My investment thesis in Biotanix (BOT) is focused on the launch of Sofdra in the US. Royalties and sales outside of the US are ignored as are potential later dermatological products in development, but I expect the net impact is unlikely to reduce the value of BOT and likely highly accretive.

Sofdra US Business Thesis:

·        Value is likely to be well above current market cap (see Basic Valuation below)

·        Management team shows a lot of capabilities of having done this all before and is well motivated and aligned.

·        Platform and go to market (DTC) looks to be well prepared, highly efficient so as to reduce friction of onboarding customers and making sales.

·        Gross to net on products and arrangements with insurers implies very strong GP providing for high profitability at low penetration levels of a large (10m) market pop.

·        Effective in 85% and relative ease or comfort in use is very favourable to alternatives currently in the market, so strong market penetration is quite possible.

·        Well cashed up, management expect it has enough to fund the commercial lunch

·        IP protection – noting that as a pharmaceutical there is a monopoly on Sofdra and they do not have to compete with copycat products or cheap knockoffs.

Key Risks:

·        Approval risk is almost entirely eliminated, but there is still a chance that some efficacy or safety issues may present once in wider use, as is the case for all new drugs.

·        Launch execution and market response may not be as strong as expected and the teams previous success not replicated.

·        Regulatory risk with the change in government (RFK) could impact the gross to net received or insurers ability to fund or impose additional regulatory costs of sale.

There are still a lot of details to check or confirm but I have confidence that assumptions are reasonable and estimates conservative and I don’t expect any missing details are likely to be thesis breaking, hence I have bought a double weighted opening position given the investment characteristics.

Disc: I own RL

Basic Valuation & Questions (3/12/24)

Back of envelope estimate of potential value based on AU$450 net receipts per monthly script for Sofdra in the US only. Looking at a break-even benchmark (0.1%pen) to see the sales needed, a base scenario (0.9%pen) where sales in the US reach levels comparable to Japan adjusted for population differences. Also, an aggressive bull scenario (11.7%pen) based on Matt’s ballpark market penetration for a leading drug being 30% of those seeking treatment plus 1% of the remaining out of the 10m total sufferers in the US.

Valuation Questions (assumptions that need testing and validating):

·        Probability of Base and Bull case outcomes?

·        What are the expected manufacturing costs, ie what gross margin do we model for?

·        Platform and distribution costs fixed and variable amounts to include?

·        Operating costs including sales team and incentives, what to expect?

·        What is a reasonable PE or P/S to work off in 3-5 years

·        ROW opportunities, growth in Japan is unlikely to add much but direct sales into Europe could be significant, cost and time to do so and likely net revenue and GP%?

·        Pipeline opportunities – will absorb free cash short to medium term but how much and what is the revenue and margin opportunity long term?

Conclusion

Subject to a review and refinement of assumptions, but on the basis that they are likely conservative or ballpark reasonable:

Breakeven is probably around a third of the sales achieved in Japan in a market that is three time the size, so should be quite achievable. If sales reach that achieved in Japan adjusted for 3x population then the company is probably a 5x. Above that is in the range of 10-100x.

Hence, it’s quite asymmetric, with the current value achievable on what would be viewed as a disastrous launch. The upside however is astronomical in its possibilities and outstanding at levels of modest success.

Other questions:

·        What are the Royalty rates for Japan? Revenue seems very low for 100k patients on a comparable basis to how US looks, suggests royalties of 1-2%, or much lower sales revenue per customer.

·        What post launch monitoring and validations are needed (ie Phase 4)?

·        What am I missing?