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ANALYST NET Company Report

MEDRx Co. Ltd. (4586 Mothers) August 28, 2020

1/16

This report is prepared by Fair Research Inc. (Fair Research) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that Fair Research judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. Fair Research shall not take any responsibility whatsoever for any results including direct or indirect damages arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to Fair Research, and any copy, transmission or quote of any contents without permission is prohibited.

In a major move, launches first product in US market

NDA for lidocaine submitted to FDA

On August 27th, 2020, as a prelude to its first product launch in the US, MEDRx

submitted an application for lidocaine tape to the US authorities. In the US, non-

opioid drugs have become the focus of intense interest in the context of the opioid

crisis. Lidocaine tape is one such. Its predecessor, ZTlido®, has rapidly achieved

strong sales growth, such that the parent company, Sorrento Therapeutics, of the

company selling ZTlido®, Scilex, had an acquisition offer valuing it at a 245%

premium (which it turned down in December, 2019). If all goes well, it is expected

that MEDRx’s lidocaine tape will receive approval in 2021 and be launched in

2022. If it acquires a 10% market share it could emerge as a JPY9 billion product and would give MEDRx its first source of stable US income.

Steadily developing a fuller line of big products

Clinical development of fentanyl tape finally began in the US in July 2020.While

oxycodone tape development remains suspended fentanyl tape could evolve as the

most promising of MEDRx’s pipelines. In order to differentiate it from other

fentanyl tape products and to give it high added value it is important to have a

misuse prevention reputation. Through capital raising moves in November 2019

to April 2020 the company has already secured the minimum development funds

necessary to acquire basic approval for fentanyl tape as a drug for medical use,

and has decided to carry out trials to allow the use of a Misuse Prevention product

label. Elsewhere, after many twists and turns, the development of the company’s

microneedles has now led to the operation of a test plant (process according to

GMP standards for the production of items allowing administration to human

subjects in clinical trials). The company has recently held discussions as to

feasibility with a number of domestic manufacturers and is now planning an

operational tie-up. It has decided to upgrade the test plant to a facility which can

handle proliferative viruses and genetically modified organisms.

Value investment strictly based on fundamentals supports the financing

The development of memantine patches and tizanidine tape has been delayed

slightly due to the spread of COVID 19, but overall, as mentioned in the previous

section, the development of major products has been steadily progressing. This

has made an increase in funding necessary. In July 2020, the company announced

a fresh funding exercise to promote the major products mentioned earlier, and in

addition to fund the development of lidocaine tape in Europe which could not be

covered by the previous round of capital raising. The underwriter for this is the

US company, Weiss Asset Management. One could say that the financing plan is

favoured by pure investors seeking value using a strictly fundamentals-based

style. Note: This report is the English-language version of the original Japanese-language

report issued on August 28 2020, to which you should refer for precise details

Follow-up Report

Fair Research Inc.

Tsuyoshi Suzuki

Company Information

Location Kagawa Pref.

President Yonehiro

Matsumura

Establishment January 2002

Capital JPY6,934 mil.

Listed February 2013

URL www.medrx.co.jp

Industry Pharmaceuticals

Employees 24 (consol.)

Key Indicators (as of Aug. 27, 2020)

Stock Price 323

Year High 542

Year Low 158

Shares

outstanding 16,540,100

Trading unit 100 shares

Market cap JPY5,342mil

Dividend (est) 0

EPS (est) JPY-68.80

Forecast PER na

BPS (actual) JPY101.87

PBR (actual) 3.17X

Results

Revenue

s

JPY mil

YoY

％

Op.

Income

JPY mil

YoY

％

RP

JPY mil

YoY

％

Net Income

JPY mil

YoY

％

EPS

JPY

Share Price

High Low

15/12 Actual 37 43.1 -999 na -990 na -878 na -131.2 1,466 500

16/12 Actual 22 -40.6 -1,342 na -1,301 na -1,259 na -155.5 1,455 341

17/12 Actual 198 787.2 -983 na -988 na -884 na -103.2 1,345 453

18/12 Actual 8 -95.8 -1,273 na -1,285 na -1,267 na -126.7 2,060 425

19/12 Actual 169 1,922.9 -1,627 na -1,633 na -1,616 na -134.3 698 301

20/12 Forecast 334 97.6 -1,089 na -1,088 na -1,091 na -68.8

Based on total shares outstanding, excl. treasury shares

MEDRx Co., Ltd. （4586 Mothers） August 28, 2020

2/16


A venture company in the

business of developing

transdermal absorption

formulations

The company has proprietary

technologies, giving its

products a higher probability

of success than other new

drug discovery businesses

Business Model

In broad terms the company is involved in developing transdermal absorption

formulations using the active ingredients of existing oral and injectable drugs. In

terms of business model, it licenses out these formulations to pharmaceutical

companies, collecting milestone payments and, after launching in the market,

royalties on sales.

Transdermal absorption formulations make up a growing medium to long-term

segment of the pharmaceutical market. Among their attributes are maximisation of

pharmaceutical effect, reduced side-effects and better quality of life for the patient.

These attributes are achieved by the following:

① Providing a consistent and sustained release of active ingredients: enabling the

maintenance of a constant volume of the drug in the bloodstream.

② Little or no first-pass effect: while the efficacy of oral drugs can be reduced to

10-20% as they pass through the liver, this is not an issue in the case of

transdermal absorption formulations.

③ Better medication compliance: suitable for patients who find it difficult to take

oral drugs due to problems swallowing, and also reduces the problem of

forgetting to medicate.

④ Unlike drug delivery by injection, transdermal delivery is painless.

⑤ Transdermal delivery lends itself to a wide range of conditions.

The MEDRx business model is also distinctive in two ways:

(a) It is low risk (i.e. high probability of success) because it does not involve

the discovery or development of new active ingredients.

(b) The company has its own transdermal absorption technology using ionic

liquids (ILTS®: Ionic Liquid Transdermal System), which distinguishes it

from other companies.

Note: Ionic liquids are salts in liquid form at room temperature composed of ions which

are resistant to crystalization. They are non-volatile, non-flammable and electric

conductive. In recent years these properties have led to applications in lithium battery

electrolysis and elsewhere. With ILTS®, MEDRx was the first to develop the technology

for the transdermal absorption of ionic liquids, thus facilitating the administration of

drugs which are normally difficult to administer transdermally. With existing technology,

transdermal absorption was difficult in the case of nucleic acid or macromolecular

formulations, but ILTS® has made it much easier.

Source: MEDRx company briefing

Company outline – management philosophy


3/16


There are four main products

using MEDRx’s proprietary

ILTS® technology. Of these,

one has been licensed out and

one was the subject of an

NDA in August, 2020

A memantine transdermal

absorption formula using

NCTS® nanocolloid

technology is being readied

for clinical trials

Another interesting feature of MEDRx’s ILTS® is that it has built high barriers to

entry. The company has a library of several hundred ionic liquids formed from

combinations of compounds with a track record of use on human subjects as

pharmaceuticals and additives. It also has extensive know-how on selecting

optimum ionic liquids for particular drug properties, and formulation expertise on

maintaining and improving the transdermal properties of ionic liquids.

The company’s primary target is the US market for transdermal absorption

formulations. This preference is based mainly on the potential size of the US market

for tape-type formulations.

In addition, by basing its activities in the US on existing formulations, the clinical

trials required to win FDA approval are simpler than for new drugs (i.e. although not

true in all cases, after Phase 1 Phase 2 can be omitted and the process moves straight

to Phase 3). Also, worth bearing in mind is the fact that patch and tape-type drugs

tend to command higher prices in the US than in Japan.

Major current pipelines

Source: company website

The main products using this ILTS® technology are lidocaine tape (MRX-5LBT)

for which an NDA was recently submitted to the FDA, tizanidine tape (CPN-101,

MRX-4TZT), which has been successfully licensed out to Cipla Corp., fentanyl tape

(MRX-9FLT), and oxycodone tape (MRX-1OXT). However, due to adverse

sentiment related to opioids in the US the development of oxycodone tape has been

suspended.

The company also has a transdermal absorption technology using nanocolloids

(NCTS®: Nano-Sized Colloid Transdermal System). As mentioned earlier, the

ILTS® technology is used in the transdermal absorption of macromolecular agents

such as peptides and nucleic acids. The NCTS® technology, however, aims to

enhance transdermal absorption of relatively low molecular mass agents by

rendering pharmacologically active components into nano-sized colloids. Among

products now at the development stage for which information has already been

disclosed is MRX-7MLL, a transdermal absorption formulation using memantine

(for the treatment of Alzheimer’s), which can suppress the skin irritation which

memantine usually causes.


4/16


There is a big potential

market for microneedle

patches in the form of

“vaccination patches”

Microneedles represent a

promising technique for

tackling pandemics in less

developed countries with a

poor medical infrastructure

The company has also developed a technology using microneedle arrays as a sort of

“vaccination patch”. Normally, a vaccine applied to the skin cannot penetrate

because of the barrier presented by the stratum corneum. The microneedle technique

works by using super-fine needles to open apertures in the surface of the skin,

thereby allowing access to the vaccine. Since microneedles are less than 1mm in

length they pierce the skin without reaching the nerves, making painless

vaccinations possible. A microneedle array is a sheet-like group of microneedles,

rather like the pin-head beds used in ikebana only with needles several hundred

micrometers in length (see image below).

MEDRx microneedle patch

Source: MEDRx

In addition to providing a physical barrier preventing the intrusion of foreign matter

into the body, the skin also has the immunological function of expelling foreign

matter. Antigen presenting cells, which are present in the epithelium under the

stratum corneum as Langerhans cells, and under the dermis as dermal dendritic cells,

play an important role in defensive reactions in the body. A powerful immune

response can be elicited by efficiently conveying vaccine to these antigen-presenting

cells.

This technique has important social implications. Vaccination patches using

microneedles avoid the pain of injections (minimally invasive) and their use does

not require medical staff (self-administration). In addition, the application of a solid

vaccine antigen to a microneedle represents a promising technique for tackling

pandemics in developing countries where room temperature storage is the norm,

transportation and preservation is rudimentary, and the medical environment is

inadequate.


5/16


Lidocaine tape is a non-

opioid local anaesthetic

While Lidoderm® is

indicated for postherpetic

shingles it is also widely used

off-label for neuropathic pain

In the autumn of 2018

ZTlido®, a lidocaine tape

formulation, was launched

and sales grew rapidly

Also worth bearing in mind

is the possibility that the

opioid crisis will create

demand for lidocaine tape

Developed by MEDRx to

have attributes distinguishing

it from conventional patch

formulations

MEDRx files NDA in the US for lidocaine tape

Lidocaine tape (MRX-5LBT) is a non-opioid local anaesthetic to treat neuralgia

after herpes zoster (shingles). This is a painful disease caused by the reactivation of

chickenpox/herpes zoster virus concealed in the dorsal root ganglia during

childhood. In most shingles patients the pain subsides in response to treatment of

the blisters, but in around 10% of cases pain continues long after treatment, leading

in some cases to postherpetic neuralgia. The treatment used to consist mainly of a

nerve block and drug therapy, but in March 1993 a transdermal absorption pad called

Lidoderm® was approved in the US. Lidoderm® became the first drug of choice in

the treatment of postherpetic neuralgia, at one time commanding sales of USD1.2

billion. In addition, it has also been widely used off-label in the treatment of

neuropathic pain. It might be that growth in the population over age 45 will be a

medium-long term growth driver.

In terms of market size, in the US in 2018, 114 million patches were sold. There are

already a number of Lidoderm® generics selling at around USD2-3 per patch, and

in October 2018 the US company Scilex Pharmaceuticals, a subsidiary of Sorrento

Therapeutics, launched ZTlido®, a lidocaine tape with superior characteristics to

Lidoderm®. It sells for USD8.95 per tape and sales in 2019 grew to USD21 million.

In the first half of 2020 sales totaled USD10.97 million, a YoY growth rate of 45.9%.

ZTlido® sales trend

Source: Sorrento Therapeutics’ Securities Reports

It appears that the market for lidocaine tape, a non-opioid formulation, has been

given an additional boost by the increasing seriousness of the opioid crisis in the US.

There is, for example, data showing that 22% of patients suffering from postherpetic

neuralgia are treated with opioids, suggesting a potentially large number might be

willing to switch to non-addictive lidocaine tape.

Ref: December 2019 - Sorrento Therapeutics rejects takeover bid

The parent company, Sorrento Therapeutics, of Scilex Pharmaceuticals, which

sells ZTlido®, received and subsequently rejected an offer pitched at 245% of

its share price. With the US still badly shaken by the opioid crisis the

acquisition offer reflected the non-opioid characteristics and consequent

growth prospects of ZTlido® and its generics. There are some analysts saying

that a 500% premium would be appropriate.

MEDRx developed MRX-5LBT with the following competitive characteristics:

① Ease of use since it is a tape formulation, not a patch

② Uses only 30% of lidocaine as conventional products for the same effect

③ Little skin irritation, superior adhesiveness and sustained adhesiveness (does

not peel off when perspiring)

(million　USD)

2018

4Q 1Q 2Q 3Q 4Q 1Q 2Q

2.6 2.9 4.7 3.8 9.7 5.2 5.8

2019 2020


6/16


Demonstrated superior

transdermal absorption in

May 2016

June 2018: demonstration of

bio-equivalence (BE) with

existing patch formulations

More trials were required in

view of the potentially

prolonged use of this therapy

and the company conducted a

fund raising program in the

first half of 2019 to pursue a

full range of tests

Phase 1 test results in May 2016 suggested that, using the ILTS® methodology,

MRX-5LBT could more rapidly and in greater quantity achieve subcutaneous tissue

penetration than Lidoderm® (lidocaine patch)

At the current time, in the lead-up to an application for approval, the following two

avenues suggested selves:

Plan A: Conduct Phase 3 trials showing superior efficacy to Lidoderm®

Plan B: Show bioequivalence with Lidoderm®

After consultations with the FDA, the company gave comprehensive consideration

to a number of questions: the level of difficulty involved in acquiring approval; the

product competitiveness and level of competition assuming development was

successful; and the positioning of the product within MEDRx’s overall development

portfolio. It was decided as a result to select Plan B, since the time required to win

approval was shorter and the probability of proceeding that far was greater. The

company then announced in June 2018 that test results had shown bioequivalence

(BE) with Lidoderm®. The company has indicated that it now plans to carry out

clinical trials using the methodology normally associated with the development of

transdermal drugs in order to confirm the safety of lidocaine tape on the skin of

healthy individuals, and to apply for approval in 2020.

However, in discussions with the FDA it was determined in November 2018 that

since the product was for chronic conditions which could require prolonged use,

more testing than had originally been anticipated would be necessary. The company

is aiming to apply for new drug approval in 2020 and the costs of testing needed to

that end would exceed the original estimate by something in the order of JPY700-

800 million. To raise the funds necessary for that and other purposes at an early date

the company announced a capital raising exercise in February 2019. By May 2019

it was financially able to carry out the tests required by the FDA and expedite

product development.

As a result, in July 2019 the company was able to successfully demonstrate in tests

that adhesiveness was superior to that provided by Lidoderm®. It was also able to

demonstrate in skin irritation tests conducted in December 2019 that the level of

irritation was less than that of Lidoderm®.

Source: Company briefing materials


7/16


As a result of all these efforts

all clinical tests were

completed in February 2020

and a fresh NDA was finally

submitted on August 27 2020

The expectation is that this,

MEDRx’s first product in the

US market, will provide the

company with a certain level

of revenue stability

The company is planning to

develop lidocaine tape for

Europe but the prohibition on

off-label applications makes

it a lower priority

Further, in January 2020 adhesiveness evaluation tests successfully demonstrated

sufficient adhesiveness to perspiring skin during physical mobility.

Source: Company briefing materials

All tests were completed in February 2020 and the company was finally able to

submit a fresh New Drug Application (NDA) to the FDA in August 2020.

The schedule now is for approval in 2021 and product launch in 2022, with decisions

on licensee and licensing terms either before or after approval is received. Assuming

a market price on a par with ZTlido® and a 10% market share, expected annual sales

are calculated at around JPY9 billion, assuring MEDRx that its first US product will

be a stable source of revenue.

On April 16 2020, the company concluded a joint R&D agreement with D. Western

Therapeutics Institute, Inc. (DWTI). Under this agreement, commensurate with

commercial success in the US market MEDRx is to receive from DWTI total

milestone revenues of JPY200 million (we surmise JPY100 million on submission

of an NDA in the second half of 2020, and JPY100 million on receipt of approval in

2021). DWTI will be paid a portion of royalties income after launch in the market.

Elsewhere, MEDRx is looking to sell its lidocaine tape formulation in Europe. It has

already had meetings with a European regulator (BfArM: Bundesinstitut für

Arzneimittel und Medizinprodukte) and has discussed and confirmed a data package

required for a new drug application. The five major European countries (Germany,

France, the UK, Italy and Spain) were estimated in 2018 to have a potential lidocaine

adhesives market of approximately JPY23 billion. Central to this market is

Versatis®, produced by Grunenthal. We infer that MEDRx is hoping for sales of

several billion yen. However, the off-label use of lidocaine tape has recently been

banned in Europe and it seems the market is shrinking. Europe requires a different

set of tests and, while the funds raised in November 2019 to April 2020 (No.15

options) were sufficient for fentanyl tape, they were not sufficient for European

development of lidocaine tape. The new financing plan announced in July 2020

(described below) was designed to make up this shortfall but it has a lower priority

than other product developments.


8/16


Fentanyl tape is customarily

used to treat medium-severe

cancer pain. While this is a

big market the authorities are

very concerned about cases of

accidental misuse

MEDRx’s decision to go

ahead was based on the

importance expressed by the

FDA of the prevention of

accidental misuse

Clinical development (pilot

PK tests) began in July 2020,

with an NDA planned for

2022

The company is boosting its

efforts to promote fentanyl

tape as its most important

product pipeline by

distinguishing it from other

fentanyl tapes and giving it

added value. For this purpose,

it is focusing on acquiring an

“accidental misuse

prevention” label

Microneedle research and

development has progressed

since the 1990’s alongside

advances in micro-fabrication

techniques

Start of clinical development of fentanyl tape (MRX-9FLT)

Fentanyl is a type of opioid administered, usually in patch form, for the treatment of

severe pain, chronic pain and cancer pain. Such patches are customarily used in

medium-severe cases of cancer pain. It is useful for cancer patients who cannot take

medicines orally because it can be administered transdermally, and is less likely to

cause drowsiness and constipation than other opioid preparations, so it can be used

for patients who have such side effects.

In the case of conventional fentanyl patches every year there are instances of young

children and infants dying after chewing on or applying used patches which have

been discarded. This is of serious concern to the authorities. The new fentanyl tape

formulation that MEDRx is developing uses the company’s own proprietary

technology to minimise or prevent accidental misuse. At meetings with the FDA in

March the view was expressed that this was of fundamental importance. MEDRx

then stated, in November 2019, that fentanyl tape (MRX-9FLT) would be a new

product pipeline for the company.

An application to conduct clinical tests was filed with the FDA in March 2020 and

in July 2020 a start was made on clinical development tests (pilot pharmacokinetic

studies to make a preliminary confirmation of blood concentration levels and

kinetics). Following the PK tests and pivotal biological equivalence tests the

company plans to seek the FDA’s guidance before undertaking tests on skin safety

and the prevention of accidental misuse. It plans to submit an FDA in 2022.

With the suspension of development work on oxycodone tape it appears that fentanyl

tape could become MEDRx’s most important product pipeline. To distinguish it

from other fentanyl tape formulations and to increase added value it is important to

be able to claim an “accidental misuse prevention function”. In the last round of

financing (November 2019-April 2020) the company was able to secure the

minimum funds necessary to acquire prescribed drug approval for its fentanyl tape.

It announced a new round of financing in July 2020 to secure the JPY418 million

additionally required to undertake the tests required to acquire and display an

“accidental misuse prevention” label.

Upgrade of the microneedle clinical trial facility

Although the microneedle concept has existed since the mid-1970’s, research had

been bedeviled by problems in production technology and by considerations of cost-

effectiveness. However, with the development of micro-fabrication technology since

the 1990’s there have been advances in microneedle development.

There are four types of microneedle. One, developed in Japan by ASTI Corporation,

is the hollow microneedle. Like the standard injection needle, it has a hollow cavity

into which the antigen solution is poured prior to administration. Another involves

the use of solid microneedles in an array to puncture the skin, following which the

needles are removed and the vaccine antigen is applied. Since these two methods

use a liquid containing the vaccine antigen, they require cold chain logistics in the

same way as the standard vaccine formulation, and this has stymied widespread

acceptance. The third method involves the use of a microneedle array, the surface of

which has been coated with dried vaccine, to puncture the skin. Since the vaccine is

not in solution but in a dried state it is highly stable and amenable to use with live

vaccines. This is the methodology being pursued by MEDRx and Nipro Pharma and,

overseas, by 3M. To improve safety (e.g. to remove the danger of a broken needle


9/16


Zosano Pharma has

completed a filing for a

migraine application, and

Radius Health is now at Stage

3 targeting osteoporosis. Both

companies plan to delegate

mass production externally

remaining in the body), efforts are being made to make microneedles using

biodegradable polymers. The products being made by these companies seem to

differ in terms of the shape of the needles, the density of the needles per unit of skin

surface, and the coating solution. In the fourth methodology, being developed by

Fuji Film, the vaccine antigen is kneaded into the microneedle, the biopolymer

needle point in the skin then decomposes and the antigen is released.

A further difference between the various methodologies is in the use of applicators

to ensure that the microneedles are accurately inserted directly into the skin.

MEDRx’s device can be inserted using only hand strength, while the Nipro and 3M

devices seem to require spring activation.

Globally, developers of medical microneedle techniques include the US companies

Zosano Pharma Corp and, in a tie-up with 3M, Radius Health Inc. Domestic

developers include MEDRx, Fuji Film and Nipro. None have received regulatory

approval so far but in December 2019 Zosano Pharma submitted an application to

the FDA for a microneedle delivery of a treatment for migraine. Zosano and Radius

Health are developing in-house but delegating production to Patheon, a unit of

Thermo Fisher Scientific and a major mass producer of drugs.

Ref 1： Zosano’s Qtrypta™ (indicated for migraine, application filed)

Applicator for inserting microneedles into skin

Ref 2: Radius Health’s Abaloparatide-Patch (now at Phase 3)

Note: Microneedle applicator for injecting TYMLOS® (osteoporosis drug). The coin at

left is to allow size comparison.

On April 10, 2018 MEDRx announced it was issuing a third-party allotment of

options (Issue no. 10) to raise approximately JPY2.6 billion to finance a production

facility and bring to fruition 15 years of microneedle R&D. From May of the same year the company began construction of a clinical trial facility (estimated cost

JPY400 million).


10/16


MEDRx plans to target

vaccines

In the case of vaccines, the

existence of a manufacturing

facility is key to any tie-up,

but raising the finance is

problematic

Provision of a test facility

went smoothly

Amidst talks with possible

tie-up candidates the

company decided to upgrade

its clinical trial facility to

handle proliferative viruses

and genetically modified

organisms

MEDRx plans to use its microneedles mainly with vaccines, an area which requires

high volumes and reliable supply. There is little interest among the major

pharmaceutical companies themselves for getting involved in developing medical

instruments, and little likelihood that they will develop and produce microneedles

in-house, even if they develop the vaccines as part of group operations. For this

reason, MEDRx has announced plans to build a mass production plant (estimated

cost JPY3 billion or more) financed by a capital increase in order to demonstrate an

actual mass production plan and to advance consideration of collaboration with a

major company.

However, in November 2018 MEDRx temporarily suspended its plan to build a

manufacturing plant because of difficulty in raising the finance. Instead, in 2019 it

used milestone income from tizanidine tape development to proceed with the

construction of a clinical test facility, which began operating in April 2020. It now

has an infrastructure capable of manufacturing products to GMP standards for

administration to humans in clinical tests.

MEDRx held feasibility discussions with a number of domestic makers and, to

improve the probability of a joint venture, in July 2020 decided to upgrade its

clinical trial facility to handle proliferative viruses and genetically modified

organisms. To enable this, it simultaneously announced a third-party allotment of

new shares and its 17th share option issue to raise an estimated JPY1.118 billion (of

which JPY480 million was earmarked for work on the microneedle project).

MEDRx will itself handle all the work up to clinical trials, after which it is

conducting various feasibility studies, including outsourcing production, with a

view to pursuing an operational tie-up.

MEDRx microneedles

Microneedles attached to applicators Simply depress and dispose

are distributed and supplied.

Source: MEDRx


11/16


Preclinical tests on

memantine patches have

already been completed.

Since Phases 2 and 3 are not

required the selection of

prospective companies to

undertake initial-final

commercial production has

been carried out in the US but

has been somewhat delayed

due to the effects of COVID-

19

Looking to submit an IND in

2020

Tizanidine tape has been

licensed out to Cipla.

Positioned as a strategic

prospect in the area of CNS

treatment

Status of other product candidates

(1) Memantine patches (MRX-7MLL)

MEDRx is developing a memantine patch (trade name: Memary) for the treatment

of Alzheimer’s. In the past, it had been developing a patch (MRX-5DML) utilizing

the NCTS® technology and combining donepezil (brand name Aricept) and

memantine, but in the United States, the sales volume of this combination did not

grow, while the ratio of oral prescriptions of memantine and donepezil each was

high. Hence, a decision was made to switch to developing patches using the

memantine monotherapy (MRX-7MLL) and donepezil monotherapy separately.

Companies like Corium, Nitto Denko and Hisamitsu Pharmaceutical have advanced

the development of donepezil patches, but memantine has been ahead since NCTS®

technology is more active. Non-clinical trials began in July 2018.

In December 2018, the FDA said, in response to a pre-clinical guidance request, that

the content of the current non-clinical trial was sufficient to initiate Phase 1 and that

if bioequivalence to oral memantine was demonstrated, Phases 2 and 3 would

become unnecessary. The company believes this has made it possible to submit an

NDA relatively early.

Non-clinical tests were completed in 2019 and preparations are now underway to

submit an application for clinical tests. Since Phases 2 and 3 are unnecessary, the

company is now selecting a partner to do the production from the start to commercial

production. However, discussions to this end have been delayed somewhat by the

current COVD-19 pandemic and restrictions on travel between Japan and the US.

The plan now is to submit an IND (Investigational New Drug) application as soon

as availability permits and to complete the filing within 2020. After acceptance of

the IND, pharmacokinetic tests (two stages) and bioequivalence tests will be

conducted, allowing an NDA submission to be made probably in 2022-2023.

(2) Tizanidine tape MRX-5TZT (CPN-101)

Tizanidine tape employs tizanidine, a central muscle relaxant used also for relieving

shoulder stiffness, rendered transdermal by ILTS®. Phase 1a trials in February 2017

confirmed that the level of sustained concentration in the blood stream is comparable

to oral formulations with a reduction in drowsiness and other side effects.

At the present time tizanidine is only available in oral form – there are no competing

patch or tape-type products. In April 2017, the company concluded a development

and sales licensing agreement with Cipla USA, the wholly owned subsidiary of the

major Indian pharmaceuticals company Cipla, covering the global market excluding

the US and East Asia. (Subsequently, due to restructuring within the Cipla Group,

the contractual partner has been changed to Cipla Technologies, LLC., hereafter

referred to as Cipla.) Cipla made a lump-sum contract payment of JPY160 million

yen in 2017 and appears to have agreed to milestone payments of up to USD30

million and, after launch, stepped royalties in proportion to sales.

There was subsequently a delay in scaling up production but in September 2019 pre-

set conditions were met and Phase 1b was successfully cleared. As a result,

milestone payments came to USD1 million in 2019, and are due to be USD2 million

in 2020 and USD3 million in 2021.


12/16


The plan was to start Phase 2

in the second quarter of 2020,

but this has been delayed

slightly as a result of COVID-

19

Cipla was planning to run Phase 2 dose escalation trials on a small number of

patients starting in Q2 2020 and lasting for about 6 months. This was to investigate

pharmacological effect and side effects, such as drowsiness. However, due to the

spread of COVID-19 the start date was pushed out to the second half of 2020. Our

guess is that Phase 3 (lasting 18 months to 2 years) will begin in the second half of

2021, that an NDA will be submitted in early 2023 and that approval will come

approximately one year later. Cipla is positioning this product as a strategic CNS

pipeline.

Source: Cipla annual report, 2018-2019


13/16


In addition to sales of

Iodocoat ointment we can

expect milestone revenues for

tizanidine tape of JPY210

million and milestone

revenues for lidocaine tape of

JPY100 million

Cash on the balance sheet at

the end of June 2020 stood at

JPY1.46 billion and second

half SG&A expenses

(including R&D) are forecast

at around JPY700 million. If

we add in the estimated

JPY410 million cost of

upgrading the microneedle

facility, and take into account

the JPY310 million sales

revenues from the two

milestone payments, it is

possible that year-end cash on

the balance sheet will fall to

around JPY500 million

2020 results outlook and possible financing

Sales in 2020 are forecast at JPY334 million, made up of JPY100 million in

milestone payments from DWTI for joint development work on lidocaine tape,

JPY210 million in milestone payments from the licensing out of tizanidine tape to

Cipla, and sales of Iodocoat ointment. It should be noted that revenues in the first

half were JPY15 million, solely from sales of Iodocoat ointment. Milestone revenues

from Cipla were originally expected in the first half but a delay to the start of Phase

2 due to the spread of COVID-19 in the US has meant that both milestone payments

are now likely to occur in the second half.

The forecast is for R&D expenditures in 2020 to be below the level of the previous

year at JPY1.145 billion because, despite the start of fentanyl tape clinical trials,

there will be a fall-off in costs associated with lidocaine tape. The spread of

COVID-19 in the US has meant delays in clinical trials and this has also contributed

to first half R&D costs falling below plan, but these costs will only be shifted to the

second half, so no change to projected costs for the full year. As a result, operating

revenues in 2020 are forecast to record a loss of JPY1.089 billion.

MEDRx profit and loss

Source: Compiled by Fair Research Inc. from short-form financial statements

There was cash of JPY1.46 billion on the balance sheet at the end of June 2020. The

company’s capital raising plan announced in November 2019 (issue of No. 15 new

share options) was completed on April 3, 2020. However, it brought in only JPY736

million, compared to a target of JPY1.054 billion. This was enough to cover the

costs of fentanyl tape development but only part of the costs of lidocaine tape.

SG&A expenses (including R&D expenditures) are projected at JPY1.420 billion

for 2020. The company is expecting revenues of JPY310 million in the second half

from two milestone payments, and is planning second half SG&A expenses

(including R&D outlays) of JPY703 million, but this does not include costs

associated with the upgrading of the microneedle trial facility. Including those costs

would probably reduce cash on the balance at the end of December to around

JPY500 million. While development milestones from Cipla should be a source of

revenue going forward, the costs of further fentanyl tape development and continued

development of memantine tape suggest a need for greater cash resources. This need

lies behind the cash call announced on July 28.

(JPY million)

2012/12 2013/12 2014/12 2015/12 2016/12 2017/12 2018/12 2019/12 2020/12

(company est.)

Sales 87 68 26 37 22 198 8 169 334

　Product Sales 71 33 26 37 22 28 8 23 15

　R&D Revenue 16 36 0 0 0 170 0 146 319

Cost of Goods 33 8 9 12 8 7 2 5 3

SG&A 621 664 1,020 1,025 1,357 1,174 1,279 1,792 1,420

　R&D Cost 415 397 718 716 1,074 888 980 1,512 1,145

　Others 206 267 302 309 283 286 299 280 274

Operating Profts -567 -604 -1,003 -999 -1,342 -983 -1,273 -1,627 -1,089

Recurring Profits -578 -616 -1,012 -990 -1,301 -988 -1,285 -1,633 -1,088

Net Income -571 -621 -1,016 -878 -1,259 -884 -1,267 -1,616 -1,091


14/16


The company announced a

JPY1.12 billion financing in

view of the post-2021

intensive development of

fentanyl tape and the further

development of memantine

patches

The assigne is boutique

investment company, Weiss,

whose investment style is

fundamentals analysis-

oriented

An outline of the recent capital raising exercise (to raise an estimated JPY1.118

billion) and proposed uses of the funds raised is given below.

Outline and purposes of financing

Raised from issue of new shares: JPY200 mil.

Issue and exercise of new share options: JPY940 mil.

Costs of issue -JPY22 mil.

Total JPY1.18 billion

① Upgrading of the microneedle clinical trial plant JPY480 mil.

（August-December 2020）

② Fentanyl tape

Cost of tests to acquire “accidental misuse prevention” label JPY418 mil.

(January-June 2021)

③ Lidocaine – European development costs JPY220 mil.

(January-December 2021)

Circled nos. show order of priority

（）Disbursement period

Exercise commitment: new share warrants – around one quarter to be

exercised by November 25

Lock-up period: 180 days

Assignee：Japan International Partners LLC

This fund is managed by the US company, Weiss Asset Management LP

Maximum dilution: 24.15％

Source: MEDRx: “Issuance of new shares through third-party allotment and exercise

price modification clause, Series 17 new stock options (with exercise designation

clause)” July 28, 2020

In order to access the funds at an early date there is a commitment to exercise one-

quarter of the new share options within 70 days. If a fall in the share price prevents

the full amount being raised the amount raised will be assigned in priority to, firstly,

the microneedle clinical trial facility, secondly, the acquisition of the desired label

for fentanyl tape, and thirdly, the development of lidocaine tape.

The allottee is Japan International Partners LLC, managed by Nippon Opportunity

Management LLC, an affiliate of Weiss. In practice, it is a fund managed by the US

company, Weiss Asset Management LP. It is a multi-strategy fund founded in 1991

by an American economist, Andrew Weiss. It has 67 employees with headquarters

in Boston with offices around the world, including San Francisco and Hong Kong.

It manages assets of USD3.6 billion (end of March 2020) for clients including

university foundations, pension funds and government institutions, using an

investment style based on fundamentals analysis to seek out true value opportunities.

Weiss is not an activist investor but a boutique with a pure investment purpose.


15/16


MEDRx has now filed an

NDA for lidocaine in a

market, the US, particularly

receptive to such products in

reaction to the opioid crisis

MEDRx is now stepping up

investment in plant and

equipment for its microneedle

clincial trial facility with a

view to an operational tie-up

Clinical trials have begun for

MEDRx’s fentanyl tape The

company intends to acquire

an “accident-proof” label in

order to distinguish it from

others and to give it increased

added value

The company has announced

a new round of financing to

strengthen development, and

Weiss, an investment

boutique whose pursuit of

value is supported by

rigorous fundamenals

analysis, should be able to

help

Conclusion

In August 27th 2020, MEDRx finally filed an application for lidocaine tape, which

was to be its first product for sale in the US market. In reaction to the opioid crisis

the country was seeing a lot of enthusiasm for non-opioid agents. Lidocaine was one

of the beneficiaries of this. A forerunner in the market, ZTlido®, had quickly built

up sales, such that Sorrento, the parent company of Scilex, which sold ZTlido®, was

the subject of a takeover bid pitched at 245% of its market price (rejected in

December 2019). Lidocaine tape is likely to be approved by the US authorities in

2021 and to be launched in 2022, providing MEDRx with a product capable of

producing a certain level of stable revenues.

In the area of microneedles for its "attachable vaccines” the company’s clinical trial

facility after many twists and turns, is finally operational (able to produce GMP-

standard products for administration to humans in clinical trials). The company has

discussed feasibility studies with a number of domestic manufacturers and is

planning to move forward with an operational tie-up. To this end it has decided to

upgrade its clinical trial facility to handle proliferative viruses and genetically

modified organisms.

With oxycodone tape now terminated it looks like fentanyl tape could become

MEDRx’s biggest pipeline. In order to distinguish it from other fentanyl tape

products and to increase added value it is important to acquire the right to describe

it as accident-proof. The November 2019-April 2020 financing provided sufficient

funds to at least underwrite the costs associated with recognition as a prescribed

medical treatment. The company is now planning to undertake tests allowing it to

display an “accident-proof” product label.

The July 2020 financing was announced to further provision the microneedle clinical

trial facility, to finance the labelling tests needed for fentanyl tape and to provide the

funds which were not available from the previous cash call to finance lidocaine tape

development in Europe.

MEDRx seems to us a worthy investment for Weiss, whose investment style is the

pursuit of value based on rigorous fundamentals research.

Note: Please see our last report (dated March 17, 2020) for a review of each pipeline’s value

Fair Research Inc.

A1 Bldg. Kayabacho 5F, 1-6-12 Shinkawa, Chuo-ku, Tokyo 104-0033

Tel. 03-6403-9217

Email: [email protected]


16/16


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