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Expert Financial Analysis and Reporting

pSivida: Thoughts on pSivida in the Aftermath of the Complete Response Letter on Iluvien (PSDV, $2.87)

Background on the Complete Response Letter
This note focuses on the implications of the complete response letter (CRL) received by Alimera (ALIM) for Iluvien. This product was developed by pSivida (PSDV) but was partnered with Alimera. This report deals only with the investment significance for pSivida.

Alimera announced that it had received another CRL from the FDA on the resubmission of the Iluvien NDA. This follows two previous CRLs received on 12/23/10 and 11/11/11. The CRL appeared to be the result of FDA concerns about the benefit/ risk of Iluvien. The agency indicated that in order to satisfy its concerns that Alimera would have to conduct a new trial with at least 12 months of follow-up. It seems highly unlikely that Alimera would consider doing a new phase III trial in diabetic macular edema (DME). The trial might take three to four years to complete and a financially strapped Alimera probably lacks the financial resources to conduct such a trial.

Could Iluvien Yet Receive Approval for Pseudophakic Patients?
The situation looks completely black except for one little ray of hope. The FDA has said that it will convene an FDA advisory committee on Iluvien on January 27, 2014. This is highly unusual in the aftermath of issuing a CRL and like many other investors I am scratching my head on this. In grasping for an explanation I came up with this hypothesis. The side effect issues with Iluvien as shown in pivotal FAME trials were elevated intra-ocular pressure that caused the use of eyedrops in about 38% of the Iluvien patients as compared to 14 % in the control group. Cataracts occurred in 80% of the Iluvien treated patients as compared to 46% in the control arm.

I think the data in FAME clearly supports the effectiveness of Iluvien in diabetic macular edema. Let’s hypothesize that the FDA believes Iluvien is effective and is willing to accept the risk of elevated intra-ocular pressure so that its concerns center on the high rate of cataract formation. If that is the case, there is a sub-group of pseudophakic patients who have had their natural lenses removed and replaced with an artificial lens. Without their natural lenses, they would not be at risk of cataract formation. Also, Alimera has shown subset data that suggests that Iluvien is very effective in that patient population. This then could be a group of patients in which the benefit/risk is very positive.

There is some chance that the purpose of the FDA advisory committee is to evaluate whether Iluvien should be approved for pseudophakic patients. If so, the next question to ask is whether the FDA might decide to approve Iluvien on the basis of existing data. It would be highly unusual for the FDA to approve a drug based on a retrospective analysis of a patient sub-group even if the AdCom felt that the benefit/risk was positive; the FDA might still require a new trial. I can’t place high probability on the FDA approving Iluvien for pseudophakic patients on the basis of existing data, but I think that I want to hold my stock until I can judge the outcome of the AdCom meeting.

From the standpoint of pSivida (PSDV), this raises some possibility of the positive scenario yet being achieved. As you may recall, pSivida is developing its proprietary drug Medidur for the condition of posterior uveitis; it uses the same active pharmaceutical ingredient, same dosage and same delivery vehicle as Iluvien. If Iluvien is approved, pSivida would receive $25 million and as importantly it could speed the approval of Medidur as explained below. The US addressable market for Medidur in posterior uveitis could be on the order of $360 million, roughly the same magnitude as Iluvien in DME.

The approval of Iluvien for pseudophakic patients would trigger the bull case of the immediate payment of $25 million which would put pSivida in an extremely comfortable cash position. Also, the post marketing clinical experience with Iluvien might give the FDA sufficient understanding of the long term safety profile of Iluvien to approve Medidur with just one phase III trial.

I think that approval of Iluvien is the most positive outcome for pSivida, but interestingly, I have hear a counter argument that takes the position that non-approval might be more positive by improving its long term prospects. The rationale is that if Medidur is approved, it would get the entire posterior uveitis market plus off label use in DME. I can see some merit in this argument, but think that approval of Iluvien is a more positive outcome.

Implications for Medidur
pSivida has just started the first of two planned phase III trials for Medidur; it will enroll 120 patients. According to the study should complete by July of 2015 so that topline efficacy data could be available in late 2015. The study also requires a three year safety follow-up on patients that could be completed in July 2017. The second phase III will enroll 180 patients and would probably start in 2H, 2015 and I would expect efficacy topline data in 2H, 2017. I think that the Company could file an NDA if the primary efficacy endpoint is reached in both trials. This assumes that the FDA would be comfortable with the safety follow-up data from the first 100 patients in the phase I trial and could result in approval in 2018.

The FDA would normally ask for safety data on significantly more patients than the 300 patients involved in the phase III trials of Medidur. I initially thought that the Medidur NDA could reference the Iluvien safety data base only if Iluvien was approved. This would have required more than 300 patients and the second phase III would have to be significantly larger than 180 patients. However, in a new and positive development at a recent meeting with the FDA, the agency indicated that PSDV could use the existing Iluvien data base for safety in support of the posterior uveitis indication being sought by pSivida, even if Iluvien is not approved; this is a major positive for Medidur that I had not anticipated in my earlier reports.

There is some chance that if Iluvien could be approved on the basis of one phase III trial if the results are striking and if the FDA believes that it understands the safety profile of Medidur which would be in part based on the Iluvien safety database. With this optimistic scenario, Medidur could be filed in 2016 and receive approval in 2017. If the FDA requires two trials, approval could be received in 2018. Again, I had originally thought that approval on the basis on only one phase III trial could only occur with approval of Iluvien. I now think that there is some chance of approval based on one phase III trial regardless of Iluvien approval. Let me emphasize that there is a much greater chance for the FDA to require two phase III trials and this is what pSivida has planned for.

Tethadur Could be A Catalyst for pSivida
In regard to possible stock performance, other than the “Hail Mary” potential for Iluvien approval for pseudophakic patients, the possibility of which we could know in January or February of 2014, there is still one other potentially important catalyst sometime in the next six months or year for pSivida that relates to its new drug delivery technology Tethadur. Let me say from the outset that it is difficult for me to evaluate the potential of Tethadur as it is still in the pre-clinical stage.

Tethadur is porous silicon that has a honeycomb structure that can be formulated in particles with controllable properties of porosity, oxidation and dissolution. The material has a high affinity for proteins and the pores of this nanostructure can be designed to fit a target protein. pSivida has indicated that 1 cm3 of porous silicon (sugar cube size) has a surface area equivalent to a tennis court. The pore size can be controlled over a wide range and surface chemistry can be adjusted to facilitate loading of most biological drugs and provide sustained drug release. The resultant product is bioerodible so that no residue is left in the body. A biological drug can be lyophilized (dried into a powder). Water is then added to the lyophilized drug and the solution is drawn into a syringe that is pre-loaded with the appropriate Tethadur formulation. After waiting for a few minutes to allow the drug to distribute through the Tethadur formulation, the contents of the syringe are then injected.

The Tethadur technology is potentially applicable to any biological drug and may have a significant opportunity in the development of biosimilars to current large selling products; it may improve the performance of those drugs through sustained release. Of particular interest is that pSivida has said that it has a fully funded agreement with a major biotechnology company to evaluate the potential for sustained release of a major product to the back of the eye. The initial agreement is for the pre-clinical setting. pSivida has not said what the drug is, but speculation naturally centers on Regeneron’s (REGN) Eylea or Roche’s (RHHBY) Lucentis. These drugs are enormously successful for the treatment of “wet” AMD but must be must be injected into the eye on a monthly or six week time frame.

If Tethadur could provide a less frequent injection schedule of say three to six months for either Eylea or Lucentis and retain the efficacy of these drugs, most of their combined sales could transfer very quickly to the Tethadur based product. This is a very significant opportunity as I estimate that Lucentis will achieve worldwide sales of $1.9 billion in 2013 and that Eylea’s worldwide sales will reach $1.4 billion. At this point, this is something of a dream. However, if pSivida were to announce a licensing deal for clinical development of Tethadur for this purpose, I think that it could cause a major move in the stock. At this point, the odds of this happening are very difficult to predict.

Financial Considerations
If Iluvien is not approved, pSivida remains in a reasonable cash position as I estimate that it currently has about $19 million of cash. With a quarterly burn rate of $2.0 to $2.5 million, PSDV has the cash resources to last until mid-2015 which would allow investors to see the topline results of the first phase III trial of Medidur and potential developments with Tethadur. In this two year period there could be payments from Iluvien sales in Europe and licensing deals for Tethadur that bring in meaningful amounts of cash so that the Company might not have to do an equity financing. I do not anticipate the need for any sizable equity offering in this period. With success in that trial, PSDV should be able to raise capital on reasonable terms to conduct the second phase III trial for Medidur.

So What Would I do with the Stock?
At current price levels, I want to hold on to my stock. As we approach the January 27, 2014 AdCom meeting, I think that the stock might trade up from current levels on anticipation of the possibility of Iluvien approval in pseudophakic patients.

In the event that Iluvien is not approved, I don’t see the risk of needing to finance out of desperation and there is reasonable, possibly quite exciting, new product potential. The upside for the stock would relate to developments with Tethadur, results for which are highly conjectural at this time. A licensing deal for Tethadur with either Lucentis of Eylea could be a major upside catalyst.

I don’t see the stock as having much downside risk without US approval of Iluvien over the next two years as we wait for the Medidur phase III data and news on Tethadur. However, barring some truly striking event related to Tethadur, I wouldn’t see the stock as having much upside either.

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