PDL BioPharma — Investing in Evofem

PDL has announced that it entered into a securities purchase agreement with Evofem, a Nasdaq-listed women’s health company that is developing a non-hormonal contraceptive product. PDL will invest up to $60m in two tranches of $30m each, the first being invested immediately and the second being invested by 10 June 2019. Both tranches will have the same terms, a purchase price of $4.50 per share (a 26% premium to the closing price of Evofem the day before the investment was announced) for 6,666,667 shares with 1,666,667 warrants with an exercise price of $6.38 per share. Additionally, Woodford, which owns 9.6m shares (~34% of the company pre-PDL deal) of the company, and Invesco, which owns 9.2m shares (~33% of the company pre-PDL deal), have an opportunity to invest up to $10m each at the same terms as PDL. Following the investment of the first tranche, PDL owns approximately 19% of the company and will own 29% of Evofem assuming it, Woodford and Invesco all exercise their rights to invest in the second tranche. The company had previously indicated that it was looking at pre-commercial opportunities and this fits in well with that. The structure is especially appealing as it does provide the promise of substantial returns but with downside capped at either $30m or $60m if Evofem does not live up to expectations.

Evofem is developing Amphora as a contraceptive. Amphora is bioadhesive vaginal gel that is a mix of L-lactic acid, citric acid and potassium bitartrate, all compounds that are considered to be generally regarded as safe (GRAS) by the FDA and are frequent ingredients in food. Amphora works by maintaining the vaginal pH level in the 3.5–4.5 range, which is mildly acidic and inhospitable to sperm, which requires a more neutral pH environment for optimum mobility. Typically, semen, with a pH of 7.2–8.0, helps to raise the pH of the vaginal environment to 6.0 or higher. Data indicate that Amphora is effective if applied up to 10 hours prior to intercourse.

The addressable market is quite large. According to the CDC, 61.7% of the 60.9 million women aged 15–44 use contraception and 27.6% (around 16.8 million) use either short- or long-acting hormonal oral contraceptive pills or devices such as a ring or a patch.

According to Evaluate Pharma, $6.5bn worth of hormonal contraceptives were sold in 2018 and importantly many still have meaningful sales despite being on the market for two to three decades and being off patent (see Exhibit 2). While generics exist, brand is important in this market.

However, despite the popularity of hormonal contraceptives, they are associated with some potential severe side effects. The risk of venous thromboembolism increases three to six times, while the risks of heart attack or stroke go up two to three times1. Also, certain women are contraindicated from receiving hormonal therapy, including smokers over the age of 35 and women with a history of breast or pelvic cancers. Hence a safe and effective alternative to hormones would likely find a market, likely a mix of some switching over from hormonal therapy and those who are currently not using contraception.

Amphora’s efficacy was demonstrated in two large Phase III trials. In 2014, the company reported that the 3,389 patient AMP001 trial met the primary endpoint of non-inferiority to Conceptrol, a spermicidal gel. In the modified intent to treat analysis, the cumulative pregnancy percentage was 10.5% in the Amphora arm and 10.0% in the Conceptrol arm. For the “perfect use” population (defined as those who used their assigned product for every sexual episode), the pregnancy percentage was 4.1% in the Amphora arm compared to 4.2% with Conceptrol. Importantly, Amphora demonstrated a benign safety profile with fewer than 2% of women withdrawing due to an adverse event, a slightly lower rate than with Conceptrol.

However, the FDA had some issues with the data, namely from the 20% of study participants in Russia, which the agency viewed as “not generalizable” to the US population and requested a confirmatory trial. Following feedback from the FDA, the company initiated the 1,400-patient confirmatory AMPOWER trial, which would be conducted exclusively in the United States with a pre-specified hurdle of a seven-cycle pregnancy rate of 16.5% with an upper limit of the confidence interval at 21%. In December 2018, Evofem announced the results of the AMPOWER trial and that it met the primary endpoint with a seven-cycle cumulative pregnancy probability of 14% with the upper limit of the confidence interval at 18%. In women who used Amphora perfectly (per patient reporting), the cumulative pregnancy rate was only 1.3%. Once again, the adverse event profile was clean with fewer than 2% withdrawing due to an adverse event.

Evofem is currently expected to re-file on this data in H219, which, assuming a six-month review (as it is not this product’s first cycle before the FDA), means approval in H120. The company plans to launch with 100 salespeople, which would allow it to target the top 30% of contraception prescribing physicians (the vast majority of whom are gynaecologists). According to market research conducted by the company, its expectation are for a warm reception with Amphora potentially becoming the second most popular birth control method (see Exhibit 3). We view this as a bit aggressive as surveys often overshoot reality and people historically are reluctant to change practices, but Amphora’s market reach does not need to be this large for the PDL investment to be successful.

With regards to price, Evofem expects to price Amphora at $100–200 per month, which will likely not pose too much of a problem in getting insurance coverage. Also, as a reminder, minimum coverage requirements dictated by the Affordable Care Act (ACA) require most private healthcare plans to cover at least one form of each of the 18 FDA-approved contraceptive methods for women at no cost to the covered individual. So there is a bit of a political/regulatory tailwind that should assist Evofem in getting coverage.

We have increased our valuation from $757m or $5.91 per basic share to $816m or $6.37 per share. The increase is due to adding the value of the Evofem investment, net of the $30m cash from the first tranche, which gives PDL a 19% position in the company. To value Evofem, we used a risk-adjusted NPV model and a 12.5% discount rate. Although both the Phase III trials were positive, we attribute a 70% chance of success to the product, slightly below our standard 80–90% in these situations. The reasons for the discount are that the FDA had previously had issues with the data from the first Phase III trial and this is not a huge unmet medical need.

We assume a price per patient of $150 per month with peak sales reaching up to $521m at expected patent expiration in 2033. With regards to the intellectual property position, there are currently granted patents that cover Amphora that expire in 2021, though the company believes these can be extended to at least 2024 through a Hatch-Waxman patent extension. In addition, Evofem also has the rights to several patent application families that would protect the product through 2033, if granted. There is also the question of how a generic would be approved as it is unclear how to demonstrate bioequivalence to a product like Amphora. It is possible that no generic is currently possible and a competitor would need to run clinical studies with their own version once patents expire (though the studies may be smaller than those run by Evofem). Without a substitutable generic and given current contraceptives have been able to maintain meaningful sales even with generics, modelling to 2033 may prove conservative.

We expect to update our valuation further once the second tranche is finalized and following regulatory updates from Evofem.

The company ended Q418 with $394.6m in cash ($244.6m in net cash) so even with a full investment of the two tranches into Evofem, PDL will have a substantial amount of cash to execute on its business plans, which may include additional investments.