We are initiating coverage of Edesa Biotech, Inc. (NASDAQ:EDSA) with a valuation of $5.00. Edesa is a biopharmaceutical company focused on developing therapies for dermatological and gastrointestinal (GI) conditions where effective therapies are needed. The company’s lead development products are based on inhibition of a family of enzymes called secretory phospholipase 2 (sPLA2), which are responsible for hydrolyzing phospholipids to produce arachidonic acid. This process is an initiator of a broad inflammatory cascade. Inhibition of the inflammatory signaling pathway through targeting of sPLA2 should lead to a superior anti-inflammatory effect since the inflammatory signal will be inhibited at its inception rather than after inflammation has occurred. Edesa is developing EB01 as a treatment for allergic contact dermatitis (ACD), which is one of the most common occupational and work-related skin conditions in the U.S., and EB02 as a treatment for hemorrhoids disease (HD), which is a common disorder characterized by itching, pain, bleeding, and difficulty defecating.
Novel Approach to Treating Inflammation
Edesa is developing treatments for dermatological and GI inflammatory conditions through inhibition of sPLA2, which sits at the apex of the inflammatory signaling cascade that exerts its effects through the generation of arachidonic acid. By inhibiting the generation of arachidonic acid the inflammatory signal is stopped at the source, similar to the mechanism of action for corticosteroids, but with a better safety and tolerability profile. In addition, sPLA2 is upstream from where non-steroidal anti-inflammatory drugs (NSAIDs) exert their effects.
ACD is One of the Most Prevalent Skin Conditions in the U.S.
ACD is a very common workplace and occupational skin condition and leads to approximately $2 billion in lost work, productivity, medical care, and disability payments each year in the U.S. An estimated 2.5 million individuals in the U.S. suffer from ACD and as many as one million may have chronic ACD. Current treatment options have low efficacy rates and corticosteroids have a number of significant side effects that preclude their extended use.
Near Term Interim Efficacy Analysis
Edesa is currently conducting a Phase 2b clinical trial of EB01 in patients with ACD. The first cohort of the study will be comprised of approximately 46 patients with a primary outcome examining the mean percent change from baseline in contact dermatitis severity index (CDSI) at Day 29 following 28 days of treatment with varying strengths of EB01 cream. Results from a blinded interim analysis of the first cohort of patients is anticipated in mid-2020, at which point the study will proceed to an 80 subject second cohort, a 120 subject second cohort, or be stopped for futility.
HD Offers Additional Upside
A proof-of-concept Phase 2a clinical trial will be initiated in patients with HD to determine the efficacy of EB02. A blinded interim analysis will take place after the first approximately 48 patients are treated, with similar outcomes to the ACD trial possible. With approximately 12.5 million U.S. adults affected by HD and no FDA approved treatments, this indication could represent a large opportunity.
We value Edesa using a probability adjusted discounted cash flow model that takes into account potential future revenues for EB01 and EB02. We are not including anal fissures or vitiligo in our model at this point, but these indications represent potential upside to our model.
For EB01, we model for a Phase 3 trial to initiate in ACD in 2022, an NDA filing in 2024 and approval in 2025. We estimate that the company will enter into a collaboration with a larger pharmaceutical company for marketing the drug and that Edesa will receive a 15% royalty on net sales. We forecast for peak revenue of $90 million seven years after launch. Using a 15% discount rate and a 60% probability of approval leads to a net present value for EB01 of $45 million.
For EB02, we model for a Phase 3 trial to initiate in HD in 2022, an NDA filing in 2024 and approval in 2025. As with EB01, we model for Edesa to enter into a commercialization partnership and receive a 15% royalty on net sales. We estimate a total prescription market for HD treatments of $90 million in 2020 that is growing at approximately 2% per year and we model for EB02 to eventually capture approximately 25% of this market. Using a 15% discount rate and a 50% probability of approval leads to a net present value for EB02 of $2 million.
Combining the net present value for EB01 and EB02 along with the current cash balance and potential money from exercised warrants leads to a net present value for the company of $55 million. Dividing by the fully diluted share count of 10.9 million shares leads to a valuation of $5 per share.
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