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BMRA: Analysis of IBS Drugs Indicates Unmet Need for Alternative Therapies

01/26/2017
By Brian Marckx, CFA

NASDAQ:BMRA

Q2 2017 Results / Operational Update: Asia Sales Nearing All-Time Highs. Low “Attractiveness Hurdle” of IBS Drugs Should Play in InFoods’ Favor... 

Biomerica (NASDAQ:BMRA) reported financial results for their fiscal second quarter ending November 30.  Revenue, for the second straight quarter, surprised on the upside by about 12% relative to our estimate with the majority of the beat in both periods related to stronger than anticipated sales in Asia.  Similarly, it wasn’t just revenue that impressed, gross margin also came in much wider than we modeled – again for the second straight quarter.

Q2 revenue of $1.4M was up 23% yoy, up 2% sequentially and about 12% better than our $1.3M estimate.  It was also the highest since fiscal Q4 2015 (May 2015).  While revenue in both Europe and the U.S., which account for approximately 35% and 15% of total revenue, respectively, saw revenue decline on both a yoy and sequential basis, this was more than offset by relatively very strong sales in Asia, which accounts for ~45% of total revenue.

Revenue from Asia was $716k, up 71% from $419k in Q2 2016 (i.e. yoy), up 25% from $575k in Q1 2017 (i.e. sequentially) and the highest since the $1.1M generated in Q2 2013 (i.e. the record-setting year).  This recent strong performance builds on the 71% Asian sales growth for the full year 2016.  And while much of the prior year growth was related to an easy comp due to disruption in sales in 2015 from a switch in distributors, the most recent numbers may suggest Asia sales are back trending towards their historical peak of almost $2.8M.  Noteworthy is that sales in Asia over the last six months of $1.29M are the highest over any two consecutive quarter period since the $1.60M generated in Q2 – Q3 2013 – which is the same year that both Asian sales and total sales ($6.47M) hit their all-time records.  Given that Asian sales now account for approximately 45% of total revenue (up from 21% in 2015 and 25% in 2014), even incremental growth from current levels in this territory will have a meaningfully positive effect.  We continue to model low double-digit annual growth in Asia sales over the next several years.

Meanwhile, Q2 sales in Europe and the U.S. fell yoy by 2% and 21%, respectively, although sales in both territories are largely flat through the first half of the current year.

Europe generated $464k of revenue in Q2, down 2% yoy.  As we noted in previous updates, recent signs of European revenue stabilizing around ~$500k/quarter has us hopeful that this territory has potential to return to positive growth in the coming (i.e. current) year.  The $509k quarterly average through the first six months of fiscal 2017 indicates that it is closely tracking that number with Europe off to a solid start.  And as a reminder, management had previously mentioned that they hope to expand distribution to other countries in Europe – if that happens, European revenue could return to even more meaningful growth and outpace our estimates.

Relative to the U.S., revenue fell 21% in Q2 to $172k but due to a relatively strong showing in Q1 ($226K, +21% yoy), sales are down less than 2% through the first six months (Q2 2016 $405k vs. $398k Q2 2017).  While we continue to model roughly flattish U.S. sales from the company’s currently commercialized product portfolio, that would almost certainly change if and when InFoods, the company’s novel IBS product, gains FDA regulatory clearance and launches.

As we detail below, the deleteriousness of IBS and significant prevalence of the disease has spawned a number of new entrants to the IBS drug market.  But all of these drugs, which target only the symptoms and not the underlying cause, provide relief to only a relatively small portion (~15% - 20%, based on clinical study data) of sufferers.  And ‘relief’, for those that do show a treatment response from these drugs, is often only partial and temporary.  As such, an alternative that can effectively address the underlying cause of IBS, such as what InFoods is being developed to do, would likely garner significant appeal and demand.

Financials

Q2 revenue of $1.43M was up 23% yoy, up 2% sequentially and about 12% better than our $1.28M estimate.  Asia sales beat our number by 64% while sales in Europe and the U.S. came in 17% and 18% shy of our respective estimates.  Revenue from the other geographic territories, which combined account for about 5% of total revenue, was about 10% better ($73k vs. $80k) than our estimate.

Q2 gross margin was 38.9% - well ahead of our 29.2% estimate and the 29.7% average in 2016.  Gross margin through the first six months of 2017 was 40.0% - which is the widest over any two consecutive quarter period since Q1-Q2 2013.  BMRA indicates in the 10-Q that gross margin has recently benefitted from relatively stable fixed costs coupled with greater efficiencies from higher production volumes.  As we continue to model moderate revenue growth from the current product portfolio, we have since made some upward revisions to our forecasted GM.

Q2 OpEx were $776k, or 54% of revenue, compared to our $606k, or 48% of revenue.  SG&A in Q2, on both an aggregate dollar spend basis as well as a percentage of revenue looks to be the highest in recent history (at least as far back as fiscal 2010).  The increase relates mostly to R&D – which at $301k, is the highest in history and compares to a quarterly average of $183k in 2015 and $195k/ in 2016.  The recent increase relates to additional spend on new products under development, including InFoods.

We note that while our model reflects an expectation of incremental InFoods-related development and regulatory expenses, we continue to refrain from modeling any potential revenue for the product due to significant uncertainties related to the regulatory pathway (and related specifics), requisite clinical trial programs (including scope, size, design and outcome measures) and additional validation of the performance, replicability and clinical utility of the product.  We will, however, continue to revisit this assumption on a regular and ongoing basis and consider updates to our model (potentially including InFoods-related revenue contribution) with additional and substantive development and/or regulatory progress.

Cash

The balance remains solid.  BMRA exited Q2 with $1.6M in cash and equivalents.  Excluding changes in working capital, the company used $118k and $138k in the three and six months ending 11/30/16.  BMRA notes in the Q2 10-Q that the Board has authorized the filing of an S-3 registration statement, although also notes that the company does not intend to immediately sell securities.  Additional, non-dilutive funds, could come from BMRA’s agreement with Celtis Pharm Co. of S. Korea which calls for that company to pay Biomerica up to $1.25M in exclusivity fees based on "certain milestones including Biomerica’s starting clinical trials in the United States, receipt of US FDA clearance and Celtis’ first sales of IBS Products in Korea".

Analysis of IBS Drugs Indicates High Unmet Need For Alternative, More Effective Therapies

Unmet Need for IBS Relief Highlighted By IBS Drugs’ Low Effectiveness, Low FDA Approval Hurdle

The U.S. market for IBS drugs is approximately $1B+, almost twice the size of what it was only just a few years ago.  The market is likely to continue to grow at a rapid pace, largely driven by new drugs that have either recently come to market or that are expected to do so in the near-term.  But while the number of drugs available to treat IBS and related expenditures continues to grow, their relative ineffectiveness in providing relief has not significantly changed.

Today, the prescription IBS drug market is mostly concentrated across four products; Linzess (Allergan) and Amitiza (Takeda) for IBS-C, and Xifaxan (Valeant) and Viberzi (Allergan) for IBS-D.  No drug is approved in the U.S. for the treatment of IBS-M.  All of these gained FDA approval for their respective IBS indications since 2012 and two, Xifaxan and Viberzi, were approved for the U.S. market in May 2015 and launched later that year.

Low FDA Approval Hurdle…

FDA has clearly recognized the seeming futility drugmakers have experienced in their quest to develop a therapy that provides significant and long-term relief of IBS.  This is evidenced by the low bar the U.S. regulatory agency has recommended in terms of efficacy endpoints that novel drugs are assessed against in order to determine whether they will be approved for sale.  We note that while FDA updated their recommendations for evaluation of novel IBS drugs in 2012 to better assess their effectiveness in addressing symptoms of IBS, the effectiveness hurdle (i.e. improvement vs. placebo) remains low.

The table below describes the pre-updated primary endpoints that have been used in many IBS drug trials.  FDA updated their guidelines as they felt that while the prior endpoints could capture the direction of change, they did a poor job of providing useful information of the effect of treatment on sign and symptoms of IBS.

The updated recommended guidelines are more defined in terms of assessment of the effect on symptoms and specifically cites a defecation component and an abdominal pain component.  For IBS-C drugs, recommendation is that defecation is assessed by stool frequency (number of complete bowel movements per week) while IBS-D drugs be assessed by stool consistency (based on Bristol Stool Form Scale).  The pain component, for both IBS-C and IBS-D, can be based on an 11-point numeric scale.

The table below describes the updated (i.e. 2012) recommended guidelines for primary endpoints of IBS-C and IBS-D investigational drugs.  Here we can see that the definition of treatment ‘response’ in these updated guidelines is more directly tied to IBS symptoms (as compared to prior guidelines).  But also, the ‘response’ thresholds are arguably meek (and, in the case of the pain measure, potentially still fraught with subjectivity).

Note that ‘response’ related to abdominal pain is a decrease of 30% or more (in weekly average worst pain) in the past 24 hours.  Weekly stool consistency ‘response’ is reduction of 50% or more days per week with mushy or watery stools.  These endpoints are far from complete reprieve of IBS symptoms and, we think, underscores not only the difficulty in effectively addressing the disease but also, when we look at the substantial revenue generated by and number of prescriptions written for these drugs, how desperate IBS sufferers are for something that will provide even minor and temporary relief.

Unmet Need For Relief Drives Demand For Drugs, Despite Being Barely Better Than Placebo…

IBS sufferers’ high unmet need for any symptom relief becomes even more obvious when examining primary endpoint outcomes data from the pivotal FDA studies of each of the four prescription drugs that account for 90%+ of the U.S. IBS drug market.  In the table below we have summarized efficacy data of the phase III studies used to support FDA approval filings for each of the leading IBS drugs (see Appendix for more details about each compound and the phase III studies).  Also included is Trulance, for which an FDA filing for IBS-C is expected to happen in the near term.

Our table also includes estimated current annualized U.S. sales and total prescriptions as well as our comments, all meant to help elucidate the significant demand for IBS drugs despite their relative lack of effectiveness and in many cases, highly unpleasant and even dangerous side effects.

Points of particular interest:

- Majority of patients did not respond:  response rates ranged from a low of approximately 12% up to 41%

- Barely more effective than placebo: response rates as compared to placebo indicate a substantial placebo effect in treatment “response”. While subjectivity of endpoint measures (particularly with ‘legacy’ measures) may play a part (our supposition), the data suggests that none of these drugs are much more effective than placebo. As an example, Linzess, which currently generates ~$600M in annual U.S. revenue and for which ~2.8M prescriptions are written each year, demonstrated only 7% - 13% superiority on primary efficacy endpoints compared to placebo.

- Drawbacks
: besides cost and relatively low efficacy there are other drawbacks to IBS drugs. This includes side effects which are often unpleasant  - such as diarrhea, and which can even be dangerous – Lotronex carries a black box warning related to the risk of potentially serious GI events.  Some drugs, such as Xifaxan, are not recommended for chronic use while others, such as Amitiza and Lotronex, are only indicated for women due to lack of data for use with men.

The Low “Attractiveness Hurdle” Should Play In InFoods’ Favor…

While there is not yet enough publicly available information relative to the performance of InFoods to make any informed opinions regarding its clinical effectiveness, the current lack of effective therapies and debilitating symptoms of the disease means that doctors and patients are likely to be receptive to just about anything that has the potential to provide even incremental benefit (whether it be incremental to existing therapies or alone).

We believe that the minimal effectiveness and drawbacks of prescription drugs means that the “attractiveness hurdle” that novel IBS therapies must meet to generate interest from the ~$1B+ U.S. IBS market is relatively low.  That should be particularly true for non-drug, side-effect-free products such as InFoods.

And with InFoods testing expected to be covered with existing CPT codes, coupled with the likelihood of a substantial cost-benefit as compared to IBS drugs, we think the market could be very receptive to the product.  We look forward to updates from the company on expected clinical trial design and other details related to validating effectiveness and clinical utility of the test.

See below for access to our most recent report on BMRA which includes our Appendices

READ THE FULL RESEARCH REPORT HERE

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