Photocure — Rapid acceleration in the US market

Photocure is a photodynamic therapy company that was founded by the Norwegian Radium Hospital in 1997 and listed on the Oslo Stock Exchange in 2000. It received its first approval in 2001 for Metvix, a photodynamic therapy for skin cancers, which was first licensed and then sold to Galderma. It currently markets the imaging agent known as Hexvix in the EU and Cysview in the US, which is approved globally for detecting and managing bladder cancer. It improves detection rates and helps prolong recurrence-free survival. The company has also developed Cevira and Visonac. Cevira is an integrated drug/device combination for the treatment of patients with HPV-related diseases of the cervix and Visonac is its treatment for inflammatory acne. Both are Phase III ready and the company is exploring strategic alternatives to continue their development.

Using a risk-adjusted NPV model with a 10% discount rate for Hexvix/Cysview, we arrive at a value for Photocure of NOK1,246m (from NOK970m), or NOK57 per basic share. We have increased our Hexvix/Cysview estimates as we believe there is less risk for competition for the product in the near to intermediate future (we have moved our projected year of generic entry, and hence peak sales, to 2024 from 2020). Also, as the company has indicated it has filed additional patents (likely formulation patents) that could potentially protect the product until 2038, we have extended our model to include that year (previously our model ran to 2029). We have also eliminated Cevira and Visonac from the model as both products continue to be on hold as the company conducts a review of strategic options. Additionally, there was an increase in cash following the company achieving operating cash flow positive status during the quarter and NPVs were rolled forward.

The Hexvix/Cysview franchise has historically been profitable with NOK8.4m in EBITDA through 2018, although this is down from NOK10.4m in 2017, mainly due to higher sales and marketing expenses in the US as the company invests in a more intense marketing effort. US revenue is the main growth driver as it is up 81% in the fourth quarter and is up 50% for the year. With NOK107m in cash, Photocure should have enough capital to meet its needs prior to profitability, which we currently expect in 2019. Also, importantly, the company was operating cash flow positive in Q418, although this effect was partly seasonal due to working capital changes in the fourth quarter.

Photocure is subject to various sensitivities common to healthcare product companies, including commercialisation, competition, reimbursement and patent expiration risks. Hexvix/Cysview is having a surge in sales following approval for the surveillance market, as well as an improvement in reimbursement, but its patent runway is short. Patents are set to expire in September 2019 in the EU and November 2020 in the US, although any potential competitor would likely need to run some sort of clinical trial and get approval from both the Center for Devices and Radiological Health and Center for Drug Evaluation and Research due to the nature of Hexvix/Cysview as a drug/device combination. This additional cost (both clinical and regulatory) would limit the attractiveness of this market to certain competitors, especially generic competitors, as generic companies are not specialised in devices. Also, as Hexvix/Cysview is part of a procedure rather than part of a pharmaceutical benefit for patients, payers are unlikely to force conversion to the generic product and hospitals will be able to make their own decisions, based largely on price and physician preference.

Photocure is currently focused on the development and commercialisation of three products (see Exhibit 1), particularly on Hexvix/Cysview, which is approved globally for detecting and managing bladder cancer. Clinical studies have shown that it consistently helps improve recurrence-free survival compared to the standard of care. Cevira is a drug/device combination for the treatment of patients with HPV-related diseases of the cervix. It appears effective in high-grade squamous intraepithelial lesion (HSIL), which has more than one million cases diagnosed annually in the US and EU and indicates a higher risk of cancer. Visonac is a Phase III-ready photodynamic treatment for inflammatory acne, which could be used in those who fail or are unsuitable for isotretinoin and oral antibiotics, a two million-person market in the US and EU.

Hexvix/Cysview is a marketed colourless contrast solution, hexaminolevulinate hydrochloride (HAL), currently indicated for the detection of non-muscle invasive papillary bladder cancer as part of the transurethral resection of the bladder tumour (TURBT) procedure as well as for patients undergoing a surveillance cystoscopy (a cystoscope is a thin tube with a lighted tip). The solution is administered into the bladder before cystoscopy. It then takes about an hour for it to be absorbed into the urinary epithelial cells and accumulates in rapidly growing cells like cancer cells. Using a blue-light cystoscope, cancerous tissue would appear to be bright pink/red. Historically, doctors would shine just a white light onto the bladder to see any cancerous tissue, but unfortunately this led to them missing lesions, especially if they were small or flat (cancer in situ).

The addition of Hexvix/Cysview was shown by Photocure in its clinical trial programme to detect tumours that white light misses (see Exhibit 2). In total, 16% of patients had Ta (non-invasive papillary carcinoma) or T1 (cancer that invades from the surface epithelial layer into the connective tissue) tumours that were missed by the white light standard of care and were only detected through the use of Hexvix/Cysview. This is quite meaningful as bladder cancer is one of those cancers where there is a big difference between five-year survival rates for cancers that are caught early and those that are caught late. According to the National Cancer Institute, the five-year survival rate for those with localised cancer is 69.9%, 34% for those with regional and 5.4% for those where the cancer has distant metastases.

By improving tumour visibility, Hexvix/Cysview enables more complete removal of tumours, which then leads to longer recurrence-free survival, as studies have consistently shown across most subgroups (see Exhibit 3).

Importantly, based on long-term data from a study by Georgios Gakis at the Department of Urology at Eberhard-Karls University in Tuebingen, Germany, the recurrence-free survival benefit is durable (three-year, recurrence-free survival was 77.8% for those patients where Hexvix/Cysview was used and 52.4% when white light was used) with a p-value of 0.002 in a 224-person trial.1

Photocure conducted a Phase III clinical study measuring the utility of Hexvix/Cysview for the ongoing surveillance of patients with non-muscle invasive bladder cancer (NMIBC). After diagnosis, patients with NMIBC typically undergo a TURBT procedure, in which tumours are resected using a cystoscope. Hexvix/Cysview is already approved for use during TURBT procedures to improve the identification of lesions for removal. These patients are then followed with routine surveillance for recurrence, which is high with NMIBC. The AUA recommends surveillance every three to six months for the first three years after diagnosis and yearly thereafter.

The clinical trial enrolled 304 patients at 17 institutions in the US. It only enrolled patients with a high probability of recurrence, as identified by having multiple tumours, a previous recurrence, and/or high-grade tumours in previous procedures. Patients on the study underwent both blue light and white light cystoscopy and the ability of the two techniques to identify recurrence events was compared. The primary endpoint of the trial was the number of patients with recurrences who were identified using Hexvix/Cysview who were missed with white light cystoscopy. In addition to the experimental portion of the trial, 68 patients were included for training purposes to acclimatise physicians to blue light cystoscopy (BLC).

A total of 220 patients were in the experimental portion of the trial and available for evaluation. From this population, 103 patients were referred to the operating room for a TURBT procedure based on initial surveillance cystoscopy, and 65 had a confirmed recurrence. 14 patients (21.5% p<0.0001) were referred to the operating room using Hexvix/Cysview and would have been missed using white light cystoscopy alone. This is significant evidence that Hexvix/Cysview can improve the surveillance in this population. Moreover, of these 65 patients with recurrence, almost half (30 patients, 46.2%) had additional lesions detected using Hexvix/Cysview over white light cystoscopy alone. In particular, Hexvix/Cysview improved the identification of carcinoma in situ (CIS). CIS is a small flat lesion in the early stages of its growth before it is generally considered a tumour with high risk of progression. Of the patients on the trial, 26 had confirmed CIS, of which nine (34.6%, p<0.0001) were diagnosed with Hexvix/Cysview and would have otherwise been missed.

However, the use of Hexvix/Cysview did substantially increase the number of false positive diagnoses of recurrence. It doubled the number of patients from 19 to 38 (8.6% to 17.2%) that were referred for TURBT who turned out to not have a malignancy. The total number of patients referred for TURBT increased by 47% (from 70 to 103) when using Hexvix/Cysview; however, we consider this increase in procedures justified considering that 42% of the new referrals had disease that would have otherwise been missed.

In mid-February 2018, the company announced that the FDA had approved Hexvix/Cysview for use in the surveillance setting. Additionally, the current label has been expanded to include improved detection of carcinoma in situ (CIS) and all restrictions on repeated use have been removed. Expansion into the surveillance market is essential to the continued growth of Hexvix/Cysview, particularly in the US. The US bladder cancer surveillance market has 1.4m procedures per year, much larger than the original market for Hexvix/Cysview of 300,000 TURBT procedures.

Photocure is commercialising Hexvix/Cysview in the US and the Nordics. It is using partners such as Ipsen in the EU outside of the Nordics, BioSyent in Canada and Juno in Australia/New Zealand to market elsewhere.

Hexvix/Cysview has been successful in the Nordic region, where it has been able to achieve between 25% and 70% market share (depending on the country) as the therapy is not linked to a specific device, reimbursement is favourable and the company is based in Norway and therefore Nordic in origin. Unfortunately, with only around 27 million people in the entire Nordic area, even this sizeable market share does not lead to meaningful sales (NOK47.0m, or about $5.5m, in 2018). Also, growth is now mainly driven by price increases. Full year revenues grew 9% but in-market unit sales over the same period fell by 4% (though this was mainly due to large deliveries to hospitals in Denmark close to the end of 2017).

Ipsen, which sells into the much larger non-Nordic EU market, has been relatively successful in doing so, especially in Germany where it has a 30% penetration rate. However, there have been some issues that have had an impact on sales. Results were strongly affected by a loss of reimbursement in France so that now hospitals must bear the additional cost of the product. This move is somewhat perplexing as the new French National Guidelines for bladder cancer, which were introduced in November 2016, recommend the use of blue light cystoscopy for the first bladder resection in almost all patients. As a result, growth in unit sales in Germany was negated by a fall in volume in France so that total in-market unit sales for partner regions was flat. In addition, growth in the relatively new markets of Australia and Canada (partnered with Juno and BioSyent, respectively) was hampered by the delayed placement of scopes and reimbursement issues though some revenues have begun to filter through from Canada. On a pro-forma basis (adjusting for IFRS changes) partner revenue increased 9% in the fourth quarter and 4% for the year. On a reported basis (which uses a different accounting standard in 2017 and 2018), partner revenue was down 12% in Q4 and 2% for the year.

The US is Photocure’s growth market. Year-on-year revenue growth in Q418 was 81% for the quarter and 50% for the full year. The current annualised run rate in the US is NOK73.6m ($8.6m). Sales are being driven by an increase in the number of permanent blue light cystoscopes installed (currently 157, up 51% from 104 at the beginning of 2018 and almost double the 83 that were installed at the beginning of 2017), which include eight flexible cystoscopes for use in the surveillance setting. These installations include 74% of National Comprehensive Cancer Network (NCCN) centres, 56% of National Cancer Institute (NCI) centres and almost three-quarters of the top 25 hospitals in the country (as ranked by US News and World Report).

While currently in a state of high growth, US sales had historically been challenging because of the company’s historically limited sales and marketing infrastructure, as well as unfavourable reimbursement. Both issues are in the process of being resolved (or have been resolved). The number of customer-facing roles will increase by 50% in the US over the course of 2019 (from 21 to 31), which will allow them to cover 75% of the metropolitan areas in the US and over 750 accounts (up from 525 today). We believe this will mainly be achieved through repositioning current headcount.

Photocure has also been able to benefit from new CMS reimbursement rules, which took effect at the beginning of 2018 and 2019 (see Exhibit 6). The company estimates that with this most recent coding change, there will be coverage for Hexvix/Cysview for approximately all of the TURBT market in the United States, including both Medicare and private insurance. As a reminder, Medicare coverage is particularly important for Photocure as bladder cancer is a cancer of the elderly, with 73.4% over the age of 65 at the time of diagnosis (median age is 73 years) according to the National Cancer Institute, making CMS the key third-party payer.

We model Hexvix/Cysview revenues to Photocure of NOK383m (~$45m) in 2024. We consider this to be very reasonable as there are over 2.8m procedures (which includes both surgical cystoscopies and surveillance cystoscopies) in the addressable market in the US and EU, which adds up to a potential market size of around $3bn (we assume approximately $1,000 per procedure). While patents are set to expire in 2019 in the EU and 2020 in the US, we do not expect immediate generic competition like when a traditional drug becomes generic as any potential competitor would likely need to run some sort of clinical trial and get approval from both the Center for Devices and Radiological Health and the Center for Drug Evaluation and Research due to the nature of Hexvix/Cysview as a drug/device combination. Therefore, even if a competitor starts the process today, the time to initiate a trial, enrol it and obtain approval from regulatory bodies would likely place the earliest time point for a competitive product at 2024 (as a reminder, the original Hexvix pivotal trials took three years, and then you need to allow for filing and regulatory review), and could be far later as the company continues to file for additional patent protection. Additionally, in Europe, there is no clear pathway to approval for a generic drug/device combination and hence the requirements a company is expected to meet are unknown. The additional cost with regards to clinical and regulatory expenses would limit the attractiveness of this market to certain competitors, especially generic competitors, as generic companies are not specialised in devices. Also, as Hexvix/Cysview is part of a procedure rather than part of a pharmaceutical benefit for patients, payers are unlikely to force conversion to the generic product and hospitals will be able to make their own decisions, based largely on price and physician preference.

Cevira is a non-invasive photodynamic therapy based on a gel form of HAL under development for HPV-related (cervical) diseases and has an SPA in place with the FDA. To gain US approval, two randomised studies with 200 patients each, comparing Cevira to placebo in women with biopsy-verified, high-grade cervical lesions will be needed. The company is currently exploring strategic alternatives (including partnership, outright sale, spin-offs and other strategic alternatives) to further the development of Cevira, although no guidance on timing has been provided.

Cervical cancer is caused by HPV, which can cause normal cells on the cervix to become abnormal. It can take five to 10 years after infection for cells to become abnormal, with abnormal cells graded either as low-grade squamous intraepithelial lesions (LSIL) or high-grade squamous intraepithelial lesions (HSIL). LSIL usually indicates mild dysplasia (normally graded as CIN 1) with a 13% chance of turning into a more severe form of dysplasia (CIN 2/3) over the next two years, according to the American Academy of Family Physicians. Also, only about 2% of patients progress to cervical cancer within 10 years, while 74% regress to normal in five years and 88% regress to normal in 10 years.2 Due to this low risk of progression to cancer and high probability of regression to normal, LSIL is often untreated, with “watch and wait” being the dominant paradigm.

Patients with HSIL have around a 15–20%3 chance of getting cervical cancer and so those patients are usually treated in a number of ways, either by ablative or excisional treatments (see Exhibit 7).

Cevira treatment consists of an HAL gel, along with a disposable battery-powered LED device that is inserted next to the cervix. The HAL gel surrounds the cervix and after five hours, the time it takes for the gel to enter infected cells and be metabolised, the device’s LEDs are activated for 4.5 hours. The LEDs then activate the drug and kill the abnormal, precancerous cells (although some normal cells are also killed).

The company ran a 262-patient Phase IIb trial comparing three different concentrations of HAL gel (0.2%, 1% and 5%) to placebo in patients with low to moderate grade cervical intraepithelial neoplasia (CIN 1/2). The primary endpoint was lesion response rate at three months, with a response originally defined as histological regression to CIN 1 or normal, cytology of LSIL or less severe and HPV negative. The 0.2% and 1% doses were no different from placebo, although the 5% dose showed a 73% response in confirmed CIN 1/2 patients vs 60% placebo (p=0.2). However, there was a statistically significant response in the HAL 5% dose patients with confirmed CIN 2. 18 of 19 (95%) patients in the HAL arm compared to 12 of 21 (57%) patients in placebo responded (p<0.001). Importantly, among patients with the oncogenic HPV 16/18 subtypes, which are responsible for 70%4 of cervical cancer cases, HPV clearance was seen in five of six (83%) patients in the HAL arm compared to two of six (33%) in placebo at the six-month point.

Also, at the behest of the FDA, the company conducted a reanalysis of the results, which included a new pathological assessment conducted by a panel of three independent pathologists (originally the samples were only read by one pathologist) and applied new clinical success criteria. As a result of this re-read of the results, 76% of HSIL patients in the Cevira group responded compared to 28% in the treatment arm, a statistically significant difference.

Of course, a major caveat here (and potentially a key reason why potential partners are hesitant) is that the previous data are from small numbers of patients. Out of a 262-patient trial, this subgroup of data (from HSIL patients) come from less than 20% of the total intent-to-treat trial population. The company that takes over Cevira would need to either run another Phase II to better understand the risk-reward of a Phase III trial or simply stomach the risk with the understanding that it is moving forward with limited data.

Treatment of abnormal cervical cells related to HPV is still a large market. There are 50m pap tests performed each year in the US alone, with approximately 5% returning an abnormal test result. Most of these cases are LSIL, with the number of HSIL cases around 500,000 in the US according to the American College of Pathology, with a similar amount in Europe, making the addressable market around one million.

Visonac is a photodynamic therapy for moderate to severe inflammatory acne. It is a cream that contains methyl aminolevulinate (MAL) as its active ingredient, which is the same active ingredient as that of Metvix, Photocure’s first approved product for skin cancers, which was divested to Galderma (now part of Nestlé) in 2009 for €51m. It works by killing the bacteria P. acnes and decreasing sebum (oil) production.

Acne is a very common skin condition that has near-universal prevalence during teenage years. Approximately 95–100% of boys and 83–85% of girls aged 16–17 years old are affected by the condition, with 10–20% having the moderate to severe form.5 In total, there are an estimated 40–50 million Americans of all age groups who suffer from the condition.6 Approximately half of those are between the ages of 15 and 24, and if 10–20% have moderate to severe acne it would mean a prevalence of around 2–2.5 million moderate to severe patients.

There are quite a few types of treatment for acne, which include over-the-counter medications (salicylic acid, benzoyl peroxide and vitamin A) and prescription medications (topical or oral antibiotics and hormonal therapy for women). Treatments generally work by reducing oil production, unblocking pores and/or killing acne-causing bacteria. More severe forms of acne are often treated with Accutane (isotretinoin) or oral antibiotics such as Solodyn (minocycline). Unfortunately, neither is 100% effective, with approximately 50% of patients failing treatment according to a market research study conducted by the company. On the safety side, Accutane in particular is considered to be rather toxic, and is associated with birth defects and liver abnormalities.

Visonac therapy consists of applying the cream to the face and allowing it to be absorbed by the skin and bacteria in the pustules for 90 minutes. The cream is then washed off and the face is exposed to red light for 10 minutes. This process is then repeated an additional three times over the next six weeks. In a 153-patient Phase IIb trial, Visonac demonstrated efficacy that was comparable to and possibly slightly better than Solodyn (see Exhibit 8), which in 2011 had sales of $761m in the US. There were no serious adverse events, but 12% of those in the treatment arm (compared to 0% in the placebo arm) dropped out of the trial due to adverse events, mainly burning/pain during illumination, which was an issue seen with Metvix and other MAL studies over the years.

In terms of pain severity, the mean score on the visual analogue scale (0–10) was 3.38 (range 0–8.8) compared to 0.52 (range 0–3.6) for placebo. This indicates a mild to moderate amount of pain on average for most patients. Also, 86% of patients in the treatment arm had mild to moderate and 3% had severe facial reddening (resolved by day two) compared to 70% with mild to moderate reddening in the control arm.

In terms of the future of Visonac, as with Cevira, the company is currently exploring strategic alternatives (including partnership, outright sale, spin-offs and other strategic alternatives) to further the development.

Photocure is subject to various sensitivities common to healthcare product companies, including commercialisation, competition, reimbursement and patent expiration risks. Hexvix/Cysview is having a surge in sales following approval for the surveillance market, as well as an improvement in reimbursement, but its patent runway is short. Patents are set to expire in September 2019 in the EU and November 2020 in the US, although any potential competitor would likely need to run some sort of clinical trial and get approval from both the Center for Devices and Radiological Health and the Center for Drug Evaluation and Research due to the nature of Hexvix/Cysview as a drug/device combination. This additional cost (both clinical and regulatory) would limit the attractiveness of this market to certain competitors, especially generic competitors, as generic companies are not specialised in devices. Also, as Hexvix/Cysview is part of a procedure rather than part of a pharmaceutical benefit for patients, payers are unlikely to force conversion to the generic product and hospitals will be able to make their own decisions, based largely on price and physician preference. It would also likely be difficult for any competitor to penetrate the market without significant investment in a sales and marketing team.

With regard to Cevira, it is a relatively high-risk programme as its proof of efficacy comes from a small subgroup within a larger trial. Also, there are competitive excisional and ablative procedures that are very efficacious, quick and relatively inexpensive. For Visonac, partners have had issues with the fact that the Phase IIb trial exclusively used the Nedax full-face lamp, which may not be readily available in dermatology clinics. If the Phase III used the same lamp and the product was approved on those data, it would require dermatologists to acquire another light source to use Visonac and many dermatologists already have multiple light sources in their office. A new partner might have to run additional Phase II trials with additional, more commonly available light sources to increase the chance of having a broader label and enabling dermatologists to use Visonac without additional capital expenditures.

Using a risk-adjusted NPV model with a 10% discount rate for Hexvix/Cysview, we arrive at a value for Photocure of NOK1,246m (from NOK970m), or NOK57 per basic share. We have increased our Hexvix/Cysview estimates as we believe there is less risk for competition for the product in the near to intermediate future (we have moved our projected year of generic entry, and hence peak sales, to 2024 from 2020). Our estimate for peak sales is now NOK383m versus NOK295m previously. This may still be conservative as there is currently no indication that any company is making preparations to start the clinical and regulatory work in order to prepare filings for a generic alternative. Also, as the company has indicated it has filed additional patents (likely formulation patents) that could potentially protect the product until 2038, we have extended our model to include that year (previously our model ran through 2029, which seemed sufficient as we had originally expected near-term generic competition).

We have also eliminated Cevira and Visonac from the model as both products continue to be on hold (Visonac has been on hold for over three years and Cevira for over five years) as the company conducts a review of strategic options. If a path forward for either product is announced, we would likely reintroduce it into the model, with any necessary changes. As a reminder, for Cevira, our model had assumed peak penetration of 16% for HSIL cases with sales peaking in 2030 at NOK2.0bn or around $250m and then falling following the expiration of the method-of-use patent. For Visonac sales peak in 2028 at NOK2.1bn or around $235m. Our model also expected sales to continue past the expiration of its method-of-use patent in 2029, at least until the expiration of the full-face lamp patent in 2033.

Additionally, the valuation benefited from an increase in cash following the company achieving operating cash flow positive status during the quarter and NPVs were rolled forward.

Following Q4 results we have lowered our 2019 revenue estimate from NOK251.0m to NOK240.1m to be a little more conservative, as 2018 results were slightly lower than we had estimated. Our 2019 estimates still represent 32% growth over the NOK181.5m reported in 2018. We have also increased our SG&A estimates from NOK174.5m in 2019 to NOK182.1m as the company is guiding for increased investment in the US sales and marketing organisation. We are also introducing our 2020 estimates, which include NOK294.8m in sales, representing 17% growth over our 2019 estimates. With NOK107m in cash, Photocure should have enough capital to meet its needs prior to profitability, which we currently expect in 2019. Also, importantly, the company was operating cash flow positive in Q418 though we await confirmation that this trend will continue in future quarters.