Description

BioSante Pharmaceuticals represents an inexpensive way to play Procter & Gamble’s launch of Intrinsa, its testosterone patch for female sexual dysfunction (FSD). BioSante has a superior product (LibiGel) and should be approved 18 months or so after P&G’s product. Being late to the party is in BioSante’s favor due to P&G’s plan to spend $100 million in marketing and blaze a trail into this developing market. Grabbing just a 10% market share of a $2 billion market, BioSante could easily be a $1 billion company in two years on its FSD drug alone, a far cry from its $170 million valuation today.

Female Sexual Dysfunction and a Female Viagra

According to the National Health and Societal Life Survey published by the Journal of American Medical Association (JAMA) in February of 1999, 43% of women experience sexual dysfunction. This is a much higher rate than 31% of men. An amazing one third of women surveyed had no sexual interest (married readers out there are not surprised) and a quarter could not experience an orgasm.

Additionally, physicians note that women are often unwilling to initiate conversations with their physicians about sexual dysfunction, so the rate of women suffering problems could be much higher than 43% reported in the study. Of the women suffering from sexual dysfunction, estimates are that about half are related to testosterone deficiency and would benefit from BioSante’s Libigel.

It is interesting that so much press, hype and market movements surrounded erectile dysfunction, but very little is focused on women’s problems, especially considering that more women suffer than from sexual dysfunction than men.

I believe that with the approval of P&G’s product and the marketing campaign planned that many more women will start talking to their doctors about this. It’s only a matter of time before this is on Oprah.

Testosterone maybe the answer for some women

There has been scientific evidence that for menopausal women that it is a lack of testosterone that has removed their sexual desire. Below is from a P&G press release highlighting the problem specifically for surgically menopausal women, which is the indication P&G is going after first.

“Testosterone is produced naturally in a woman's ovaries and adrenal glands and has long been linked to female sexual function. When a woman has her ovaries surgically removed, she experiences an immediate decline in testosterone. The loss of sexual desire can be associated with a drop in testosterone. According to a recent study, an estimated one in three surgically menopausal women in the U.S. has low sexual desire and nearly half of these women report being distressed about it. Low desire is the most commonly reported type of female sexual health complaint.”

Potential Size of the Market

The market for hormone therapy products is about $2.5 billion in the U.S. alone. Hormone products address such issues as muscle weakness, osteoporosis in men and menopausal symptoms (hot flashes, decreased libido, and osteoporosis) in women.

“The commercial market for legitimate products to treat "female sexual dysfunction" barely exists today. This stands in stark contrast to the mountains of cash forked over by men for drugs like Viagra, Cialis and Levitra.” Adam Feuerstein – Realmoney.com (http://www.thestreet.com/_rms/comment/adamfeuerstein/10183449.html)

Estimates put the sexual dysfunction hormone market at $250 million. It appears as if many products are prescribed off label (even ones with toxicity). For example, Solvay’s Estratest (estrogen and methyltestosterone) tablets had sales of more than $160 million, this despite the risk of liver toxicity. With a much safer efficacy profile, I believe usage of P&G’sa Intrinsa and BPA’s LibiGel will soar.

P&G and Biosante will initially be targeting surgically menopausal women, and then target all menopausal women. It is estimated that there are over 40 million menopausal women, and by 2010 there will be over 50 million women due to baby boomers aging. This is a large and growing market, and I believe as safer more efficacious hormone therapies become available; the hormone market will start to grow again.

Procter & Gamble Blazes the Trail

On September 21st, P&G received priority review for Intrinsa, its testosterone patch. Assuming it receives approval; P&G will spend $100 million marketing its patch. I believe the marketing campaign will lead to more and more women wanting to initiate a discussion with their doctors about their problems.

P&G is going before an FDA advisory committee on December 2nd for surgically post menopausal women. Once approved, through sales reps and marketing power will make sure that every woman knows about this product and the problem of female sexual dysfunction.

LibiGel’s recent results points to technological superiority

In May, P&G announced positive results from their phase III study of 562 surgically menopausal women. “Women in the study who wore the testosterone patch reported a 74% increase in the frequency of satisfying sexual activity as well as a 56% increase in sexual desire vs. baseline. Results from the study were statistically significant.” Realmoney.com, article cited above.

With the caveat that BioSante tested their product on a much smaller group of 46 women, their results were much more spectacular, with an increase of 238% over baseline. And even though some think that the results are inflated due to the small sample size, even if the number came down to 125%, it would still be dramatically better than Intrinsa. This may be due to LibiGel being a gel as opposed to a patch and to Antares better gel technology.

There are several advantages that gels have over patches. For one, the gel is invisible and is absorbed by the skin; the patch is visible (ex: hard to hide wearing a bathing suit). The patch can also cause irritation and problems in the location it is put on. The patch can also fall off. The gel is rubbed on your arms and shoulder and is absorbed.

Antares Pharmaceuticals Technology

Actually it isn’t BioSante’s technology, it is Antares Pharmaceuticals’ (AMEX: AIS) technology. In June 2000, BPA signed a sweetheart deal with a Permatec Technologies of Switzerland, now called Antares. The license was basically sold for a song: $1 million upfront license fee and a mid single digit royalty rate. Within a year of signing the $1 million upfront payment they re-licensed some of the technology elsewhere for in excess of $2 million, proving management’s savvy.

Antares owns some worldwide rights and has been trumpeting BioSante’s results, but LibiGel will not be as lucrative to Antares as it will to BioSante due to its extremely low royalty rate. BioSante has all of the U.S. rights and that is pretty much the only important ones right now.

LibiGel Timeline

LibiGel is going to launch its first Phase III trial in the first quarter of 2005 and then six months later run another study. It will take six months to enroll and six months of therapy. They plan to announce results of the studies in the third quarter of 2006, file an NDA in the fourth quarter of 2006 and get approval in 2007.

There is always the chance that the company could get expedited approval like P&G, but I’m not counting on it.

Also, even though management has said they are going to launch their own 75 person sales team to sell LibiGel, I believe that instead that they will partner with a larger pharma company that has a large sales force in the field. Management admits this a possibility.

Bio-E-Gel

This is BioSante’s closest product to market. This is an estrogen gel for the treatment of menopausal symptoms in women. Phase II studies have shown that Bio-E-Gel has reduced the severity of hot flashes without the variability in blood levels that oral therapies have shown. Products like this will continue to increase the shift of patients to transdermal therapies over oral therapies due to the much more favorable risk/benefit profile.

Concerns over hormone therapy

There have been concerns about hormone therapy and the increased risk of breast cancer and heart disease, after a government sponsored health trial showed such in 2002. Prescriptions plunged 50% from before the trial in oral hormonal therapies and 20% in transdermal therapies, but they have stabilized over the course of the last year. And transdermal therapies have increased their market share as transdermal is seen as a much safer delivery mechanism than oral.
Also, note that Prempro and Premain, which were used in the government study in 2002, contain conjugated equine estrogens, whereas gels such as BioSante’s contains a bioidentical estradiol, a synthetic form of naturally occurring estrogen.

And natural forms of testosterone that are sold over the counter are being pulled as the FDA cracks down over health concerns. This should benefit firms that are approved and sell with FDA approval.

Interestingly, sales of transdermal hormone therapy in the U.S. are up 10% in the last twelve months.

Partnerships

BioSante’s has a partnership with TEVA pharmaceuticals for a testosterone gel in men; this product is called Bio-T-Gel. Estimates have BioSante receiving a 5% royalty rate. I estimate that by 2008, Bio-T-Gel will have at least $50 million in sales. Bio-T-Gel is on track for a second half 2006 launch.

BioSante’s also has a partnership with Solvay Pharmaceuticals for its Bio-E/P-Gel. Bio-E/P-Gel is a combination estrogen and progestogen therapy. Estimates are for BioSante to receive a modest 8% royalty rate.

CAP technology is icing on the cake

BioSante is working on an exciting nanotechnology called CAP (Calcium Phosphate). They are trying to develop safer and more effective vaccines and therapeutic drug delivery methods. BioSante’s particles are extremely small and offer many advantages due to their size.

BioSante is developing three products thus far:

♦ BioVant is an adjuvant that increases the immune response from the vaccines.

♦ CAP-Oral is a drug delivery system that takes proteins and other therapies that must currently be vaccines and makes them available orally.

♦ BioAir is an inhalable version of CAP-Oral.

BioSante has partnerships and collaborations with the U.S. Navy, U.S. Army and DynPort. The DynPort collaboration is very interesting in that they are working on anthrax vaccines. VaxGen (VXGN: Pink Sheets) was just awarded a $877 million contract from the government to develop an anthrax vaccine.

Strong Management Team

As stated above management has made some extremely smart moves. One example is that they bought the hormone rights from Antares only to turn around and get almost four times that amount in sub-licensing fees and they will be receiving further royalties.

Also this management team of the CEO & CFO, Stephen Simes and Phillip Donenberg, have been together for the past two companies. It is worth noting that each company was later bought out and management only cashed out after the buyout. It appears they are doing it again.

Management owns almost 30% of the company.

Potential Valuation

The most important value determinant to the equation is LibiGel. There are two assumptions we can make the conservative and the aggressive. The conservative estimate says that by 2007, the market for FSD will be about $1 Billion. And even though BPA’s product is superior due to it being a gel and having better efficacy, assume it only take 10% of the market, because it is just a small company. Valuing that $100 million at 3 times, would add $300 million in valuation.

The aggressive estimate, has the FSD market being $2 billion, and BPA grabbing 20% of the market, which would indicate $400 million in sales. Valuing that at 5 times would indicate a $2 billion market valuation.

I also estimate that BPA’s Bio-T-Gel will have $50 million in sales in 2007 through TEVA pharmaceuticals. BPA’s royalty will be $3 million. Valuing that at 10 times, gives $30 million in valuation from this product.

Bio-E-Gel should have about $12.5 million in sales in 2007, valuing that at 3 times, adds another $37.5 million in value. And its partnership with Solvay for its Bio-E/P-Gel should bring in $1 million in royalty, indicating a $10 million valuation.

And I also add about $50 million in valuation for its CAP nanotechnology.

Excluding LibiGel, in 2007, BPA should be worth a little over $125 million, which is not far from its current market cap. With LibiGel, BPA could be worth anywhere from $425 million to $2.1 billion. Assuming they raise more money through about a 2 million share offering and BPA will have about 25 million shares diluted (22.4 FD right now). That gives us a price range of $17 to $85 in 2007. A 25% discount, would give us a short term price objective of $13 and a longer term projection up to $64 a share, or 45% to 600% plus return potential.

Dates of Importance

1) November 16th the CEO will present at the New York Society of Security Analysts.

2) December 2nd FDA Advisory Committee on P&G submission.

3) 1st Quarter 2005, Bio-E-Gel completion of Phase III for menopausal women.

4) 1st Half NDA filing for Bio-E-Gel

5) 2nd Half ANDA for Bio-T-Gel

6) 2nd Quarter Initiation of Phase III trials in Bio-E/P-Gel

7) 1st Quarter Initiation of Phase III trials in LibiGel

Summary

I do not foresee BPA being an independent company by the time its LibiGel comes out. The history of management says they build companies up and sell them off. Plus, they could benefit from a Pfizer or even a P&G sales force. Plus, their longer term nanotechnology is quite exciting and in the right labs and with more money, the technology could really take off. But, even if they don’t get bought out, this company will provide tremendous returns to shareholders.

With a major catalyst in P&G’s approval ahead, are investors going to buy P&G, or are they going to scour the investment landscape for small to medium cap companies that could benefit as well? And when script data is strong as many women try out P&G’s product, you know that investors will extrapolate that data to a much higher valuation to BPA.

And beyond LibiGel, BPA is a small cap pharmaceutical with four products in late human clinical trials, only burning $850,000 a month, and with an exciting longer term nanotechnology potential.

Another big catalyst will be December or January, when BPA is going to switch to the NASDAQ. This should be a major positive for investors worried about investing in companies on the AMEX. It should allow better liquidity and exposure.

There is about to be an explosion of news and hype about female sexual dysfunction and P&G’s product and BPA’s valuation does not take into account this.

Everyone knows that SEX SELLS, and it is no different in the stock market.

Catalyst

1) P&G December 2nd FDA meeting to approve Intrinsa
2) NASDAQ listing
3) New analyst coverage
4) Positive script data and marketing blitz from Intrinsa
5) Filing for NDA in Bio-E-Gel
6) New contracts and licenses for CAP technology