  89.7% of patients responded with a reduction in joint pain and 91.2% with an improvement in knee function.  All patients were symptomatic with OA pain for at least 6 months and had failed current standard of care (analgesics, NSAIDs, or corticosteroids).  70% of patients had moderate to severe BMEL (size 5 to >20 mm in diameter).  Patients were administered 2 injections of PPS per week for three, four, or six weeks.  Patients were followed up at 4 to 6 weeks.  During the course of treatment, patients did not receive NSAIDs or corticosteroids;
  
  
• case studies of treating ex-AFL players with PPS for knee osteoarthritis;
  
  
• Phase 2a clinical studies of PPS in patients with MPS showed:
  
  
  • treatment was well tolerated by all patients;
    
    
  • reduction in GAG concentrations;
    
    
  • improvement in range of motion was noted in 3 of 4 patients; and
    
    
  • improvements in pain were noted in 3 of 4 patients, with 2 of 4, being those with higher reported pain scores at commencement, experiencing no pain;
    
    
• Phase 2a pilot study of PPS in patients with RRV showed:
  
  
  • primary endpoint of safety met;
    
    
  • near remission of symptoms (based on Rapid-3 disease assessment method) at 3 months in patients treated with PPS (72.7% or 8/11) compared with placebo (14.3% or 1/7);
    
    
  • improvements in hand grip strength which were clinically significant between patients treated with PPS and placebo.  The results were statistically significant from baseline, but not placebo; and
    
    
  • improvements in quality of life which were clinically and (at days 15, 39, and 81, but not 29) statistically significant between patients treated with PPS and placebo.  The results were statistically significant from baseline at all points in time;
    
    
• a 2005 clinical study of 115 patients with knee osteoarthritis which found that PPS injections were associated with significantly improved duration of joint stiffness and pain at rest compared with controls for 20 weeks after the cessation of treatment and significantly improved pain on walking and overall function for 8 weeks after the cessation of treatment.  Results of study suggest that PPS improved joint stiffness, pain at rest, and patient assessment of the effectiveness of treatment for up to 20 weeks after treatment cessation, and pain on walking, for 4, 12, and 20 weeks after treatment cessation.  The aggregate ADL functions core were also significantly improved at weeks 8 and 12 for the group administered with PPS;
  
  
• other studies of animals, single patients, in vitro, and of other inflammatory conditions, which this article will not cover.

Commerciality

If a drug is both safe and effective, the next questions is whether the drug has a chance of commercial success.  To answer that question, it is necessary to compare the drug to the current standards of care.

Current treatment options for osteoarthritis are:

• reduced weight-bearing and physical therapy;
  
  
• analgesics (including opioids);
  
  
• non-steroidal anti-inflammatory drugs (NSAID);
  
  
• corticosteroids; and
  
  
• joint replacement surgery (e.g. total knee arthroplasty).

Current treatment options have the following problems:

• NSAID and corticosteroids have been found to have negative effects on bone healing and metabolism of cartilage.  That is, they may make the patient’s condition worse;
  
  
• the effectiveness of analgesics, NSAID, and corticosteroids in patients with moderate to severe osteoarthritis is questionable;
  
  
• NSAIDs are associated with a high risk for gastrointestinal lesions with long-term use (arising from NSAIDs’ inhibitory activity on the synthesis of the gastroprotective prostaglandins by the cyclooxygenase (COX)-1 enzymatic system);
  
  
• continuous corticosteroid usage can increase risk of fracture;
  
  
• corticosteroid injections require intraarticular (in the joint) injections which are less safe than subcutaneous (under the skin) or intramuscular (in the muscle) injections of PPS;
  
  
• current treatment options relieve symptoms but have no or negligible benefit on the underlying pathology and/or disease progression.  In fact, some reports suggest that NSAID might exacerbate the failure of cartilage and bone in arthritic joints by inhibiting cellular repair mechanisms and connective tissue homeostasis.  Also, long-term use of NSAIDs has been associated with serious adverse effects in the elderly population;
  
  
• current treatment options mask pain which can lead to patients unintentionally worsening their condition with physical activity which would otherwise have promoted a pain response; and
  
  
• problems associated with surgery (patient aversion, risks, cost, recovery time, rehabilitation, repeat surgery etc).

PPS has none of the above problems.  In fact, as noted above, PPS appears to not only treat the symptoms of arthritis, but also the underlying cause of the condition.  In addition, PPS may increase the time before total joint replacement surgery is recommended.

No current treatments have been shown to shorten the duration or alter the course of RRV.

PPS for treatment of MPS would be an adjunct therapy to the current standard of care, enzyme replacement therapy and bone marrow transplantation.

Intellectual property position

If a drug is safe, effective, and superior to current standards of care, the next questions is whether the company developing the drug has intellectual property protections such that a competitor could not simply create a generic version of the drug and compete with them.

Intellectual property protection can take many forms but the gold standard for a drug company is to be granted a patent for the drug (composition of matter patent).  Paradigm is re-purposing an off-patent drug, so it does not have this protection.  However, it does have other forms of protection.

PAR has an exclusive 20-year supply agreement (to August 2035) with Bene-PharamChem GmbH & Co KG of Geretsried, Germany (Bene) for supply of PPS for use in the treatment of osteoarthritis.  In November 2019, this agreement was extended to include supply of PPS for the treatment of MPS.

Bene currently supplies PPS to Johnson & Johnson for ELMIRON® and has done so for over 20 years.  Bene has manufactured PPS since the 1940s.

Bene manufactures the only US FDA, EU, and Australian approved form of PPS. 

Bene has registered the only drug Masterfile (DMA) with the FDA for PPS.  This means that any potential competitor would be blocked from referencing Bene’s DMF in a new drug application for a generic copy.  This means that any potential competitor would need to be able to manufacture an exact match of Bene’s PPS for the active pharmaceutical ingredient (API) to be called PPS.  The method of manufacture is extremely complex (PPS is a semi-synthetic derived from an organic substance) and a well-kept trade secret. 

Studies by Degenhardt et al (performed in 1998 and 2001) of batches from different manufacturers found significant differences between the batches made by the different manufacturers and noted that “minor variations in the molecular shape and size of a drug can have profound effects on its pharmacological activities.”  It is extremely difficult for a manufacturer to maintain batch consistency.

There are other manufactures of PPS but they are for veterinary purposes.  The formulation of the API for veterinary and human purposes is markedly different.  Bene is the only manufacturer of PPS for humans.

ELMIRON® sales are estimated at between US$240 to US$500 million per year.  The drug’s patent expired in January 2010.  Despite this, no generic forms of the drug have been made suggesting that it is simply too hard to do so. 

However, we note that an Indian company, Alembic Pharmaceuticals, has filed a generic application with the FDA which is currently under review.  We further note that in March 2018, the FDA made a number of ‘observations’ in relation an inspection of Alembic’s laboratory control systems, including that there was a failure to take appropriate corrective and preventative actions to reduce the high number of invalidations in a timely manner when out of specification results were observed, failure of the quality unit to support the root cause through scientific rationale and supporting documentation for product deviation, quality control analysts’ not being properly qualified, and deficient procedures for production and process controls designed to assure that drug products have the identify, strength, quality, and purity they purport or are represented to possess.  Based on these ‘observations’, and noting the complexity of manufacturing PPS, particularly with batch consistency, it seems unlikely that Alembic will be successful in its application.

Further, Paradigm has been granted dosing, formulation, and method of use patents for specific indications.  Paradigm has been granted such patents for the treatment of:

• BMEL with PPS (geography: USA, EU, Australia, Japan, China, Taiwan, Singapore, and other APAC countries);
  
  
• MPS with PPS (geography: USA, EU, Australia, and NZ);
  
  
• alphavirus arthritis and joint pain with PPS (PAR has exclusive world-wide rights to commercialise patent granted to Griffith University); and
  
  
• respiratory diseases including allergic rhinitis, allergic asthma, and chronic obstructive pulmonary disease with PPS (geography: EU, Canada, Australia, China, and NZ).

It is important to understand that the above patents provide significantly inferior protection than a composition of matter patent.  If Paradigm is successful, such patents are likely to be challenged by would-be competitors.

PPS is not a cure

There is no better drug than one which a patient takes once and is cured.  There is also no worse drug investment.  Far better for the patient to require repeat dosages which generate ongoing revenue.  Because the metabolic imbalances associated with the pathophysiology of osteoarthritis are promulgated by etiologic factors (e.g. aging, genetic, mechanical) that cannot be directly influenced by the pharmacologic effects of a drug, with time, clinical symptoms might return.  This means that PPS is not a cure for osteoarthritis and patients will require repeat dosages.

FDA fast track

PAR has a real chance to receive FDA fast track designation for ZILOSUL®. 

The drug meets many of the criteria for fast track designation, including that it shows superior effectiveness to available treatment options, avoids the serious side effects of available treatment options, and is a non-addictive, non-opioid, drug (and thereby helps to address the opioid/addiction epidemic in the USA), and shows DMOAD characteristics.

Relevantly, FDA has granted ‘Fast Track’ designation for other disease-modifying osteoarthrosis drugs including Galapagos’ GLPG1972/S201086, Medivir’s MIV-711, and NGF inhibitor Pfizer and Eli Lilly’s Tanzeumab, Cenrexion Therapeutics’ CNTX-4975 (a non-opioid, non-addictive pain injection).

Competing drugs in development

When investing in a pharmaceutical company, it is important to know about the possible competitor drugs and, if those drugs are under development, track the development.  Paradigm has a few key competitors which are developing DMOADs for arthritic indications:

• Galapagos is developing GLPG1972 (marketed as ROCCELLA) which is a DMOAD candidate targeting the treatment of cartilage loss by inhibiting cartilage degrading enzyme ADAMTS-5.  On 15 July 2019, Gilead Sciences agreed a US$5.1 billion deal with Galapagos which included in relation to GLPG1972, an option to pay a $250 million fee to license the compound in the United States after the completion of ongoing Phase 2b study for treatment of osteoarthritis.  If certain secondary efficacy endpoints are met, Gilead would pay up to an additional $200 million.  Following opt in, Galapagos would be eligible to receive up to $550 million in regulatory and commercial milestones (i.e. Gilead Sciences will potentially pay up to US$1 billion for GLPG1972);
  
  
• Medivir is developing MIV-711 which inhibits cathepsin K, the principle protease involved in breaking down collagen in bone and cartilage.  Developed to slow or reverse the progressive degeneration of joints affected by osteoarthritis.  Phase 2a studies showed no statistically significant reduction of pain or improvement of function or quality of life.  Reduced loss of cartilage thickness demonstrated;
  
  
• Pfizer and Eli Lilly are developing Tanezumab which is a DMOAD candidate that inhibits NGF.  Phase 3 study met 2 of 3 co-primary efficacy endpoints, demonstrating a statistically significant improvement in pain and physical function compared to NSAIDs at 16-week analysis but patients’ overall assessment of their OA was not statistically different than NSAIDs and there was a statistically significant higher rate of joint safety events in the tanezumab arms compared to NSAIDs at 80 weeks. Discontinuations due to adverse events were high among those receiving tanezumab compared to NSAIDs during the 56 week treatment period.  Eli Lilly had paid $200 million and agreed to up to $1.4 billion in milestone payments to gain rights to Tanezumab.  The drug is unlikely to be approved due to safety concerns;
  
  
• Teva and Regeneron are developing Fasinumab which is a DMOAD candidate that inhibits NGF.  Trials were previously put on hold due to safety concerns.  Teva had paid $250 million and agreed to $1 billion in milestone payments for rights to Fasinumab; and
  
  
• Centrxion is developing CNTX-4975 for treatment of knee osteoarthritis.  Phase 2 study showed 1mg improved pain up to 24 weeks, 0.5 mg improved pain up to 12 weeks.

Skin in the game

Management have greater than $114 million of stock (at $4.20 per share).  The CEO alone has greater than $98 million of stock.  Management are certainly aligned with shareholders.

Partnerships

It is likely that Paradigm will partner with ‘big pharma’ for the osteoarthritic indications.  Management has repeatedly noted that such discussions are ongoing.  Based on comparable deals, any such partnership would likely include a sizable upfront payment (think 100’s of millions of USD) and a total package including milestone payments of perhaps ~US$1 billion (compared to current market capitalisation of ~US$562 million). 

Paradigm has executed an exclusive in-licence agreement with the Icahn School of Medicine at Mount Sinai, New York, for the treatment of MPS with PPS.

Paradigm will likely partner with the US Department of Defence (DoD) for the development of RRV/CHIKV indication, as thousands of US service men and woman deployed in Asia suffer from CHIKV each year.  Discussions with the US DoD are ongoing.

Catalysts

Potential catalysts include:

• knee osteoarthritis pre-IND (investigational new drug) application meeting with the FDA (request submitted for meeting December 2019).  This is the first step towards Phase 3 clinical trials;
  
  
• scientific advice meeting with the European Medicines Agency (EMA) for knee osteoarthritis indication (request expected Q1 CY2020);
  
  
• MPS joint pre-IND application meeting with FDA and EMA (request expected Q4 CY2019);
  
  
• request TGA provisional approval for knee osteoarthritis indication (briefing documents submitted for meeting on 11 November 2019, if granted, potential revenue generation from Q3 CY2020);
  
  
• treatment of 10 ex-NFL athletes with PPS for knee osteoarthritis in the US which will raise awareness (commencing late CY2019/early CY2020);
  
  
• commercial discussions with potential ‘big pharma’ partners; and
  
  
• discussions with US DoD.

Risks

There are many risks associated with an investment in a pharmaceutical development company.  These risks should be obvious.  The potential downside of an investment is 100%.  A key risk for Paradigm will be whether PPS provides enough benefit to patients above and beyond current standards of care to be recommended by treating doctors given the cost.  Patients may prefer to simply mask symptoms with cheaper pain medication.

Position sizing

Having regard to the risks associated with an investment in PAR, and risk appetite, funds managed by the author initiated a position of less than 1% of assets.  This is despite detailed research and significant potential upside.  The author initiated a position in PAR at prices below $1.80 and considers the current risk/reward significantly less favourable.

Valuation

Description	Amount
Shares outstanding (diluted)	199,735,349
Share price	$4.20
Market capitalisation	$838 million
Cash	$78 million
Enterprise value	$760 million

We have adopted a top-down probability weighted scenario analysis to value PAR.

We have limited our valuation to just one discrete market: US patients with knee osteoarthritis with concurrent BMELs (estimated at 7 million people).

Assume the following assumptions:

• 5% market penetration (350,000 patients)
• 10 years to reach 5% market penetration
• US$2,000 per annum cost of treatment (low end of PAR management estimates)
• Royalty expense 10% of revenue (Bene royalty is low single digits but assume 10% to be conservative)
• Other expense 50% of revenue
• AUD/USD of 70 cents;
• Tax at 30% (likely to be lower given lower corporate tax in the US)
• 12.50% discount rate
• NPAT multiple in 10 years of 20
• Probability weight success at 50% (and for simplicity, and to be conservative, assume total failure and no residual value in the alternative)

The above assumptions provide a net present value of future cash flows of approximately $862 million or $4.35 per share (a slight premium to current share price).

Importantly, the above valuation attributes no value to PARs other indications, other geographies, other segments of the arthritic market, and cash generated over the next 10 years.

Readers can input their own assumptions to test sensitivity to inputs.

The potential ‘bull case’ scenario is many multiples of the current share price.  Note, for example, that Paradigm has stated that both the osteoarthritis and MPS indications have ‘blockbuster’ potential for >US$1 billion revenue per year.

Disclosure: the author, and entities controlled by the author, hold shares in Paradigm.