Botanix held a webinar to update the market on the commercial launch of Sofdra.

One of the key points I took away is that the number of diagnosed patients in the US is now thought to be 7 million out of 10 million people suffering axillary hyperhydrosis. Botanix previously had this at 3.5 million diagnosed. If correct that means there are twice as many patients who are aware of their diagnosis and open to trying a new product. 

This may also increase the number of patients able to access Sofdra with no out of pocket expenses. If an insurer requires a patient to have already tried an alternative treatment before authorising Sondra, it seems having a larger cohort of diagnosed patients increases the number of patients who have already tried a competitor and be eligible for $0 out of pocket coverage. This could bring forward the customer adoption rate and accelerate sales.

Where to from here?

So far so good. I’m bullish on the prospects for Botanix, to the point where I’m asking myself: what am I missing?

There is execution risk: it’s possible that all these plans don’t work, or the product doesn’t work, or the customers try it and just switch back to competing products.

The thing is it’s not actually a new product and has been successfully sold in Japan (though a different formulation). So it probably does actually work. We’ll have to see how many patients try it and stick with it. Maybe it’s better than the alternative but not that much better? 

If these commercial plans come off the upside is significant. I’d expect low multiples of the current share price and then up from there if customer retention is good. 

So why does it appear to be overlooked? There’s no revenue yet, so the stock probably doesn’t look attractive on traditional metrics. You have to understand what is in motion. I also wonder if it suffers a bit from being in a less glamorous market: they aren’t curing cancer. This is OK with me but maybe makes it less exciting to follow for some.

The share price has had a good run up over the last 12 months, and I’m weighing up whether to buy more. I’m suffering from some price anchoring here - I bought it earlier when it was cheap, but if I do believe the price remains significantly undervalued then the current price is attractive with less risk than when I purchased previously. I probably will buy more but be patient. I don’t think there’s going to be anything in the next few months to cause a price inflection.

$BOT have sent existing shareholders and everyone on their mailing list the updated Euroz Hartley report following last weeks Commercial. It is a thorough and well-written report, so I have put screenshot below in this straw.

Its gives a valuation of $0.33, and clearly seems to encourage the pre-FDA SP uplift short term trade. (Not for me)

I prefer to focus on the long term investment proposition in the success case.

Before reading, be aware the EH supported $BOT in the recent capital raise. It is also likely based on my reading of the disclaimer they have been engaged by $BOT as their defence adviser. EH have been paid by $BOT in shares for the advisory services they've provided. So although EH have certified that this is their own opionion, it is clear that it has been prepared benefiting from the EH collaboration with $BOT management and board.

So when I read it, I read it more as the view of $BOT management than of an independent analyst. So, I wanted to make that clear up front.

You can read the report yourself, but I wanted to highlight a few points.

FDA Approval

The imply a CoS of FDA approval in June as 90%

Benchmarking ASX FDA Knockbacks Leading to CLRs

They compare recent ASX companies that received a knockback at FDA approval (listed in Fig 3. on page 4). Of the 7, 5 were finally approved, one withdrawn, and one under review.

However, what is important, is that none of the sample group received knock-backs purely for label/patient information data. All were some combination of safety, efficacy of manufacutring, with one (later approved) not providing details.

%BOT's CRL was was labelling and patient information. The corrected labelling led to 100% compliance in the human factors study.

Therefore I think 90% is a reasonable CoS, and perhaps given $BOT reports of having high confidence of approval following engagement with the FDA in recent weeks, it is hard to understand the basis for a rejection. Should a rejection occur it would be a shock.

Revenue Profile

Figure 8 on Page 7 provide revenue projections. The growth curve looks reasonable. However, to my eye it looks conservative give the gap in the market that SOFDRA addresses. The projection is to only penetrate 1.0% of the market by 2033 - 9 years after launch.

As ever, the drug will only suit some sufferers, and not everyone will respond. In any event there is certainly upside to this if the drug is well-received by the market.

Cautioning my own enthusiasm, I note that the analysis has considered the progress of the drug in Japan in developing their projections. $BOT reported that Kaken have sold 350,000 units in the last 12 months in Japan. The valuation forecast projects the US taking 5 years to get to this. So following launch (assuming approval) it will be instructive to follow the early US profile compared with the experience in Japan. There has to be a bull case to do much better than the EH profile.

Valuation

Of EH's valuation of $0.33, $0.26 comes from SOFDRA and $0.06 from the development portfolio.

My Quick Valuation - Bull Case - SOFDRA is approved in June with minor risk adjustment

I think the EH sales profile is a prudent forecast, and I base my valuation solely on SOFDRA.

On the basis that $BOT achieve an EBIT in 2029 of US$104m, carrying no debt, and applying tax at 30% and USD:AUD 0.67 give 2029 NPAT of A$109m.

With 1,575m SOI, although $BOT will be highly cash generative quite soon, I'll allow some dilution due to share based compensation, so assume SOI of 1,800 in 2029.

That gives a 2029 EPS of $0.061.

I'll deal with the uncertainty via the P/E ratio, ranging from 25 to 45 - probably very conservative for a high growth pharma company.

I'll add a risk premium to the WACC, and discount at 12%.

My unrisked valuation range is: $0.88 to $0.1.56 (but including a margin of safety in the risk premium)

So, now I am going to apply my 90% CoS, and assume that in the 10% failure case

1. There is a net 5% chance that there is a subsequence approval on what ever the residual issues are, and that the profile gets pushed out by another year, leading to a further discount and a further dilution of 10%.
2. There is a net 5% chance that the drug is withdrawn amd the value of the business is $0.06 of the development portfolio.

Boiling all this up together, and I get a risked valuation of: $1.13

What do I have to believe: 1) SOFDRA gets approved some time in the next year, 2) the telemarketing strategy is successful, 3) the product gets some traction over 9 years with 1% of the potential market.

Not a long bow to draw for a Bull Case.

Now at the start of this straw, I speculated that EH are $BOT's defence advisor. If their valuation is truly $0.33 that clearly cannot be true, because as my analysis shows, if you believe the forecast, and had deep pockets, you'd happily put in a takeover offer today of $0.50 to $0.60. The board should send any acquirer away for anything south of $0.60 or even $1.00 IMHO, given the upside which I haven't even attempted to assess.

So there is a lot of risking being applied to the EH analysis, unless I am missing something!

(I note that my fellow $BOT bull @Nnyck777 is at $1.92 ... I'm slowly getting there :-)

Disc: Held in RL and SM