Medlab Clinical — Transforming into a pure-play biotech

Historically, management has explored the feasibility of its NanoCelle delivery technology in combination with many different pharmaceutical compounds searching for a product that could be protectable via fresh IP, but would also offer an attractive commercial opportunity. This resulted in a broad R&D pipeline (Exhibit 1 demonstrates only some of Medlab’s project pipeline).

NanaBis is Medlab’s lead asset, but we see signs of portfolio optimisation with management picking the likely winners (Exhibit 1, projects with a green star). This mix of projects also includes fairly recent initiatives, such as the mRNA-based COVID-19 vaccine encapsulated in NanoCelle. Portfolio optimisation is typical for pure biotechs in the R&D stage, that is, picking the best prospects and going to the market as fast as possible. Subsequently, licensing income or cash flows from the marketed products support the development of other projects.

In its latest investor presentation (16 November 2021), Medlab states its priority projects are:

At the heart of Medlab’s innovation is NanoCelle, a patented drug delivery platform designed to bypass the digestive tract and first-pass metabolism. NanoCelle’s particles (micelles) have a hydrophobic core and hydrophilic shell, therefore the formulation is water-soluble (suitable for the delivery of insoluble drugs) and stable at room temperature despite the original solubility characteristics of the API.

The API encapsulated in NanoCelle can be absorbed via buccal or nasal delivery using a spray, as opposed to a peroral or intravenous route. The benefits of transbuccal delivery are closer to those of intravenous administration versus peroral (quick resorption, avoids first-pass metabolism in the liver, so the dose can be lowered, no issues with interactions with food), but without intervention.

With minor adjustments to the manufacturing procedure, the NanoCelle technology can be applied to a wide variety of active ingredients, both nutritional and pharmaceutical. The exact composition, possible variations of it and combinations with various APIs are protected by a patent that was first filed in 2016, and now granted in all key markets including Australia, Europe, Canada and the United States. The protection period extends to at least 2036. See our initiation report for a more detailed introduction to NanoCelle.

Medlab’s lead product is NanaBis, a combination of THC (tetrahydrocannabinol) and CBD (cannabidiol) (1:1) cannabinoids encapsulated in NanoCelle particles, which enable a convenient buccal spray formulation. The clinical development of NanaBis gained speed with the initiation of the Phase I/II trial in cancer patients with pain. The trial was completed in March 2020, and subsequently Medlab initiated a large observational study (n=2,000) to gather real world evidence of NanaBis use in cancer patients via the Special Access Scheme in Australia. This is ongoing, but the reduction in pain scores recorded so far is consistent with, or exceeds, the level obtained in the Phase I/II trial. Consequently, Medlab has decided to pursue the registration of NanaBis as a drug.

This work has been done with the botanical version of NanaBis (a cannabis extract). As Medlab announced in May 2021, it has successfully produced a synthetic version of NanaBis, thus significantly streamlining the regulatory pathway. Two synthetic cannabinoids, CBD and THC, will replace the botanical extract in the new version of NanaBis (there was previously no drug master file for neat synthetic THC, known as dronabinol, which Medlab developed with its contract manufacturer; see our initiation report for more detail). Although the transition to a new formulation will require additional work (being carried out at the moment), the advantage that a synthetic formulation offers is significant, as regulators typically prefer synthetic compounds. Botanical extracts can still have trace amounts of many other molecules, which need to be characterised, involving lots of chemistry work. Also, the quality of the source material (cannabis plants in this case) can vary depending on cultivation conditions.

With the opioid crisis unravelling, we believe support for nonopioid pain killers from various stakeholders will only grow. The initial indication is cancer-induced bone pain. The study is designed to demonstrate that NanaBis is effective as monotherapy for the management of opioid-requiring bone pain due to metastatic cancer and that NanaBis monotherapy is non-inferior to opioid treatment (see our initiation report for more detail on the design). Although it is a niche in pain disorders, Medlab believes it represents the fastest route to market. If the data are positive, NanaBis’s label could be expanded via a bridging trial to other pain disorders.

The reformulation should be completed this year, but the COVID-19 pandemic could have an impact. It is still to be determined whether any bridging studies will be required. If not, NanaBis will re-enter Phase III clinical development as a fully synthetic, non-opioid pain relief drug optimised with proprietary delivery technology. The IND application has already been approved by the FDA, which Medlab will complement with the reformulation data. The Phase III protocol has already been designed as well.

NanoCBD is Medlab’s second cannabinoid product in development utilising its proprietary NanoCelle delivery platform. CBD is the next most abundant, but nonpsychotropic cannabinoid in the plant.

In 2021, Medlab announced an agreement with Arrotex Pharmaceuticals, Australia’s largest generics supplier to pharmacies. Medlab and Arrotex are preparing for guidance from Australia’s Therapeutic Goods Administration (TGA). Medlab’s goal is to register NanoCBD as a pharmaceutical grade product, so it could be supplied to Australian pharmacies as an OTC product (Schedule 3 drug).

Initially, Medlab plans to position NanoCBD as a stress reliever. To date, the FDA has approved one pharmaceutical-grade CBD product, cannabis-derived Epidiolex, for the treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome in patients aged two years and older (purified CBD, GW Pharmaceuticals, approved in 2018, expected 2021 sales of US$730m, growing to US$1.4bn by 2026; EvaluatePharma). Although there are no plans with Arrotex to initiate clinical trials at the moment, the strategy is to enter a very large market of anxiety-related medications with a pharmaceutical grade product that is OTC and priced at accessible out-of-pocket levels.

For this reason, the project appears in the preclinical setting in the R&D pipeline (Exhibit 1); however, the product could reach the market quickly. We do not expect it will reach the same levels of peak sales and profitability as therapeutic drugs that have undergone clinical trials and can make legal claims about efficacy. But this a near-term opportunity that could provide a path to a ‘proof-of-concept’. If NanoCBD finds traction in the OTC setting, it means customers are returning to buy more, which would create an incentive to initiate clinical trials and would then support adding specific claims to the product. There is a tailwind in the industry at the moment, which enables this pull-push strategy. The cannabis and related products are being recognised socially and politically more and more. The fact that CBD does not have any significant psychoactive effects yet is one of the most abundant cannabinoids in the plant makes it the most popular cannabis-related product in the consumer market globally. Medlab will report on the progress of discussions with the TGA later this year.

The second most advanced project is NRGBiotic for depression. It is a probiotic formulation that contains Lactobacillus acidophilus, Bifidobacterium bifidum and Streptococcus thermophilus species with orotate. The preliminary results from a Phase IIa study were announced in February 2021 and showed a significant reduction in depression scores and a significant improvement in quality of life from baseline. The final results announced in July 2021 confirmed this.

A recent announcement stated the US patent office has granted the formulation patent for this product, providing protection until 2037. The patent is focused on orotic acid (orotate) in depression, which is the key component of NRGBiotic. Orotate is now protected in United States, Australia, Canada, Europe, New Zealand, Singapore and Hong Kong.

As the next step, Medlab indicated the data from this trial also gave ‘insights how to further optimise’ the formulation. No details were mentioned, but management has stated it will ‘consult with Australian Health Authorities on potential development and evidence next steps’.

The mRNA-based COVID-19 vaccine project is the latest entrant to Medlab’s R&D pipeline. No details have been disclosed so far, but management indicated it is one of the prioritised projects. We presume the rationale here is to encapsulate an existing COVID-19 vaccine with NanoCelle, enabling a non-invasive vaccination. COVID-19 vaccines are a rapidly developing market, but it now seems re-vaccinations (boosters) will be needed for the foreseeable future. Annual flu jabs already put a burden on some parts of the population and some people simply do not want or do not tolerate intramuscular injections. If the combination with NanoCelle is effective, then there could be demand for it. Given the size of the market, even a small market share would translate into significant revenues. The project is still in an early preclinical stage.

In October 2021, Medlab announced it had agreed to divest the rights to its nutraceuticals portfolio in Australia for A$2.2m in cash to PharmaCare, a well-established Australian health and wellness company. Medlab retained ownership of its R&D and both parties have agreed to work together on future product development, potentially providing ongoing innovation to PharmaCare as well as an ongoing income stream to Medlab. All nutraceuticals rights for the rest of the world are still with Medlab, which is actively pursuing opportunities.

Medlab reports the two business segments separately. Nutraceuticals sales (excluding NanaBis for a compassionate use programme) grew to A$4.1m in FY18 and A$5.1m in FY19, before being affected by the COVID-19 pandemic (A$2.0m in FY20), but then a strong rebound to A$3.7m in 2021, as the company shifted its strategy towards online sales. On an EBITDA level this segment reported negative earnings over the same period.

The pharmaceutical research segment generates recurring income from the sales of its cannabinoids via a special access scheme in Australia (A$843k in FY20 and A$733k in 2021). Medlab plans to continue offering its cannabinoid products via this programme in Australia and plans similar initiatives in the UK, other European countries and the United States, so there is potential to grow the top line even before NanaBis completes the Phase III trial.

Medlab’s total FY20 and FY21 revenues were A$5.8m and A$8.1m respectively. Of those amounts A$2.9m and A$3.7m were R&D tax incentives, government grants and other revenues. The rest was from product sales as described above.

Medlab’s total operating expenses were A$19.3m and A$20.5m in FY20 and FY21 respectively, with a net loss of A$13.5m and A$12.4m in the same periods. The costs associated with pharmaceutical research should increase once the Phase III trial starts; however, Medlab will save around A$2m per year after the divestment of the nutraceuticals business (as stated in the announcement). Although the business was being reported as a separate segment, it is difficult to evaluate how the cost structure will change, as some of management had duties in both segments. No pro forma statement is available. For this reason, our estimates are subject to change after the H122 report, which will fully reflect the divestment.

Medlab guided that after the transaction completed (November 2021) it had cash of A$13m. Our profit before tax forecasts for FY22 and FY23 are A$12.7m and A$11.0m. According to our model, the existing cash provides funding well into FY22. We assume an illustrative long-term liability of A$5.1m in FY22 and A$18.2m in 2023 (as per our research principles in lieu of equity funding).

We value Medlab at A$239m or A$0.70 per share, marginally higher than previously (A$0.59 per share) after rolling our model forward and increasing our success probability to 45% from 40%.

As we explained in our initiation report, the probability of success of 40% we used at that time was lower than for a typical non-oncology asset in Phase III (Wong and Siah, 2018; the probability of success for non-oncology assets in Phase III is 60–70%). At that time, Medlab announced the transition to a synthetic version of NanaBis which, according to the latest updates, is going well. In addition, together with its quarterly business update, Medlab released interim real-world evidence analysis from the observational study. In total, 46% of the planned 2,000 participants have now been recruited into the study (up from 40%). The findings from the latest analysis track the previous update and the Phase I/II results (more details on this study can be found in our initiation report). Based on this progress, we increase our success probability to 45%. Once the fully synthetic NanaBis is developed and the Phase III trial starts, we will look to revise our success probability further.

Our valuation is based on NanaBis in cancer-induced bone pain (a detailed discussion of our assumptions is in the initiation report). However, we can see that management is working on many other projects that could progress at varying speeds, and we are re-assessing them for inclusion in our valuation model on an ongoing basis.

Furthermore, to better understand the value of Medlab’s core technology, NanoCelle, we have looked at comparable deals involving drug delivery platforms (as opposed to product-centric deals). Exhibit 3 summarises the EvaluatePharma database of drug delivery platform deals since 2015. The upfront payments averaged $22m, while potential milestone payments averaged $623m. We note that most of these deals were classified as preclinical, meaning that the licensee companies paid for access to the delivery technology and then spent their own funds to continue product development (while the licensor companies collected the payment without involvement in clinical development). With minor adjustments to the manufacturing procedure, the NanoCelle technology could be applied to a wide variety of active ingredients. Since NanoCelle’s key patent has recently been granted in the key US market, in theory there are now no obstacles to Medlab engaging in more concrete out-licensing discussions.