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AZRX: MS 1819 Trial, First Look Positive; 2016 Results

04/17/2017
By John Vandermosten, CFA

NASDAQ:AZRX

On April 11th, AzurRx BioPharma, Inc. (NASDAQ:AZRX) provided a first look at its open label Phase IIa trial investigating the use of MS 1819 for the treatment of exocrine pancreatic insufficiency (EPI).  The first three patients at either the second or third of the four escalating dose levels (16x35 mg/day and 8x140 mg/day respectively) exhibited a favorable dose response in excess of 20 percentage points compared to baseline.  This compares to a 17 percentage point improvement in CFA in the Phase Ib trial and a 25 to 29 percentage point improvement in preclinical studies.  While the results only include three of the anticipated 12-15 enrollees slated for the trial, we see this as a promising indicator going forward and expect future updates will continue to support this improved efficacy over baseline results.  In addition, the trial has shown favorable safety and final results are expected to be available after study completion in 3Q:17.

The company also filed its annual report form 10-K on March 31st, 2017.  During the fiscal year, ending December 31, 2016, the company reported a loss of ($14.6) million or ($2.45) per share compared to our estimates of ($10.3) million or ($2.00) per share.  The greater than expected loss was predominantly due to a spike in in interest expense to $4.1 million in the fourth quarter of 2016 related to warrants issued to OID noteholders.  

Operating expenses of $6.3 million were lower than our estimates of $6.6 million on lower R&D and a $1.2 million shift in the value of contingent consideration in the fourth quarter.  For the full year, R&D was $2.5 million, below our $3.0 million estimate and G&A was $4.1 million compared to our $2.6 million estimate.  

Compared to 2015, 2016 R&D expenses rose $1.1 million to $2.5 million on increased manufacturing costs related to additional batches of MS 1819 and tax credits offset some of this amount.  G&A expenses were also higher over the prior year, rising to $4.1 million in 2016 from $3.3 million in 2015.  Public company costs, non-cash stock grants as well as auditing, D&O insurance and directors’ fees added to the growth.  

Cash used in operations was ($4.5) million in the year ending December 31, 2016, a bump up from the ($4.2) million consumed in 2015.  With only minimal capital expenditures, cash burn was essentially the same for both periods, and approximately $380,000 per month in 2016.  

As of December 31, 2016, AZRX held $1.8 million in cash on its balance sheet and $155,000 of notes payable related to Directors and Officers Liability insurance.  Cash burn for the year was $4.5 million, with amounts increasing sequentially as the year progressed.  

Recent Events


On March 8, 2017, AzurRx announced that Charles J. Casamento, with a history at a variety of health care advisory and pharmaceutical companies became director of AzurRx.  He is currently executive director and principal of The Sage Group and his connections in the financial community are expected to be a valuable asset for AZRX.
  
2016 Highlights

Received regulatory approval to conduct MS 1819 study in Australia and New Zealand
Completed public offering of 960,000 shares at $5.50 per share in October 2016
Initiation of Phase II clinical trial for MS 1819 in 4Q:16
Retirement of $362,786 of OID convertible debt

Competitive Environment

Competitor Anthera (NASDAQ:ANTH), who announced in December that their Phase III SOLUTION trial for cystic fibrosis patients with EPI failed to reach its non-inferiority endpoints, will launch another Phase III trial for Sollpura.  After a capital raise a few weeks ago, the company announced plans to conduct another Phase III trial named RESULT (Reliable Emergent Solution Using Liprotamase Treatment) which is expected to begin in 1H 2017.  The trial design will be modified to increase dosing of Sollpura to address the more acidic environment of in CF patient duodenum.  Topline data is anticipated at the end of 2017 or early 2018.  Given the previous failures with the compound in phased trials, and the inability of Sollpura to be effective in more acidic gastric environments of EPI patients, we do not perceive this to be a serious threat.

Company Assets

MS 1819, is a yeast-derived lipase enzyme used to compensate for exocrine pancreatic insufficiency (EPI).  The compound has several superior characteristics compared to standard EPI therapy, demonstrating increased efficacy in low pH environments and derivation from a non-porcine source.  Currently MS 1819 is in a Phase 2 trial which we anticipate will be concluded before year end 2017.  

The company’s second compound in development is AZX 1101.  This is a recombinant β-lactamase derived from a bacterial source to address hospital-acquired infections acquired as a result of antibiotic use.  AZX 1101 is currently in preclinical development and will soon commence in vivo studies in animal models.  While the market opportunity is substantial, due to the early stage of development we do not attach any value to AZX 1101 in our analysis.

Investment Thesis

AzurRx has developed a core competency in non-systemic biologics that employs recombinant proteins for the treatment of gastrointestinal diseases and microbiome related conditions.  The company’s pipeline consists of two compounds.  The first of which is a recombinant lipase enzyme for the treatment of EPI, which is currently in Phase 2 testing with expected topline results in 1H:17.  The second is another recombinant enzyme intended for the prevention of nosocomial infections; specifically Clostridium difficile.

The company’s lead product, MS 1819, is produced from the genetically modified yeast Yarrowia lipolytica, and has shown favorable characteristics compared to the current standard of care for EPI.  Shortcomings in the use of currently approved pancreatic enzyme replacement therapy (PERT), such as pill burden, animal sourcing and poor efficacy in low pH environments may be solved with MS 1819.  The agent’s profile appears to address many of the weaknesses of PERT based on the preclinical and Phase 1 data generated to date and current Phase 2 efforts should produce results which strengthen the argument for AzurRx’s lipase product.  The market for MS 1819 is potentially large given the size of the cystic fibrosis (CF) and chronic pancreatitis (CP) patient groups and possible expansion into other disease states.  Given the non-systemic nature of MS 1819, the off-target effects of the drug are expected to be minimal, supporting a favorable safety profile.

While our target price is generated based on the anticipated performance of MS 1819, the other asset in the portfolio could also potentially add substantial value.  AZX 1101 is a non-systemic, recombinant β-lactamase designed to protect the natural gastrointestinal microflora from the use of intravenous β-lactam antibiotics in a hospital setting.  While it is currently specifically intended to protect against the β-lactam family of antibiotics, AZX 1101 has the potential to inhibit the activity of aminoglycoside, fluoroquinolone and other antibiotic groups.  Potential addressable market size could be from $4.5 to $11 billion  and consist of 14 million patients.  

Key reasons to own AZRX shares:


Lead candidate MS 1819 adresses many of the shortcomings in other PERT 
o Non-systemic, non-porcine derived lipase enzyme
o Improved efficacy in acidic environments
o Elimination of exposure to porcine and animal contamination risks
PERT addressable market size in AZRX territories is several hundred thousand
Potential for development of other non-systemic recombinant proteins

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