By Steven Ralston, CFA
CSE:HUGE.CN | NASDAQ:HUGE
READ THE FULL HUGE.CN RESEARCH REPORT
FSD Pharma (CSE:HUGE.CN) (NASDAQ:HUGE) has evolved into a specialty, biotech pharmaceutical R&D company as management advances its strategic objective of developing, over time, a pipeline of FDA-approved synthetic compounds that target the human endocannabinoid system. Currently targeted pharmaceutical applications include managing chronic pain via an anti-inflammatory agent and down-regulating the exuberant immune response (as well as the “cytokine storm”) for the treatment of COVID-19.
Through the acquisition of Prismic Pharmaceuticals in June 2019, FSD Pharma attained the worldwide rights (except for Italy and Spain) of the micronized and ultra-micronized formulations of palmitoylethanolamide (micro-PEA and ultra-micronized-PEA). Prismic had previously acquired the license to conduct R&D and commercialize micronized-PEA and ultra-micronized-PEA as a prescription medication for the relief of inflammation and pain from Epitech Group SpA. Today, Prismic Pharmaceuticals is the core of the FSD Pharma Bioscience Division.
PEA targets the CB2 receptor of the endocannabinoid system and is a naturally occurring anti-inflammatory agent. It is expected to be effective in many inflammatory ailments, including chronic pain, and arthritis (particularly early stage osteoarthritis), among others. Micronization of PEA improves its oral bio-availability, and this micronization technique is protected by patents until 2030.
FSD Pharma also is seeking to address the opioid crisis, by developing opioid-sparing prescription drugs utilizing ultra-micronized formulations of palmitoylethanolamide (PEA) and to target other diseases of the CNS (central nervous system).
The company’s lead compound is FSD201 (ultra-micronized PEA). Thus far, FSD Pharma has achieved the following milestones:
• Completed Phase 1 first-in-human safety and tolerability study of ultra-micronized PEA
• Received permission from the FDA to design a proof-of-concept study for the use of ultra-micronized PEA (FSD201) as a treatment for COVID-19 patients
Currently, management is preparing an Investigational New Drug Application (IND) for the use of FSD201 to treat hospitalized COVID-19 patients.
Management is also looking to expand the company’s drug development pipeline through acquisitions.
Management is closing down the company’s medicinal grade cannabis operation in Cobourg, Ontario and concentrating solely on advancing pharmaceutical R&D efforts. On July 30, 2020, the company announced that Health Canada has been notified that FV Pharma is forfeiting its cannabis-related licenses and that all activities by FV Pharma will be suspended within 30 days. FSD Pharma is in the process of liquidating all of FV Pharma assets. The cannabis production facility in Cobourg, Ontario is listed at realtor.ca.
The company has sold and is divesting non-core equity investments to help fund management’s strategic objective. Through the first half of 2020, the company has received $8,470,524 in proceeds from sale of investments. In addition, several recent equity financings and the exercise of stock options have provided FSD Pharma with an impressive amount of capital, approximately $21 million since December 31, 2019.
Phase 1 In-Human Safety and Tolerability Study of FSD201 Successfully Completed
FSD201 ultra-micronized-PEA is the company’s lead candidate, which successfully underwent a Phase 1 randomized, double-blind, placebo-controlled human safety and tolerability clinical trial at Alfred Hospital in Melbourne, Australia. Single and multiple ascending doses of FSD201 were administered to 48 healthy adult men and women volunteers. The trial consisted of single ascending doses ranging from 600 mg to 2,400 mg tablets as well as multiple ascending doses ranging from 600 mg to 1,200 mg tablets administered twice daily for 7 consecutive days. All subjects completed the trial. All dose levels were well tolerated without any serious adverse events, even up to the highest dose of 2,400 mg/day. The study found FSD201 to be safe and well tolerated. The clinical study was completed in accordance with FDA-approved guidelines.
The study validated the body of scientific literature (comprised of at least 22 clinical studies with more than 4,000 patients) published in the European Union.
The company plans to submit the results of this Phase 1 trial for publication in a peer-reviewed journal.
FSD-201 Ultra-micronized-PEA Phase 2a Clinical Trial for COVID-19-related Inflammation
FSD Pharma is pursuing the advancement of ultra-micronized PEA through the regulatory process as an anti-inflammatory agent for the treatment for COVID-19 patients. Management became aware that some Italian physicians/scientists supported the use of ultra-micronized PEA to treat the symptoms of COVID-19 due to the drug’s mechanism of action and its anti-inflammatory profile, particularly the reduction of the production of pro-inflammatory cytokines, which invokes a cytokine storm in hospitalized COVID-19 patients.
Historically (between 1969 and 1979), PEA used to treat patients with influenza and the common cold in Czechoslovakia. At the time, six randomized, double-blind, placebo-controlled clinical trials were conducted that demonstrated PEA was safe and effective for the treatment of respiratory infections.
In early June 2020, FSD Pharma received permission from the FDA to design a proof-of-concept study for the use of ultra-micronized PEA (FSD201) as a treatment for COVID-19 patients. The life-threating stage of COVID-19 is characterized by an acute, elevated inflammatory response in the lungs that too often leads to death.
The company is preparing an Investigational New Drug Application (IND) for the use of FSD201 to treat hospitalized COVID-19 patients. Management expects that a Phase 2a proof-of-concept trial will demonstrate ultra-micronized PEA’s capability to down-modulate the immune response, particularly the cytokine storm.
Management expects that the clinical trial to be a randomized, controlled, double-blind, U.S. multicenter study. The study is expected to assess the efficacy and safety of FSD201 at two dose levels (600mg and 1200mg twice-daily) plus SOC (Standard of Care) versus SOC alone in symptomatic patients over a treatment period of 14 days. The primary endpoint is to see if FSD201 plus SOC improves the clinical outcome, particularly reducing the length of time to attain symptom relief.
Valuation
Valuation analysis of pharmaceutical R&D companies is a very challenging exercise, since many are pre-revenue entities in the development stage. In addition, almost all these companies are reporting negative EBITDA and net income. However, the pursuit of FDA-approval for therapeutic compounds creates unique opportunities to invest in pharmaceutical R&D companies with immense potential.
Empirically, there appears to be subsets of pharmaceutical R&D companies, one of which can be defined by several quantitative and qualitative factors, particularly those with a market capitalization between $100 million and $1.0 billion and trading on a major exchange (NYSE, NASDAQ and/or the CSE) with a reasonable, single-digit P/B valuation. This subset usually captures a range of well-funded pharmaceutical R&D companies that have met the financial hurdles becoming listed on a major stock exchange.
In the life cycle of nascent pharmaceutical R&D companies, the appropriate valuation methodology migrates from one metric to another. Initially, as a company’s strategy gains acceptance, investors willingly fund operations during the emerging stage through private placements to qualified investors. Through these financings, the company’s book value increases and the company receives much needed capital to fund growth initiatives. If management successfully executes its strategy, the company’s book value will increase through operational activities. Furthermore, in the embryonic pharmaceutical R&D company space where strategic alliances are commonplace, strategic partnerships and alliances have spurred cross-ownership investments, which reinforce business relationships. The values of these investments are reflected on the balance sheet, impacting the company’s book value. Currently, the P/B valuation range for well-funded pharmaceutical R&D companies is between 2.09 and 5.14. With the expectation that FSD Pharma’s stock will attain a mid-second quartile P/B ratio of 3.8, our comparable analysis valuation price target is $15.45.
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