Expert Financial Analysis and Reporting

Investment Thesis

I have been speaking with ophthalmologists, investors and Alimera (ALIM) management about the upcoming Iluvien launch. As I write this, the sales team is in meetings preparatory to an imminent roll out. I think that it is fair to say that most new product launches have proven disappointing in recent years and this is especially the case with launches by small companies like Alimera who often have inexperienced commercial teams. However, the Alimera management team is highly experienced with product launches:

• the SVP of sales and marketing has 26 years of ophthalmic experience and has launched 10 drugs during his career.

• the four regional directors have collectively 100 years of ophthalmic experience and all have launched products in ophthalmology.

• fifty percent of the sales force is over the age of 50 and 70% have retinal sales experience.

I believe that I am in line with the consensus of investors who are cautious about the launch. However, I am on record as saying that Iluvien over time will find a significant niche in the treatment paradigm for diabetic macular edema and later in other retinal diseases. It is caution about the ramp of the launch and how investors will view it that causes me not to have a Buy on the stock at this time.

I think that investment consensus is that the launch will be slow and viewed as disappointing which means that if evidence emerges that Iluvien is doing well, it would be a significant surprise and have a measureable upside impact on the stock. Contributing to my caution on the stock is that Alimera has a current cash balance of about $75 million and has said that it will spend $30 million on the US launch. If the launch is slow, there is no cash cushion and investors would likely anticipate that the Company will have to do another financing in late 2015 or early 2016 and anticipation of this could be an overhang and roadblock for the stock.

In a previous report, I have laid out the case that Iluvien will eventually play a significant role in the treatment of diabetic macular edema and have postulated US sales of $100 to $200 million in 2019 and European sales of a similar amount so that worldwide sales would be $200 to $400 million,  Capitalizing these sales at a multiple of 5x would be in line with sales multiples for comparable specialty pharmaceutical firms and would suggest a market capitalization of $1 to $2 billion in 2019 which compares to the current $325 million based on fully diluted shares of 61.5 million. Obviously, this is a product and company that I am interested in as an investor. I will be watching the launch closely. If I come to believe that I am wrong in my cautionary stance on the launch, I could move quickly to a buy.

What Is Diabetic Macular Edema (DME)?

The retina is a thin film at the back of the eye which captures the images that humans see. The macula is a tiny oval-shaped pigmented area near the center of the retina with a diameter of about 5.5 mm. Near the macula’s center is the fovea, a small pit that contains the largest concentration of cone cells in the eye. Cone cells are photoreceptor cells that are responsible for color sensitivity and vision. There are about six to seven million cone cells in a human eye and most are concentrated in the macula.

A serious complication of diabetes is that chronically elevated levels of blood sugar can cause structural damage to the inner lining of blood vessels in the retina leading to blood vessel permeability (leakage).This leakage can result in a breakdown of the blood-retina barrier and allow fluid and proteins to leak into the retina. This causes the macula to swell and bulge, distorting nerve cells and causing a decrease in visual acuity and sometimes blindness. Roughly 8% of the U.S. population is diabetic, and I have seen studies that suggest that 7% of diabetics develop DME; however, not all of these cases are clinically significant and demand immediate treatment. DME is a chronic, slowly progressing disease.

The Current Treatment Paradigm for Diabetic Macular Edema; Iluvien’s Role

Historically, laser photocoagulation has been the standard of care for DME and short acting steroids given by injection were also used off-label. Within the last three years, there have been several important new drugs approved. The anti-VEGF products-Genentech’s Lucentis and Regeneron’s Eylea-were approved on August 10, 2012 and July 29, 2014 respectively. The sustained release injectable steroids, Allergan’s Ozurdex and Alimera’s Iluvien, were approved on September 29, 2014 and September 26, 2014 respectively. This clinical trials underlying these new product approvals has given important new insights into the etiology of DME that will change the treatment paradigm.

The anti-VEGF products, Lucentis, Eylea and Avastin (used off-label) address macular edema that results from leaky vascularization that accompanies diabetes. Laser photocoagulation addresses the same target. However, there is also another component to the disease which is inflammation that only can be addressed with steroids. Coming out of the FAME phase 3 trials that were the basis for Iluvien’s approval, clinical trial data has provided evidence that DME starts on the basis of VEGF contributing to leaky vasculature, but over time progresses to an inflammatory condition. As this becomes better understood and accepted in the ophthalmology community, patients will start on the anti-VEGFs and then move to steroids. The FAME studies and other work suggest that the inflammation component of DME can be the driving component within two years of diagnosis.

VEGFs versus Ozurdex and Iluvien

Current feedback from ophthalmologists is that the anti-VEGFs are only effective in about half of the patients treated. Lucentis and Eylea are not nearly as effective in DME as they are in age related macular degeneration where they have shown very impressive efficacy. The patients who don’t respond to the anti-VEGFs can’t be prospectively defined so the question is how ophthalmologists will know when to move on to steroids; i.e. Ozurdex, Iluvien or the unapproved steroids that are injected with a hypodermic needle. Iluvien is a sustained release steroid with a release time up to 3 years in most patients while Ozurdex lasts for perhaps 4 to 6 months.

Genentech and Regeneron suggest that physicians should give about 9 to 12 injections over the course of a year before it can be judged that their products are not working. Another school of thought championed by Allergan and Alimera is that a determination can probably be made after three or four injections. Physicians at baseline can measure the swelling of the retina that is caused by edema and then compare this to another measurement made after a few months of treatment. If there is no improvement, it is strongly suggestive that the treatment is not effective. They can use this measure in conjunction with eye chart determination of visual acuity to judge if the products are working. This will be an important issue to watch in the next few years.

How Worried Are Doctors About Side Effects of Steroids?

The efficacy of steroids is unchallenged; it is concern about side effects that is of most concern to physicians and patients. The most disturbing side effect is an increase in intraocular pressure which can compress the optic nerve and potentially in the worst case cause blindness. There is no prospective way to determine which patients are more susceptible. This is a deterrent to the use of a long acting injectable products like Iluvien and less so for short acting injectables and Ozurdex.

The way the FDA label handles this issue for Iluvien is that it tells doctors to use Iluvien in patients who have been previously treated with a shorter acting steroid and have not experienced a clinically significant increase in intra-ocular pressure. This is actually a pretty broad label. In the FAME phase 3 trials, it was found that 62% of patients in those trials did not develop intra-ocular pressure. Moreover, some of the patients who do develop intra-ocular pressure do not experience a clinically significant increase and can be treated with eyedrop formulations commonly used to treat glaucoma.

The second issue with steroid use is acceleration in the formation of cataracts. This is not that much of a concern. Diabetics have a higher incidence of cataracts in any case and cataract surgery is common and usually inevitable. Steroids would just accelerate the timing of an operation. Importantly, there are benefits to cataract surgery as it improves eyesight. There is also a subtle positive to having Iluvien implanted at the time of surgery as steroids are routinely used to treat inflammation associated with cataract surgery and Iluvien would already be on board and providing an anti-inflammatory effect.

Ozurdex and Iluvien

Allergan in marketing Ozurdex and Alimera in marketing Iluvien are on one level sharing the goal of persuading physicians to look to injectable steroids for the treatment of DME if the anti-VEGFs fail and as the disease progresses. With their recent approvals for both products in September 2014, the companies are only beginning to inform physicians about the attributes of their products. Both companies will educate physicians on the need to move to steroids when the anti-VEGFs fail. The sales forces of both companies will be carrying this message and no doubt will be up against strong counter promotion from Genentech and Regeneron.

Ozurdex and Iluvien will go head to head on which steroid product should be chosen. The clinical trial data gives a modest edge to Iluvien in visual acuity, but this is not overwhelmingly so. Frequency of dosing may be a more important issue. Ozurdex in its clinical trials was dosed at six month intervals and has the significant advantage that it biodegrades in the eye. Iluvien is injected every three years in about 75% of patients; it is not biodegradable but the material used is the same as that in intra-ocular lenses and has been shown to be incredibly safe. In actual clinical practice, I have heard anecdotal reports that Ozurdex has to be given every four to five months. This suggests about two to three injections per year which compares to nine or more for the anti-VEGFs. Iluvien, of course, is given once every three years.

Ozurdex is priced at about $1,300 per injection while Iluvien is priced at $8,800 for three years or $2,900 per year. With injections every four months the cost of Ozurdex per year would be $5,200 per year over three years would be $15,600; with injections every six months the price per year would be $2,600 per year and over three years would be $7,800. Lucentis and Eylea cost about $2,000 per injection so that at nine injections per year they would cost $18,000 per year and $54,000 over three years.

According to the label, before physicians can prescribe Iluvien patients must have been treated with another steroid product and have not shown a clinically significant increase in intraocular pressure. Ozurdex does not have this restraint. Alimera will argue that Ozurdex should be used after the anti-VEGFs and if there is no increase in intra-ocular pressure they should then be switched to Iluvien. Allergan will argue that patients should remain on Ozurdex pointing out that the frequency of injections is much less (two to three per year) than the anti-VEGFs (nine to twelve per year) and that this injection schedule has been well tolerated. Hence patients should welcome Ozurdex after being on the anti-VEGFs. Allergan will also raise the issue that Iluvien effects last for three years so that if a side effect occurs, it will have to be managed for that length of time.

Alimera can come back with a strong counter argument. Most of the patients being treated have vision problem and can’t drive. This means that a caregiver (usually a son, daughter or grandchild) must drive the patients to the doctor’s office for the treatment. This can consume a day away from work or tending children. With Iluvien, the visit for treatment occurs about every three years. This is not an unimportant marketing point.

Reimbursement Issues for Iluvien

Investors have become accustomed to seeing most new product launches disappoint in their early stages because of hurdles put up by managed care. Their decisions for reimbursement for new drugs are driven by costs not medical benefit. They have become skilled at putting up road blocks that delay or dampen product uptake. This is frequently accomplished by requiring companies to negotiate a place on a pharmacy formulary and then being placed in a tier that requires older (cheaper) products to be used first and also requires significant patient co-pay. They also require extensive paper work from physicians that is intended as a deterrent to prescribing and frequently send reimbursement requests back for minor technicalities. This is all meant to put more work on the physician and his/her staff to deter prescribing.

Alimera points out that because Iluvien is a physician administered product, it does not have to battle through the pharmacy formulary process although paperwork requirements are still substantial. Alimera also points out that a reason why managed care blocks new product launches is that this often results in more cost. However, the cost of therapy for the anti-VEGFs is $18,000+ per year so that Iluvien at $8,800 for three years and $2,900 for one year is much cheaper. Relative to Ozurdex, as was previously pointed out it is roughly the same price. Hence there is actually a cost advantage in switching from the anti-VEGFs to the sustained release steroids and managed care might be indifferent to the cost of Ozurdex versus Iluvien.

One issue that Alimera may confront is that payors have to pay $8,800 up front without knowing whether the product will work or not. With Ozurdex, they only have to pay $1,300 to see if the product works. I have seen other companies in a similar situation begin to give something like a money back guarantee in the event that the product does not work. In the case of Iluvien, Alimera might say that they would cover costs by keeping say $1,000 and refunding $7,800 if the product did not perform in a certain period of time. Of course, determining the criteria and time for this proposal could be a significant problem.

How Well Could Iluvien Do In Its First year.

Eylea was approved in July 2014 for DME and Regeneron incorporated estimates for DME in its sales guidance. In early November 2014 for the first time in its history Regeneron had to lower sales guidance because Eylea was not performing as expected in DME. Regeneron said that compared to wet AMD there is less urgency to treat patients and that there is a high degree of satisfaction with laser therapy. Physicians have a sense of urgency in treating wet AMD as it is a very aggressive disease and after diagnosis, physicians quickly treat patients to preserve visual acuity. There is less urgency with DME whose course is more chronic. On the other hand, physicians know that diabetic patients are at risk of DME and they are routinely screened for this. On the fourth quarter conference call, Regeneron was more upbeat.

Some industry sources have suggested that Regeneron is masking a problem with managed care reimbursement by trying to suggest that the disappointment with Eylea in DME is due to physician attitudes toward DME.  Eylea has a significant price disadvantage versus Lucentis in DME as it has one dose and therefore one price of $1,850. Lucentis has two doses: a higher dose approved for AMD costs $1,950 while a lower Lucentis dose for DME is price at $1,170. Eylea has had considerable success against Lucentis for AMD where prices are comparable. However, in the DME market Eylea carries a price premium of $680 per injection.

Ozurdex was approved in the US in July 2009 for the treatment of macular edema following branch retinal vein occlusion (BRVO) or central retinal vein occlusion (CRVO). Retinal vein occlusion (RVO), including BRVO and CRVO, is the second most common retinal vascular disease after diabetic retinopathy and is a significant cause of vision loss. Ozurdex had estimated worldwide sales of $170 million in 2014 and $130 million in 2013 or a 30% increase in sales. It was approved in the US for DME in September 2014 and has been previously approved in some European countries. I don’t have an estimate for its sales in DME.

In the UK, in the one year following NICE approval for use in pseudophakic DME patients, Alimera sold 750 implants. The population of the UK is 64 million and that of the US is 319 million. If the number of per capita implants is the same in the US as in the UK, Alimera would sell 3738 implants and at a price of $8,800 per year this would be $38 million of sales in the first year of marketing. This would be extremely well received by investors.

My published US sales estimates for Iluvien are $200,000 in 1Q, 2015; $975,000 in 2Q: $1,400,000 million in 3Q; and $3,000,000 in 4Q. This would lead to 2015 sales of $5,575,000. While these numbers suggest precision, I have little confidence in them and they are intended to be conservative. This is in keeping with the long string of disappointing new launches in recent years. My sales estimate for Iluvien in Europe is $12,000,000 in 2015.

Alimera may release unit sales of Iluvien in the US and in international markets. This would be a great metric for investors to chart the course of the launch.