BioPharma Credit — New debt investment in OptiNose

XHANCE (fluticasone propionate) is a nasal spray, an FDA-approved corticosteroid drug-delivery system used in the treatment of chronic rhinosinusitis with nasal polyps. The FDA has not recognized chronic rhinosinusitis (CRS) as a disease indication, but instead accepted nasal polyps and chronic sinusitis as indications. FDA approval for the treatment of nasal polyps in patients aged 18 years or older was issued in September 2017. OptiNose uses its proprietary EDS with a unique Bi-Directional mechanism designed to reliably and effectively deliver medications or vaccines high and deep into the nasal passages.

XHANCE is currently available to >75% of commercially insured people in the US. The salesforce, which was recently brought in house, is now targeting c 10,000 speciality-like primary care physicians, and management estimates the current annual market opportunity for rhinosinusitis with nasal polyps at c US$1.1bn. Broadening the US market opportunity into chronic sinusitis (without nasal polyps) is underway, with OptiNose initiating two Phase IIIb clinical trials (in Q418 and Q219). Should these be supportive of a label extension, and the prescribing base broadens into primary care physicians, Optinose’s management believes the US opportunity for XHANCE could reach c US$9.5bn. Interestingly, the US healthcare system is spending c US$60bn pa in direct costs treating patients with chronic rhinosinusitis and its associated symptoms (including US$5.0bn pa on sinus surgeries), according to the American Academy of Allergy, Asthma & Immunology.

There are a number of treatment options, other than OptiNose’s product, available at the moment. However, each of them seems to have significant limitations in comparison with XHANCE:

XHANCE was rolled out in April 2018 and its sales have been gathering momentum, with OptiNose reporting its third consecutive quarter with >50% growth in prescriptions in Q219. Consequently, sales reached US$10.7m in H119 (US$6.7m in Q219 alone) and OptiNose guides to US$29–34m in sales in FY19, which seems achievable given the current EvaluatePharma consensus of US$32m. Subsequently, consensus estimates imply sales growth at a five-year CAGR of 67% and reaching US$0.54bn in 2024, which translates into c US$1.1bn cumulative sales until the notes mature (see Exhibit 1). With OptiNose reporting a more than 80% gross margin on XHANCE in H119, the loan seems well secured. The note is secured on all of OptiNose’s assets, with XHANCE being the company’s main revenue-generating product.

Funding provided by BPCR and BioPharma V is structured in up to four tranches, with the first US$80m (of which US$44m is from BPCR) provided straight away and used to repay OptiNose’s existing US$75m notes with Athyrium. The second US$30m tranche will be issued by February 2020, while the last two tranches of US$20m each will be available at OptiNose’s discretion before August 2020 and February 2021, respectively (with all tranches maturing in September 2024). However, the issue of all tranches except for the first is subject to the achievement of predefined quarterly and semi-annual sales milestones. These require XHANCE to reach a sales volume of US$9m in Q419 to issue the second US$30m tranche; US$11m in Q120 (or US$25m in H120) to issue the third US$20m tranche; and US$14.5m in Q320 (or US$31m in H220) to issue the final US$20m tranche. Based on current consensus estimates, these milestones look achievable.

OptiNose has another approved product, Onzetra Xsail (migraine treatment using EDS), which has been out-licensed to Currax Pharmaceuticals post the transaction date. Onzetra became commercially available from May 2016 and was marketed by Avanir, reaching c US$12m sales in 2018, according to EvaluatePharma. Avanir terminated the agreement in March 2019 to focus on its core area of central nervous system solutions. Under the current licence agreement, Currax will market Onzetra in the US, Canada and Mexico. OptiNose receives an upfront payment of US$4.5m, a one-time 10% royalty from 2020 Onzetra sales above the level of US$3m and a one-time US$1m payment on reaching an undisclosed regulatory milestone.

OptiNose is also exploring the potential use of its EDS device to deliver other drugs or drug combinations. An example is OPN-300 (oxytocin), which is in early-stage clinical development (Phase I). It is worth noting that there are certain advantages of delivering drugs through the nasal cavity/passages, as it allows them to be delivered directly into the bloodstream – as opposed to medicines delivered through the digestive system where they may be broken down before entering the bloodstream.

We estimate that following the investment in OptiNose, BPCR’s current cash position stands at a relatively high level of c 40% of NAV as at end-July 2019. This is the result of the US$322m Tesaro loan prepayment in early 2019 (triggered by Tesaro’s acquisition by GlaxoSmithKline), which coincidentally took place shortly after BPCR’s US$305m capital raise in autumn 2018. However, we note that BPCR received significant make-whole and prepayment fees of US$45.8m which, together with interest received on the loan, generated a return on investment of 22.5% pa. This has given BPCR an investment runway of around 15 months (ie before the cash drag results in returns below long-term target NAV total return of 8–9% pa). Since the Tesaro prepayment, the fund has gradually been deploying its cash with the investment in BDSI (total debt commitment of US$80m plus a US$25m equity investment, see our earlier note), advancement of a further US$38.6m associated with BPCR’s interest in the stream of payments from Bristol-Myers Squibb (BMS) and now the debt investment in OptiNose. We understand that BPCR plans to be very active on the investment front and deploy the majority of its dry powder until end of 2019.

In July 2019, Sanofi announced that it was terminating the agreement with Lexicon (one of BPCR’s borrowers) related to Zynquista, an oral drug containing sotagliflozin (a dual SGLT1/SGLT2 inhibitor) for use with insulin in patients with type 1 and type 2 diabetes. BPCR funded a US$124.5m five-year loan to Lexicon in December 2017, which made up 9% of BPCR’s portfolio as at end July-2019. The termination followed the results of top-line summary Phase III trial data for the use of Zynquista in type 2 diabetes, which demonstrated positive results in two Phase III trials but fell short of a statistically significant improvement in a third Phase III trial in renally compromised diabetic patients. Earlier this year the FDA rejected Zynquista for type 1 diabetes. In Europe, the drug was approved in April 2019 for use as an adjunct to insulin therapy in type 1 diabetes. Outside the EU, Zynquista is being studied but has not yet been approved by any other regulatory authority. However, we note that on 16 September 2019, Farxiga (a competing SGLT-2 inhibitor) was granted FDA Fast Track designation for development to reduce the risk of cardiovascular death or the worsening of heart failure in adults with heart failure with reduced fraction (HFrEF) or preserved ejection fraction (HFpEF). This could drive renewed interest in the class, potentially benefiting Zynquista as well. It is also worth noting that BPCR’s interest in royalty streams from BMS is linked, among others, to Farxiga.

Moreover, it is important to note that BPCR’s investment decisions are based mainly on the value of already approved drugs representing the core component of loan collateral (ie Xermelo in the case of Lexicon), which means that Zynquista is considered only an additional safety buffer. Although market consensus with respect to Xermelo’s sales ramp-up has reduced materially since BioPharma entered into the loan agreement, Pharmakon Advisors is confident that there is excess collateral value to fully support the loan.

This has been further supported by the resolution of the Lexicon-Sanofi dispute announced in September 2019. As part of the alliance termination and settlement agreement, Lexicon will regain all rights to Zynquista, and solely responsible for its worldwide development and commercialization in both type 1 and 2 diabetes. Moreover, Sanofi has agreed to pay Lexicon US$260m which, together with the US$106m in cash and short-term investments on Lexicon’s balance sheet at end-June 2019, should allow the company to fund operations for more than a year (according to Lexicon’s management). Sanofi will work with Lexicon to complete the transition of responsibility for ongoing clinical studies and other related activities.