Oasmia Pharmaceutical — An appealing metamorphosis

Oasmia Pharmaceuticals, founded in 1999, is headquartered in Uppsala, Sweden, and employs 59 personnel (post restructuring in 2021 there will be 27). Oasmia listed on the Nordic Growth Market (Nordic MTF) in 2005 and has been listed on Nasdaq Stockholm since 2010. Oasmia has raised SEK1.95bn to date. The company’s R&D innovation capabilities are centred on its XR-17 technology platform, which enables nano-sized particle formulations of active pharmaceutical ingredients (APIs) to be water soluble. Its focus to date has been on widely available cytostatic cancer drugs; lead assets include Apealea (paclitaxel micellar) and docetaxel micellar with the main advantage of shorter administration time. With its promising technology platform applicable across a broad range of drugs and a global commercial agreement for Apealea in place, the newly appointed management has realigned its strategic focus to achieving profitability in the near term. Oasmia is thus at a major inflection point; timely strategic and sales execution (through partners) is critical to deliver on its vision to become a profitable company, which we forecast from FY23 onwards contingent on achieving milestone payments from Elevar. With a lack of visibility on the amounts and timing of potential milestones, our forecasts are based on our assumption of $25m (SEK219.3m based on current FX) in milestone payments from Elevar in FY23 relating to launches in the US and additional countries in Europe. For FY24, we forecast $12.5m (SEK109.7m based on current FX) in milestone payments relating to US sales and launches in additional European countries.

Assigning a fundamental valuation to Oasmia requires consideration of the inherent value of the technology platform, potential clinical pipeline candidates and future partnership deals. However, our valuation of SEK2.82bn or SEK6.29/share including net cash (plus short-term investments) of SEK274m (at 31 July 2020) is exclusively based on a risk-adjusted model of the future royalties and milestones we expect from the Elevar deal for Apealea in ovarian cancer only (SEK1.76bn), docetaxel micellar in prostate cancer (SEK346.1m) plus an indicative value of the animal health business (SEK443.7m), which is in late clinical stage and we expect to be divested. We have not ascribed value at this point to the technology platform and unconfirmed candidates at an early stage in preclinical development; consequently, we see uplift potential as the pipeline progresses with potential out-licensing deals, and as Apealea moves into additional indications.

Oasmia is subject to various sensitivities common to speciality pharmaceutical companies, including commercialisation (pricing, reimbursement, uptake and competition) and financing risks. The key sensitivities for Oasmia relate to successful commercialisation of Apealea by partner Elevar (Apealea represents 62% of our Oasmia valuation) plus crystallising value from its earlier-stage pipeline. Oasmia is a turnaround story thus the successful execution and delivery on the strategic objectives by the new management is key. Our forecast profitability is dependent on royalties on sales and more importantly milestone revenues from existing partners; delay or failure to receive future milestones would compromise our premise that profitability is achievable in FY23. The US is a key market and Elevar is in discussions with the FDA on the pathway to approval for Apealea. Any need for additional clinical data could affect our approval timeframe and associated milestones.

In FY20 (Oasmia financial year ends 30 April), net sales of SEK201.8m related to the upfront payment of $20m from Elevar, and the operating loss was SEK30.1m. Net cash as of 31 July 2020 was SEK274m ($31.2m), following a SEK371.9m net capital raise in December 2019. Our net cash calculation includes a deduction of SEK80m for the short-term liability relating to the MGC Capital claim. However, we note this is largely offset by a counter claim held by Oasmia that has a face value of SEK60m (book value SEK40m). We forecast total revenues of SEK0.8m in FY21 (SEK96.9m in FY22). With the tightening of the cost base post restructuring we expect that Oasmia can break even in FY23, with profitability thereafter subject to regular milestone payments (we forecast a net loss of SEK137.2m in FY21 and SEK47.1m FY22). Oasmia has guided cash burn of SEK10m per month, which implies a cash runway into our break-even year of FY23.

Oasmia is at a major inflection point as it focuses on its transformation into an R&D-driven, profitable, speciality pharmaceutical company with commercially available assets developed in-house. The deal with Elevar Therapeutics means the worldwide commercialisation of Apealea (ex Nordic, Baltics, Kazakhstan and the Russian Federation) is now mainly in the hands of a partner, which will enable Oasmia to focus on its core drug development competencies and new strategic focuses. The Elevar deal terms consist of a $20m upfront licence payment, double-digit royalties on sales and up to $678m in sales, clinical development and regulatory milestones; this reflects Apealea’s potential value across multiple cancer indications beyond its initial approval for ovarian cancer (we assume $130m of the milestones relate to ovarian cancer). Newly appointed management (including CEO Dr Francois Martelet, plus board members) have outlined its vision for a new Oasmia and the steps required to complete the transformation. Importantly, management has started to deliver in a short space of time and in June 2020 set out a defined plan to realign the business through organic growth and strategic acquisitions, in addition to significant cost control (by moving away from direct commercialisation activities requiring operational cash) to focus on drug development and a partnering business model to extract optimal value.

Apealea was developed through Oasmia’s proprietary XR-17 platform technology, which solubilises water insoluble substances and can be applied to a wide range of compounds (including established drugs such as paclitaxel). De novo drug development is both costly and time-consuming. This is magnified by the high rates of attrition during clinical trials and the difficulty of meeting rising safety standards while maintaining clinical efficacy and an overall disease benefit. Oasmia is able to significantly de-risk this development process by using its proprietary XR-17 platform technology to reformulate currently approved drugs that are off patent and already have proven safety and efficacy. These reformulated drugs are in principle patentable. Although the usual preclinical and clinical trials are still required for regulatory approval, in the US Oasmia may be able to take advantage of the 505(b)(2) regulatory pathway, allowing it to submit clinical data for the original legacy drug as part of the new drug application (NDA) submission, which may reduce R&D costs and may also reduce the time to the US market.

Apealea is a nano-sized particle formulation of paclitaxel, the API in Bristol-Myers Squibb’s (BMS’s) Taxol, which was the world’s first blockbuster oncology treatment. Today, paclitaxel is one of the most widely used chemotherapy agents in a variety of indications. Oasmia has utilised its proprietary XR-17 technology to formulate a water-soluble formulation of paclitaxel that is Cremophor EL-free and human albumin-free so that it has the potential to confer specific advantages to available paclitaxel formulations (including branded and generic Taxol in terms of improved tolerability, shorter infusion times and no mandatory corticosteroid premedication). Apealea is bioequivalent to market leader (by value) Abraxane, which ended Taxol’s monopoly with an improved formulation (and resulting tangible benefits of improved survival and quality of life to patients).

Apealea for the treatment of second-line (2L) ovarian cancer launched in Nordic regions in February 2020, and in the near term the focus will be on the potential for US NDA filing (through global partner Elevar). The full commercial supply on a pan-European basis will depend on Elevar finding a sub partner (although some patients will have early access via the agreement between Tanner Pharma and Elevar). The market opportunity for improved paclitaxel formulations has been established by human albumin-bound paclitaxel Abraxane (BMS/Celgene); consensus forecast peak sales for 2020 of $1.6bn encompasses a range of cancers. Initially Apealea will launch for second-line ovarian cancer, an indication Abraxane is not approved for. In order to crystallise the significant deal economics of the Elevar deal, the approval and commercialisation of Apealea in additional cancer indications is necessary. In terms of resource allocation Elevar will need to optimise investment into two or three value driving indications, (we believe Apealea will not be developed for indications for which Abraxane is approved) and we note combination studies with targeted therapies and/or PD-1 inhibitors will be a critical element of its future success. We do not include other indications in our forecasts and valuation as we have no visibility on future development plans.

Apealea is a water-soluble, iv formulation of paclitaxel that is solvent-free (no Cremophor EL solubilising agent used in Taxol). This is a particularly attractive value proposition as it significantly improves on the profile of a widely utilised chemotherapeutic agent with lower infusion time and removal of mandatory corticosteroid premedication vs conventional paclitaxel (Taxol). Apealea received approval in the EU for the treatment of second-line platinum-sensitive ovarian cancer in 2018. Additionally, Oasmia is developing docetaxel micellar (solvent-free formulation of Taxotere) in prostate cancer, a market that could potentially be larger than Taxol. We expect Oasmia to expand its pipeline offering as it looks to identify APIs to reformulate and advance into clinical development in core therapeutic areas, and additionally extract value from the platform by the potential out-licensing of non-core assets. Furthermore, XR-17 will also be utilised to explore combination drug formulations (XR-19); this is important as oncological therapeutic regimens move increasingly toward double/triple drug strategies; key to this is tolerable individual drugs and water soluble, solvent-free formulations lend themselves extremely well to such approaches.

In February 2020, Oasmia’s newly appointed board appointed Francois Martelet as CEO. A biotech/pharma industry veteran, Dr Martelet has a proven track record of delivering on strategic biotech turnarounds. This was followed by the appointment of Peter Selin as chief business officer in August and the appointment of Fredrik Järrsten as CFO in September (to start before 8 March 2021). In June 2020 management set out clear strategic goals for an operational and financial course to realising its aim to be cash flow positive in FY23. During 2020 Oasmia signed two collaboration agreements including the major commercial deal with Elevar and also a partnership with the Swiss Group for Clinical Cancer Research (SAKK) to conduct the first clinical trial of docetaxel micellar in advanced prostate cancer. Execution is critical; however, we believe the goals are sensible and achievable in the near term. Exhibit 1 highlights Oasmia’s strategic priorities.

Oasmia launched Apealea in Russia and Kazakhstan in 2015 and Nordic countries (Sweden, Denmark, Norway) in early 2020 and future launches will now be led by global commercialisation partner Elevar Therapeutics. Elevar has in-licenced rights globally (with the exception of Oasmia territories). The pathway and timing to US approval and launch are key given that Elevar plans to launch in this territory (Elevar will need to establish a commercial team in the US). Worldwide opportunities start with the European roll out (Apealea received CHMP approval for ovarian cancer in 2018) and Elevar is seeking to establish a partner for European commercialisation.

Elevar Therapeutics is a US based wholly owned subsidiary of publicly listed HLB, a Korean conglomerate. Elevar focuses on the development of oncology treatments with a view to commercialisation in the US. Its key assets in development include Apatinib (rivoceranib), a selective VEGFR2 inhibitor approved in China for gastric cancer and a BTK/JAK3 inhibitor (hematologic malignancies and rheumatoid arthritis). Elevar hold the worldwide rights for Apatinib, excluding China. Data from the global Phase III registration monotherapy study (ANGEL) in patients with metastatic gastric cancer, its most advanced indication, were announced in September 2019. With Apatinib progressing to US NDA submission, the in-licensing of Apealea should enable Elevar to establish its US oncology commercialisation team and enable further synergies on the launch of Apatinib (if approved).

In the US Elevar is in discussions with the FDA for Apealea; as such the exact timing of an NDA filing is not clear. Discussions may centre around whether the Apealea NDA can be prepared under the 505(b)(2) regulatory pathway; this is a hybrid between a new molecule entity (NME) regulatory pathway 505(b)(1) NDA and the abbreviated new drug application (ANDA) 505(j) regulatory pathway. Filing via the 505(b)(2) pathway means the NDA submission can include originator drug trial data, data that establishes pharmaceutical bioequivalence and demonstrates bioequivalence to paclitaxel. We note that the 505(b)(2) pathway benefits include shortened development time and lower costs, plus the potential for three to five years of market exclusivity but not necessarily shorter review time to approval (in 2017 Tufts published a review suggesting approval time for 505(b)(2) is nearly five months longer than NME). Elevar is engaged in the pre-NDA meeting with the FDA and we expect the US NDA to be filed based on the EU data. We forecast US launch in FY23, but note that if the FDA requests additional data or clinical trials, this would materially impact on our approval and associated milestone assumptions and, if this is the case, we would need to reassess our profitability forecast year of FY23. We note that in 2018 the FDA issued several guidelines pertaining to the application of nanotechnology in FDA-regulated products.

In July Elevar announced a partnership agreement with US based Tanner Pharma, a global provider of integrated specialty access solutions, that will facilitate access to Apealea on a named patient basis ex US in countries where Apealea is not commercially available. In Europe patients could benefit initially from early access (excluding the Nordic region, where Oasmia launched Apealea in February 2020). The launch of Apealea in the Nordics was hampered by COVID-19 and as a result no sales have been made to date. Under the named patient programme (early or expanded access programme), physicians can prescribe investigational or approved drugs prior to their commercial availability to patients with no therapeutic alternatives. In the near term we expect a partnering deal for Europe to be announced by Elevar to enable full launches across Europe with the accompanying country by country reimbursement negotiations.

The global paclitaxel market is dominated in value terms by BMS/Celgene’s Abraxane (approved for non-small-cell lung carcinoma (NSCLC), breast cancer, and pancreatic cancer), which reported $1.6bn global sales in 2019, while Taxol and its generic versions make up significant volumes. Despite a slew of novel cancer drug treatments transforming care for many oncology indications, established chemotherapy regimens remain a cornerstone of treatment that is unlikely to be fully displaced given cost effectiveness, broad applicability, accessibility globally and efficacy as monotherapy and in combination therapy. Reformulations are appealing for use in patients who experience adverse events on Taxol, or in those where a higher tolerated dose of drug is required (particularly in the resistant patient populations that Apealea is targeting). Apealea’s profile is differentiated to Taxol (shorter infusion time, no mandatory steroid premedication and no solvent-related adverse reactions) and combined with an optimal pricing strategy (vs Abraxane as opposed to competing with generic paclitaxel pricing) should enable significant uptake across its primary indication of second-line platinum-sensitive ovarian cancer, an indication not included on Abraxane’s prescribing label. Further sales and valuation uplift will be defined once we have clarity on additional indications sought, and clinical trials (including combination with PD-1 inhibitors and/or targeted therapies) are initiated and funded by Elevar. We note that Apealea is not being positioned to take on Abraxane indications.

Our valuation of the Elevar deal largely focuses on the potential milestone payments in the near term, with tiered royalties on sales (15–18%) for Apealea in ovarian cancer. We forecast global peak sales of $282m in this indication. Ovarian cancer is the eighth most commonly occurring cancer in women with c 300,000 new cases in 2018 globally. The US market is the largest and in 2017, 233,364 women in the US were living with ovarian cancer. Ovarian cancer incidence rates are c 11/100,000, and 70% of patients relapse after first-line treatment. We assume Apealea could be used in 10% of eligible US patients (second-line relapsed ovarian cancer) at its peak and pricing of $1,000 a cycle (six cycles) represents a significant discount to the $1,500 Abraxane pricing per injection. In Europe we assume a 10% peak penetration rate and pricing of $500 per cycle (six cycles). With opportunities in the rest of the world (RoW) including China, our RoW assumptions may prove conservative with pricing at $250 per cycle (six cycles) and 10% penetration. This leads to our peak sales forecast in 2028 of $282m (US $128m, EU5 $62m and RoW $92m).

Ovarian cancer typically presents in women over age 50 and treatment options, depending on stage at diagnosis, include surgical resection, chemotherapy, radiotherapy and novel cancer targeted therapies including VEGFR inhibitors. The standard of care first-line chemotherapy for epithelial ovarian cancer is a combination of paclitaxel and carboplatin. Approximately 70% of advanced-stage ovarian cancer relapses despite a raft of novel cancer drugs now available including VEGF inhibitors, PI3K/AKT/mTOR inhibitors and PARP inhibitors, and in these patients paclitaxel in combination with a platinum-based agent (eg carboplatin) remains the standard of care. Apealea is approved in Europe for 2L platinum-sensitive epithelial ovarian cancer, primary peritoneal cancer and fallopian tube cancer.

A critical outcome in a more tolerable formulation of paclitaxel is enhanced therapeutic benefit combined with improved tolerability, which lends itself to combination trials, increasingly important in the treatment strategies for cancer. Abraxane has been evaluated across various cancer indications and combination studies include with T cell checkpoint inhibitors, atezolizumab (NSCLC, triple neg BC). According to Evaluate Pharma, the sales split in 2019 was $545m in pancreatic cancer, $867m in breast cancer and $182m in NSCLC. With Abraxane dominating breast cancer and pancreatic cancer, it makes sense for Elevar/Oasmia to focus on other indications not covered by Abraxane and pursue combination strategies.

Apealea is a nano-sized particle formulation of paclitaxel, the API in Taxol, a naturally derived (from the bark of the Pacific yew tree, Taxus brevifolia) chemotherapy agent and a member of the taxane family of drugs that was discovered in 1962 by the US National Cancer Institute and then commercially developed by BMS. Paclitaxel acts as a mitotic inhibitor; it prevents rapidly growing cancer cells from dividing by attaching to scaffold-like structures of the cells called microtubules. This results in the blockage of the metaphase‐anaphase transitions, the inhibition of mitosis and induction of apoptosis (cell death) in a wide spectrum of cancer cells (and non-cancerous cells, thus a wide spectrum of side effects are observed with chemotherapy agents).

Taxol was the revolutionary cancer treatment of its time. Approved for ovarian cancer in 1992, Taxol went on to become one of the most successful chemotherapy agents, reporting sales of $1.6bn at its peak in 2000, before generic paclitaxel products became available in 2001. Peak sales of Taxol reflect approved indications for ovarian, breast and lung cancer, plus off-label to treat other cancers. One of the biggest issues of Taxol is its poor solubility in water, which was overcome by dissolving the API in ethanol, with the addition of a castor oil derivative known as Cremophor EL.

Despite its success, one of the main drawbacks of Taxol is its side effects that relate to the solvents used as excipients (as opposed to the API paclitaxel), which may cause life-threatening hypersensitivity reactions, which can include fatal anaphylaxis. While pre-medication with corticosteroids, diphenhydramine and H2 antagonists and slow infusion times have improved the severity of hypersensitivity reactions, there remains an unmet need for an improved paclitaxel formulation. Abraxis BioScience, recognising the need, went on to develop and successfully commercialise Abraxane (human albumin-bound paclitaxel) by carving out a market for the higher priced reformulation despite the availability of generic paclitaxel. The impressive uptake of Abraxane highlights the willingness to prescribe for a subset of patients who experience side effects with solvent-based paclitaxel, despite the significantly higher price.

To improve on Taxol’s formulation, work was initiated on compound ABI-007 (license to kill cancer), which combined paclitaxel with natural human albumin utilising nanoparticle technology to enable a solvent-free formulation. Abraxane (human albumin-bound paclitaxel particles for injectable suspension) had lower hypersensitivity reaction, and reduced infusion time compared to generic paclitaxel. Furthermore, the clinical data that led to Abraxane approval demonstrated superiority in reduction of toxicity vs Taxol leading to a significantly higher MTD for Abraxane. Abraxane received initial FDA approval in 2005 for metastatic breast cancer with later approvals for NSCLC and pancreatic cancer, and EMA approval in 2008.

Like Abraxane, Apealea offers a Cremophor EL-free formulation of conventional paclitaxel, and its improved profile means improved stability and pharmacokinetics (PK), and reduced infusion times compared to Taxol, as determined by the Phase III OAS-07OVA study in ovarian cancer (Exhibit 2). No toxicity has been observed with XR-17 doses of up to 200μg/ml (the maximum concentration tested) providing a fourfold safety margin. Importantly there is no evidence of the retinoid derivatives that constitute the XR-17 platform interacting with retinoid receptors and incurring the associated side effects. Apealea therefore exhibits an improved tolerability as well as reduced need for corticosteroid premedication always required with Taxol.

Preclinical studies of Abraxane show a higher dose of drug can be administered without corticosteroid premedication. In November 2015 Oasmia confirmed that the final data from the Apealea H2H comparison study vs Abraxane (both Cremophor EL-free) demonstrated superimposable paclitaxel PK profiles in patients with metastatic breast cancer. The cross-over study demonstrated virtually identical plasma levels of total and unbound drugs for the two formulations such that they are bioequivalent with regards to unbound paclitaxel concentrations. The latter is important as it is the unbound concentration that relates to clinical effect.

Despite multiple companies pursuing reformulations of Taxol, the marketplace globally remains dominated by Abraxane. Exhibit 3 highlights the different formulations of paclitaxel approved regionally or globally. For Apealea, pricing will be key to determining market share, as will be rolling out beyond the ovarian cancer indication.

We note competitors such as Lipusu and Cynviloq appear to be focused on their domestic markets. Besides Apealea, Sun Pharma Advanced Research Company’s (SPARC) Taclantis appeared to represent the biggest threat to Abraxane’s global monopoly over the reformulated paclitaxel market. Currently approved in India, this product boasts a higher maximum threshold dose than Abraxane (325mg vs 300mg), potentially allowing higher doses and improved efficacy. However, in February 2020 the US FDA issued a complete response letter rejecting Taclantis’s NDA in its current form. The company is working to address the concerns raised.

To date, no clinical studies have directly compared the efficacy of Apealea and Abraxane. However, Apealea does exhibits a similar PK profile to Abraxane. The absence of human albumin in this formulation is beneficial as Apealea does not require an albumin donor and has a reduced risk of microbial growth and viral transmission relative to Abraxane. Additionally, the relative simplicity of the XR-17 technology enables efficient and cost-effective manufacturing of Apealea, which should allow Apealea to be priced competitively vs reformulated paclitaxel brands. The particularly low ratio of excipient to API for Apealea also reduces the risk of excipient-based side effects and offers the opportunity for higher drug load capacities. We note that Elevar has not clarified its plans for which future indications and the related clinical trials it is planning for Apealea.

A potential disruption to the paclitaxel market could come after the patent expiry of Abraxane in the US in 2026 and Europe in 2022. Celgene (BMS) has been rigorously protecting Abraxane’s intellectual property from infringement and in 2015 filed a Citizen Petition to the FDA requesting the need for clinically demonstrated safety and efficacy for any ANDA or 505(b)(2) application that references Abraxane. This could potentially delay approvals of nano-formulations of paclitaxel. In March 2016, Allegan submitted a paragraph IV ANDA claiming its generic version of Abraxane did not infringe on Celgene’s patents. However, we note a generic version of Abraxane is yet to be approved in the US. In February 2019 the EMA approved Teva’s Pazenir as the first generic version of Abraxane in Europe for the treatment of metastatic breast cancer and NSCLC. We expect the emergence of generic versions of Abraxane to be slow due to the stringent manufacturing requirements necessary to prevent potential microbial and viral transmission from the human albumin component. However, we note that Abraxane could come under pricing pressures as competition increases.

Sanofi’s Taxotere is one of the most commercially successful and widely used chemotherapies, generating global sales in excess of €2.2bn in 2009, prior to the expiration of the patent in 2010. Taxotere is approved for the treatment of prostate, breast, head and neck, stomach and NSCLC. Docetaxel micellar (previously known as Docecal) is a nanoparticulate formulation (utilising Oasmia’s XR-17 platform technology) of docetaxel, the pharmaceutically active ingredient of Taxotere. Docetaxel has an inherently low aqueous solubility. To enable iv administration, docetaxel is solubilised through micelle formation with polysorbate 80 and ethanol as Taxotere. However, premedication with prednisone corticosteroid is always required to manage the severe side effects of these solubilising agents and this can have a detrimental impact on the therapeutic performance of the chemotherapy. Oasmia’s solubility enhancing XR-17 technology enables the iv administration of docetaxel without the need for the solubilising agents, and thus no mandatory requirement for steroid premedication.

Oasmia is evaluating docetaxel micellar in metastatic castrate-resistant patients, as such treatment involves a one-hour iv infusion of Taxotere every three weeks, with continuous exposure to prednisone (orally twice a day). Oasmia believes that this small patient population would benefit most from the use of docetaxel micellar, reducing the need to preload corticosteroids. In June 2020, Oasmia signed a partnership agreement with SAKK to conduct the first clinical trial of docetaxel micellar in patients with advanced prostate cancer in Switzerland. SAKK will be responsible for the management of the Phase Ib trial (n=18), while Oasmia will supply docetaxel micellar and fund the costs of the trial, which are not deemed material. The trial is expected to initiate in early 2021, with top-line results expected within the next 12–18 months that will determine the future development path. The dossier prepared from the Phase Ib Switzerland trial will be US compatible, allowing Oasmia to launch into a global Phase II study if the results are positive.

Clinical trials conducted in breast cancer validate the improved safety and tolerability of docetaxel micellar. The product was able to bypass a Phase Ia clinical trial and go straight into Phase Ib on the merit of safety, tolerability and PK data previously acquired from Phase I and II trials (230 patients treated in total) in metastatic breast cancer, prior to discontinuing its development in this indication. Oasmia recently presented data from both of these trials at ASCO20. The Phase I trial showed that docetaxel micellar is bioequivalent with Taxotere and exhibits a similar PK profile, in terms of both the maximum concentration and duration of exposure (Cmax and AUC). The Phase II trial was a multicentre, randomised, open-label study comparing docetaxel micellar vs standard of care Taxotere. Patients receiving Taxotere also received standard mandated premedication (corticosteroids), while those receiving docetaxel micellar did not. Fewer serious adverse events were reported with docetaxel micellar, which included side effects of neutropenia (52.0% vs 83.0%), leukopenia (15.3% vs 27.0%) and febrile neutropenia (14.3% vs 23.0%). Almost twice as many patients (12.2% vs 24.0%) required dose reduction due to the severity of these adverse events in the Taxotere arm. The primary endpoint of objective response rate was not reached and non-inferiority of docetaxel micellar in terms of efficacy could not be confirmed. This resulted in development of docetaxel micellar being discontinued in metastatic breast cancer.

Prostate cancer is the most common cancer in men. The American Cancer Society estimates there will be 191,300 new cases of prostate cancer diagnosed in the US in 2020. Almost all prostate cancers are adenocarcinomas, and established risk factors include increased age and specific inherited genetic conditions (such as Lynch syndrome and BRCA1/BRCA2 mutations). Around 76% of new cases are diagnosed at an early stage when the disease is still localised to the prostate. For many of these patients, active surveillance is the initial course of action. Treatment options for early-stage disease includes surgery and whole gland radiation therapy (side effects include impotence and incontinence). Hormone therapy that suppresses the production of androgens that drive tumour cell growth is used for patients with progressive disease, but this is not a curative treatment.

Prostate cancer that has progressed on hormone therapy is referred to as castrate-resistant prostate cancer. Despite receiving a combination of treatments 30–40% of patients have progressive disease. Chemotherapy remains a commonly used treatment for patients with late-stage, metastatic and castrate-resistant prostate cancer. The current standard of care for these patients involves a combination of the cytostatic agent Taxotere with prednisone (corticosteroid) premedication. However, many patients with advanced disease have bone metastases, and the use of additional steroids as premedication with solvent-based Taxotere may increase the incidence of skeletal-related events such as fractures that affect quality of life and survival. We expect docetaxel micellar approval and launch in both the US and Europe in FY25 with peak penetration of 30% in this small and specific subset of patients with advanced prostate cancer who have very limited treatment options. We assume pricing of $1,000 per cycle in the US and $500 per cycle in Europe, with six cycles per treatment. This leads to our peak sales forecasts of $239m in FY30. We assume Oasmia will continue to fund the clinical development cost into Phase II/III in prostate cancer.

The success of Oasmia’s XR platform has been validated by Apealea. While Oasmia’s focus has been on oncology and chemotherapeutics, its XR-17 technology is applicable to APIs in other therapeutic areas and we expect to see Oasmia move into non-oncology indications in the near future. Management has stated that it is looking to grow the current pipeline through strategic acquisitions and in-licensing of late-stage assets, with Nordic-based oncology companies expected to be the likely targets (we expect a deal to be announced by the end of 2020). Oasmia also has the opportunity to out-license its XR-17 technology and forge partnerships with companies that have promising APIs that could benefit from its proven solubility-enhancing technology. The XR-17 technology is compatible with 10–15 different cytostatic therapies and Oasmia is in advanced discussions with a number of companies. Oasmia has indicated it is also looking to build collaborations with prominent academic groups to generate novel APIs in oncology and other therapeutic areas, as well as further develop its XR-17 technology platform.

Poor aqueous solubility is a key driver of clinical attrition during drug development. As only the soluble fraction of the drug is available for absorption, poor solubility can lead to inadequate and variable bioavailability (drug exposure), hampering the drug’s efficacy and potentially limiting the beneficial disease response. For iv administered treatments, precipitation of the API from solution is a key safety concern. Approximately 40% of marketed drugs and 90% of clinical candidates in development are considered poorly soluble, and these percentages are expected to continue to increase.

A range of techniques have been developed to improve the solubility of drugs by modifying their chemical composition and physical properties. For chemotherapeutics more specifically, emulsifying agents such as Cremophor EL (polyoxyethylated castor oil) and polysorbate 80 have successfully been used to improve the solubility of cytostatic drugs for intravenous administration. These agents often cause adverse side effects that can be severe but have been accepted in the oncology arena given the limited treatment options. More recently, new solubilising technologies that aim to avoid these side effects have emerged, involving the use of lipids, proteins, polymers, nanoparticles and micelles.

Oasmia’s proprietary XR-17 solubility-enhancing technology enables water soluble nanoparticulate formulations of previously insoluble APIs that can be intravenously administered to patients. This technology can be applied to any poorly soluble iv dosed API and the reformulated drugs are patentable, giving Oasmia freedom to operate and many opportunities for development. In 2018 a new manufacturing patent was granted in the US for the XR-17 technology and all products that are manufactured using it. This is a key market for Oasmia, and the patent is valid until 2036. Oasmia has 56 patents protecting combinations of APIs with XR-17 in key territories. The company has also applied for supplementary protection certificates in Europe, which if granted would extend patents by five years.

The in-house developed XR-17 technology utilises two chemically identical vitamin A (retinol) derivatives, XMeNa and 13XMeNa, to encapsulate a poorly soluble API in a highly soluble nanoparticle sized spherical structure called a micelle, Exhibit 4. These micelles are 20–60nm in size (by comparison a human hair is c 70,000nm wide) and have a water-soluble exterior formed by the hydrophilic head groups of the XR-17 derivatives and an API-solubilising hydrophobic (lipophilic) interior formed by the long hydrocarbon tails of the XR-17 derivatives. This infers water soluble properties to the micelle-drug nanoparticles, enabling iv administration without the need for solvent-based emulsifying agents.

Once in the blood, the micelle disintegrates releasing the API. Oasmia has shown that the XR-17 excipient is well tolerated by the body and the reformulated API exhibits a similar PK profile to the legacy unmodified API. The XR-17 solubility-enhancing technology offers a number of potential advantages that include:

During the last decade combination therapies have revolutionised the relapsed and refractory treatment paradigm and continue to advance into earlier lines of treatment. Oasmia’s XR-19 technology is an extension of the XR-17 platform, using the same vitamin A derivatives to encapsulate two APIs in to one solubility-enhancing micelle.

Initially it is likely that Oasmia will focus on chemotherapeutics, where a combination of two commonly paired cytostatic agents could potentially enable a single infusion instead of two consecutive infusions. If successful, this could significantly reduce infusion times and treatment costs while increasing hospital patient throughput. Dual encapsulation also has the potential to improve the dosing profiles of combination therapies. Pre-clinical studies have so far shown encouraging results and Oasmia is evaluating potential combinations to progress for further development.

As far as we are aware, Oasmia is currently the only company pursuing the dual encapsulation of combination therapies in this way and will have broad freedom to operate through patent protection. If effective, in the long term, XR-19 technology could potentially be used to combine any two solubility-limited small molecule APIs or even larger therapies such as monoclonal antibodies.

The company’s lead asset Apealea is a patented formulation of paclitaxel in combination with a 50:50 mixture of solubility-enhancing XR-17 derivatives XMeNa and 13XMeNa. The recommended dose of Apealea (250mg/m2) can be administered in one hour, which is significantly faster than the three hours required for the current standard of care Taxol (175mg/m2). The XR-17 nanoparticulate formulation of Apealea is freeze-dried following manufacturing and is provided as a solid powder that can be reconstituted at the bedside within 30 minutes and administered. The solid powder has a shelf life of three years, which is in line with industry standards but Oasmia believes it can improve this and is undertaking further development work. Apealea is currently only approved at a single strength (60mg) and a typical dose requires eight of these vials to be reconstituted and administered. Oasmia is looking to develop a second-generation Apealea product at a higher dose. Next in the pipeline, is docetaxel micellar, a patented nano-size micelle formulation of docetaxel in combination with Oasmia’s solubility enhancing XR-17 derivative XMeNa.

Oasmia’s ‘new API’ candidate is an in-house developed asset that has progressed through preclinical laboratory testing and is now being evaluated for the strength of its intellectual property and the freedom to operate. If sufficient, Oasmia will file an IND and progress this asset into clinical trials. The target indication of the new API is undisclosed but is very likely in the oncology arena.

Oasmia is also using its XR-17 solubility-enhancing technology to develop new formulations of chemotherapeutics for use in the treatment of veterinary oncology indications; its two most advanced assets remain in clinical stage development. The US is the largest market in the field of veterinary medicine and represents the main market for Oasmia’s products. Total expenditure on pets has risen steadily over the last decade and the American Pet Products Association (APPA) estimates that total expenditures were in excess of $75bn in 2019 (Exhibit 5). Medical treatments represent c 30% of these expenditures, which suggests the animal health market was worth more than $20bn in 2019 and is expected to keep growing in line with the historical trend. This is mainly driven by an ageing pet population, a growing number of insured animals and an increased willingness from owners to pay for high-quality veterinary care.

There are 89.7m domestic dogs in the US and c 6m are diagnosed with cancer each year. Cancer in animals has many similarities with cancer in humans such as prevalence, pathogenesis and treatment. Current treatment options include surgery, chemotherapy and radiation therapy. Chemotherapy is the mainstay of cancer treatment for dogs and due to the lack of available treatments specifically approved for dogs, the standard of care is predominately off-label use of iv administered cytostatic agents approved for human use. However, these therapies often employ solubilising agents that cause severe side effects or vehicles that are not compatible with use in dogs.

For treatments being developed for veterinary purposes in the US, the Minor Use and Minor Species (MUMS) designation is a status similar to orphan drug designation for human drugs. MUMS designation makes a sponsor eligible for financial incentives to support FDA approval (Phase III development costs) as well as seven years of market exclusivity. It also provides the opportunity of conditional approval, which allows the company to market the drug after completing Phase II clinical studies. A Phase III (field study) study is required to achieve full approval before the conditional approval expires (five years).

Oasmia has two clinical candidates in its animal health pipeline, Paccal Vet for mammary carcinoma in dogs and Doxophos Vet for lymphoma in dogs. These assets employ the same XR-17 technology that is utilised for the human health products and benefit from the same advantages previously described (page 12).

Paccal Vet is a patented formulation of paclitaxel using Oasmia’s XR-17 technology that is intended to treat mammary carcinoma in dogs. Paccal Vet is identical to Oasmia’s lead asset Apealea, which has been approved in Europe for the treatment of second-line ovarian cancer. Mammary tumours are the most common type of cancer in female dogs with 36,000–41,250 dogs treated annually in the US alone. Paccal Vet has successfully completed both Phase I and II studies and was marketed in the US under MUMS designation between 2014 and 2017. Oasmia is evaluating the development strategy of Paccal Vet at a lower dose to improve its tolerability and expand patient access. Currently there are no iv administered chemotherapeutics that are specifically approved for use in pets, although drugs approved for human use are commonly used off-label. We also note that the paclitaxel containing chemotherapeutics Taxol and Abraxane are not safe for use in dogs due to the solubilising agents utilised. Taxol exhibits intolerable side effects that are associated with Cremophor EL, while dogs have a resistance to the human albumin vehicle used in Abraxane. We believe Paccal Vet potentially offers significant advantages over current treatment options and will command a sizeable portion of the market share.

Doxorubicin is the active ingredient in Pfizer’s Adriamycin, which is approved for a plethora of indications in humans. Doxophos Vet is a patented nanoparticulate micelle formulation of doxorubicin in combination with Oasmia’s solubility-enhancing XR-17 technology that is being developed for the treatment of lymphoma in dogs. Lymphoma is the most prevalent cancer in dogs, accounting for 15–20% of new cases in the US each year, which represents c 1m dogs. Oasmia has already completed both a Phase I and II study that confirmed the product’s safety and efficacy in a small number of dogs, which could form part of an FDA application for conditional approval. A larger Phase III study is required for full approval.

We place an indicative value of SEK443.7m on Oasmia’s animal health business. For simplicity we value the US market opportunity alone for each indication but note that the EU market (87.5m dogs) represents significant upside to our valuation if accessed. Both assets have already successfully completed Phase II studies and require Phase III studies for full approval. We forecast launches in FY24 for both assets, which results in a valuation of the animal health business of SEK443.7m. Our valuation for Paccal Vet only includes mammary carcinoma but we acknowledge that continued development in both squamous cell carcinoma and mastocytoma could provide potential upside. In addition to the development and commercialisation of Paccal Vet for dogs, Oasmia may also look to investigate its use in cats, providing further potential upside to our valuation.

Management has indicated that the veterinary business is under strategic review and multiple outcomes are possible, including in-house development, partnering, licensing, spinoff or divestment. We believe divestment is the strategy that maximises shareholder value as cash proceeds could be reinvested in building out the human health pipeline (potentially through in-licensing opportunities), the company’s primary business.

Oasmia is subject to various sensitivities common to speciality pharmaceutical companies, including commercialisation (pricing, reimbursement, uptake and competition) and financing risks. The key sensitivities for Oasmia relate to execution risk; our sales forecasts and valuation are dependent on the successful US and European commercialisation of Apealea (subject to approval by the US FDA). Furthermore, with the focus on one asset in the short term, the valuation is skewed to and dependent on Apealea (which represents 62% of our valuation). We also acknowledge that Elevar is building its commercial infrastructure (compliance and medical staff) in anticipation of a potential launch of its lead asset Apatinib, contingent on NDA acceptance and approval by the FDA. Any delays in this process could negatively affect the US launch of Apealea. Elevar does not have a proven track record in commercialisation of products, thus there remains significant sales execution risk.

Financing needs depend on milestone revenues from existing partners and potential new partnering activities; delay or failure to receive future milestones, peak sales expectations and sales growth trajectory would compromise our premise that profitability is achievable in FY23. Additionally, a number of companies are pursuing solubility-enhancing technologies and Oasmia’s products and candidates will likely face competition.

The company relies on its proprietary XR-17 technology platform for value generation. Oasmia holds patents in all countries that it deems important. Its US manufacturing patent that covers the XR-17 technology and all products manufactured using it is valid until 2036. Oasmia is subject to the usual patent risks that include legal disputes and applications being rejected. We note that Ardenia Investment has transferred its patents to Oasmia but has not yet registered these patents in accordance with the transfer agreement. The company’s legal adviser has concluded that all of the patents in question are owned by Oasmia and the company has initiated recordation of the assignment in key geographies (the US and many European countries).

Litigation risks are ongoing. MGC Capital presented a claim for compensation as a result of not being allowed to subscribe for shares by means of 23.2m warrants. The claim is set at c SEK80m plus interest and additional claims for damages that amount to SEK230m. Oasmia strongly refutes that MGC Capital ever had possession of these warrants and has acquired a SEK60m payment claim (plus interest) against MGC Capital from Arwidsro for SEK40m. We also note the labour law lawsuits filed by previous working chairman Julian Aleksov and previous CFO Anders Blom have been contested by Oasmia and the final hearing is expected to be held after the end of 2021.

Our valuation of Oasmia Pharmaceuticals is SEK2.82bn or SEK6.29/share (Exhibit 6) and is based on a risk-adjusted NPV model of Apealea for treatment of ovarian cancer (US, EU5 and RoW) and docetaxel micellar in prostate cancer. Our valuation does not include Oasmia’s proprietary technology platform and unconfirmed candidates at an early stage in preclinical development; consequently, we see uplift potential as the pipeline progresses with potential out licensing deals and as Apealea moves into additional indications. Our NPV calculation is based on Apealea in ovarian cancer achieving peak sales of $282m in FY28 globally; given its commercial availability, we utilise a 10% discount rate and risk adjust the US opportunity accordingly (90%). We forecast docetaxel micellar peak sales of SEK239m and place an indicative NPV of SEK1.33bn, which risk adjusted at 25% contributes and rNPV of SEK346.1m to our Oasmia valuation. Adding in net cash of SEK274m (at 31 July 2020), we reach our risk-adjusted NPV of SEK2.82bn. Additional indications for Apealea and docetaxel micellar plus bringing new candidates into the clinic would provide further upside.

Oasmia’s valuation is sensitive to the contribution from Apealea. Given Elevar’s intention to fund and conduct additional clinical trials (Phase II/III required for other indications), we illustrate the potential value to Oasmia shareholders. Assuming $350m peak sales in ‘another cancer’ with Phase III starting in FY21, approval in FY24 and launch in FY25, with 15–20% tiered royalties on sales and cumulative $100m milestones across lifecycle duration (development, regulatory approval and sales milestones) yields an NPV of SEK2.01bn discounted at 75% (appropriate for Phase III assets) gives a risk-adjusted NPV of SEK1.52bn or SEK3.38/share. We note all trial costs will be funded by Elevar.

There are multiple levers that can enable Oasmia to realise its strategic goal of being cash positive and operational profitability from our forecast year of FY23. Timings of cash flows are difficult to predict as they are dependent on differing factors; however, our base case scenario assumes Apealea US launch in FY23. Assuming a stable operating cost base (~SEK120m per year, this leads us to forecast FY23 for maiden profitability. Sustainable profitability is contingent on expected milestones (regulatory and sales) and, to a lesser extent, royalties on sales. Multiple levers to profitability include:

Oasmia reported consolidated net sales of SEK201.8m (vs SEK2.0m FY19) for financial year ending 30 April 2020 (FY20), which consisted largely of the upfront licence income of SEK201.0m from Elevar relating to the global licensing of Apealea. Oasmia capitalises development costs under IAS38 relating to the Phase III clinical trials for the product candidate Apealea, which were reported as SEK4.4m (vs SEK8.4m FY19), but with the Elevar deal in place this will no longer be capitalised and the Apealea portion of the capitalised development on the balance sheet (SEK323.9m) will be amortised (we assume over the life of the US patent, which expires in 2036). The remaining SEK109.4m capitalised development costs on the balance sheet relate to Paccal Vet. Research and development costs that were not capitalised amounted to SEK84.8m in FY20 (vs SEK55.7m FY19). Employee benefit expenses reported at SEK63.8m (vs SEK52.1m in FY19), we note the number of employees at end of the year was 63. Other operating expenses during FY20 increased significantly to SEK162.5m versus SEK68.2m in FY19 reflecting legal costs (including litigation fees) plus transaction and adviser costs in connection with the agreement with Elevar. Oasmia reported an operating loss of SEK30.1m in FY20 (vs SEK150.2m in FY19) as the upfront payment from Elevar offset the significant increase in costs.

We forecast net sales of SEK0.8m and SEK96.9m in FY21 and FY22, the ramp-up reflecting small contribution of royalties on sales of Apealea and a US approval milestone in the latter period. As part of its strategic overhaul new management have targeted annual cost savings of SEK100m and a reduction in the cash burn rate per annum by 50% to below SEK10m per month. With the significant reduction in head count (target number of employees 27 in 2021), plus a new management team whose compensation includes share-based renumeration, we expect a reduction in employee expenses. Furthermore, other opex should reduce significantly reflecting lower legal costs. We forecast SEK127.8m and SEK37.7m in operating losses in FY21 and FY22 respectively. Our FY22 forecast includes a $10m (SEK87.7m based on current FX) milestone payment on Apealea US approval. We forecast breakeven from FY23 and sustainable growth in profits thereafter. Our forecasts are based on our assumption of $25m (SEK219.3m based on current FX) in milestone payments from Elevar in FY23 relating to launches in the US and additional countries in Europe. For FY24 we forecast $12.5m (SEK109.7m based on current FX) in milestone payments relating to US sales and launches in additional European countries.

During FY20 Oasmia repaid its outstanding convertible bonds of SEK59.6m leaving short-term borrowings of SEK80.0m and raised net funds of SEK371.9m in December from an equity placing.

Oasmia reported flat consolidated net sales of SEK0.208m in Q120/21 (SEK0.182m in Q119/20), which comprised largely of sales of supplies of SEK0.171m (SEK0.072m in Q119/20) as the launch of Apealea in the Nordics was hampered by COVID-19. Operating expenses increased to SEK51.7m (vs SEK39.4m in Q119/20) due to higher employee benefit expenses (SEK21.9m vs SEK14.6m) attributable to a larger average number of employees and severance costs relating to the strategic cost-reduction programme. The number of employees at the end of Q120/21 was 59. Operating loss for the quarter amounted to SEK49.2m (SEK35.8m in Q119/20).

Taking into consideration cash and cash equivalents plus short-term investments of SEK354m, Oasmia had a net cash position of SEK274m at 31 July 2020. Our net cash calculation includes a deduction of SEK80m for the short-term liability relating to the MGC Capital claim. However, we note that this is largely offset by a counter claim held by Oasmia that has a face value of SEK60m (book value SEK40m). This is sufficient to fund Oasmia through to our forecast breakeven year of FY23, given our expectations of costs to stabilise at a lower run rate and the top line to start contributing meaningfully.