This year has been a difficult one for pharmaceutical stocks. Once drug pricing became a hot subject in the U.S. presidential campaign, very little good followed in an industry that was enjoying record-high share prices just over a year ago.
The politicians directed most of their wrath at specific companies, but repeated statements on the hustings from Democratic Party candidates about reining in drug price inflation after the election had its effect on many other drug manufacturers as well.
Against such a dismal backdrop, the performance of Foamix Pharmaceuticals – which develops foam-based drugs to treat skin diseases – is a notable standout. Foamix shares have outperformed the Nasdaq’s biotechnology index by 55% since the beginning of 2016, and risen by 66% since the company’s initial public offering in September 2014.
The Rehovot-based firm, which has a market capitalization of $390 million, raised a combined $172 million in three public offerings – including $57 million in September.
One possible explanation for the company’s performance and its ability to raise so much capital even though it has just 60 employees, is its combination of proven technology, a pipeline of products in relatively advanced stages of development, and cooperative ties with large companies. This is expected to generate a stable revenue stream for Foamix, beginning in 2019.
“Both of us have been intensively involved for many years in the dermatology sector, which is a field with relatively little innovation,” says Dov Tamarkin, Foamix’s CEO, who founded the company with Meir Eini in 2003. “We looked for an idea that would allow us to establish a big business, and then we happened upon creating a preparation using foam,” he added.
Not the first, but fast
Eini and Tamarkin weren’t the first to hit on the idea. Connetics, which preceded them, took two steroid ointments – one for the treatment of allergic skin reactions and another for inflamed scalp, which had been selling for $10 a tube – and turned them into a foam that initially sold for $200 per package. In 2006, three years after Foamix was founded, Connetics was sold to Stiefel Laboratories for $640 million.
But even if they weren’t the first, Eini and Tamarkin acted quickly, entering the field early and creating a measure of protection from future competition. “We weren’t the first in the field, but we created something unique,” explained Tamarkin.
The advantage of foam over ointments, creams and gels or oral medications for treating skin conditions is that it’s absorbed more rapidly and can cover a large area of the body. And it doesn’t penetrate beyond the layer at which most skin diseases are present and then enter the bloodstream. Side effects are, therefore, relatively minimal and the foam can reach areas that are difficult to access with other medications, including intimate areas of a woman’s body.
Foamix’s technology includes nine sub-technologies with foams based, for example, on creams, ointments and oils, and the range enables the company to develop products for various parts of the body and broaden its market potential.
The company’s business strategy involves not giving the world’s major pharmaceutical firms any incentive to develop their own expertise in foam. Rather than wait for them to emerge as competitors, Foamix has instead signed cooperation agreements with many of the industry’s giants, including Bayer, Mylan and Allergan pertaining to product-life cycle management – meaning extending the period during which a product is protected by patent from generics.
Foamix’s most advanced relationship – involving a product that has been approved and is being offered for sale – is with Bayer: Foamix developed a foam form of Finacea, a drug for the treatment of inflammation due to rosacea, a skin disease that generally appears around the age of 30 and most often with women.
The product was developed jointly by the companies using Foamix technology, was approved by the U.S. Food and Drug Administration in July 2015 and is protected by patent until 2029. The collaboration extended Bayer’s exclusivity on its biggest dermatology drug by an entire decade, and it is making every effort to get patients to switch to the foam.
Despite the success of the strategy of developing technology and then making it available to other drug companies for a fee and royalties, Foamix is now pursuing a second course.
“The model worked nicely and we even made money, but we understood that our strategy needed to be more daring,” said Tamarkin. “We came to the conclusion that we could develop a drug and take it all the way to market.”
The trigger for the turnabout was a technological breakthrough: a foam version of Solodyn, which is the leading product for the treatment of acne, with annual sales of $567 million. The reason it’s such an interesting business opportunity, said Tamarkin, is that Solodyn has to be taken orally for 12 to 16 weeks for the treatment of moderate to severe acne. But the drug is an antibiotic, and the general rule is not to take antibiotics for an extended period – to avoid side effects and resistance by bacteria.
Phase II clinical trials of Foamix’s generic foam version of Solodyn (FMX-101) achieved a 66% to 72% reduction in the number of acne sores after 12 weeks of treatment, compared with 50% in a group that received a placebo. There were also two degrees or more of improvement based on an accepted medical scale among 20% to 34% of patients, compared with 14% who received a placebo. Phase III clinical trials are expected to conclude at the end of 2017. If successful, they would enable the company to enter the market of 10 million Americans suffering from moderate to severe acne.
The second product Foamix has been aiming to bring to market by itself is FMX-103, a foam whose active ingredient is minocycline. That’s the same ingredient as in Solodyn, but at a different concentration. It’s designed for patients with moderate to severe rosacea, which causes redness to the face. Phase II trials of the product ended in September, with good results.
Rosacea affects 16 million Americans alone, and the market for medication to treat it is considered particularly concentrated: It’s 80% controlled by Galderma, with annual sales of $650 million from four products; Bayer has the remaining 20%.
Foamix as takeover target
Consolidation in the global drug industry has been particularly severe in the market for skin diseases, which has led to firings and experienced managers looking for work. That in turn has made it easier for Foamix to attract personnel to set up its own sales and marketing operation, in support of its business strategy to go it alone.
“Part of the uniqueness of Foamix as a startup is the combination of development facilities in Israel and a group in the United States, and their members have the ability to take a product that has been proven to work and be effective, and take it all the way to the FDA and to market in an organized manner,” said Tamarkin.
“The cost of a salesperson is $200,000 to $250,000 a year. These are not very expensive staff and they live on commissions, so we think we can meet the goal we have set for ourselves to be a specialty pharma company specializing in one area of treatment with a focus on the United States,” he added.
Companies like Foamix are frequently targeted for takeover: does that fate await the firm in 2019 or 2020?
Pharmaceutical analyst Louise Chen, from Guggenheim Securities, expects that the product Foamix has in its most advanced stage in the pipeline, FMX-101 (for the treatment of acne), could generate revenues of $170 million in 2021 and $500 million annually at its peak. When it comes to FMX-103, for rosacea, she says it could generate revenues of $30 million in 2021.
Chen set a $20 target price for Foamix shares for the next 12 months, reflecting a market cap that, at $730 million, is double its current market valuation. The shares closed at $10.91 on Friday.
Analyst Ken Cacciatore at Cowen & Co., meanwhile, thinks FMX-101 could ultimately achieve sales of $500 million, pointing to two comparable drugs, Allergan’s Aczone and Galderma’s Epiduo, which have $400 million in annual sales. He says FMX-101 will be found to be better than the two others. Also, it will provide an alternative to oral antibiotics that affect the entire body, with the attendant potential to develop resistance rather than solving the particular skin problem, Cacciatore added.
If Foamix’s two leading products do meet expectations, Foamix will become a takeover target and be trading at closer to $1 billion in market capitalization, even if Tamarkin continues to talk about growing the company.
Four months ago, Foamix shares jumped 10% on the day it released favorable clinical trial results for its rosacea drug. Three months before that, GSK sold its foam medication portfolio for the relatively small sum of $50 million to the Mayne Pharma Group of Australia. It included the foams that had initially been developed by Connetics, but which had lost a substantial part of their value when Perrigo developed generic versions.
Perrigo was able to attack the patents on the original drugs, and GSK and Perrigo then reached a settlement that allowed Perrigo to market its version in 2013.
And the fact that Foamix’s innovation is a new delivery system for an existing molecule may lead other companies to believe that Foamix’s patent protection is not an insurmountable obstacle, attempting to do what Perrigo did to Connetics.
Tamarkin rejects the comparison with Connetics, saying that, among other differences, Connetics had developed foam versions of ointments, while minocycline – the active ingredient in two Foamix products – is currently administered orally.
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