Foamix Pharmaceuticals (NASDAQ: FOMX) shares have been on a free fall for the past six months, declining by more than 30 percent to $2.3. The clinical-stage company which develops and commercializes foam-based formulations for dermatological therapy, appears to have fallen out of favor with investors despite delivering positive news about its pipeline back in April of this year.
However, Foamix should be very attractive to long-term value investors since the underlying fundamentals are solid and when coupled with news of the FDA accepting its NDA for lead drug candidate FMX101, the stock seems to be ripe for a turnaround. Before going into detail about why this could be the perfect time to consider Foamix’s stock, here’s a little bit of background information for investors not familiar with the company.
Based in Rehovot, Israel, Foamix went public in September 2014 with an IPO price of about $8. It started out with FMX101 as its lead product candidate after clinical trials had shown it had the potential to become the new standard of care for moderate-to-severe acne.
The company’s strong executive team led by CEO David Domzalski has been instrumental in steering the company to its current glory and developing the company’s second product candidate, FMX103, being investigated for the treatment of moderate-to-severe papulopustular rosacea.
Both FMX101 and FMX103 are novel topical foam formulations of the antibiotic minocycline. They have been developed using Foamix’s molecule stabilizing technology, a proprietary foam platform designed to optimize the topical delivery of minocycline which is currently available only in oral form despite its widespread use in dermatology.
FMX101 contains micronized minocycline hydrochloride, an antibiotic in the tetracycline class, in a 4% concentration and is intended for use in the treatment of moderate-to-severe acne vulgaris. Acne is a chronic, inflammatory skin condition that affects the skin’s oil glands and hair follicles. It is characterized by both inflammatory lesions (papules and pustules) and non-inflammatory lesions (open and closed comedones) affecting primarily the face and other areas of the body.
In September 2018, Foamix announced that its third Phase III clinical trial of FMX101 (Study FX2017-22) had met both of its co-primary endpoints, (a) absolute change from baseline in inflammatory lesion count at week 12, and (b) investigator global assessment treatment success (IGA 0/1) at week 12, and at least a 2-grade improvement (decrease) from baseline. FMX101 had demonstrated a statistically significant reduction in the number of inflammatory lesions and a statistically significant improvement in patients’ Investigator’s Global Assessment, or IGA, scores, a metric commonly used to measure efficacy in acne trials.
The mean inflammatory lesion count at baseline was 30.7 and 30.8 for FMX101 and the vehicle treatment groups, respectively. The proportion of subjects with an IGA score of 3 (“moderate”) or 4 (“severe”) at baseline was 84.0% and 16.0%, respectively, in the FMX101 treatment group and 83.5% and 16.5%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -16.93 lesions for the FMX101 treatment group and -13.40 lesions for the vehicle treatment group.
We are extremely pleased with the top line results of this confirmatory Phase 3 trial. These study results should support a finding that FMX101 appears to be safe and effective in the treatment of moderate-to-severe acne,” said CEO David Domzalski. “This is the most significant milestone to date for Foamix and brings us closer to helping patients who struggle with the physical and psycho-social effects of acne. If approved, we believe FMX101 would be the first topical minocycline product available for patients in the United StatesFOMX Press Release
The results of these studies served as the basis for the New Drug Application (NDA) for FMX101 in March this year which the FDA accepted and set October 20th as the PDUFA action date.
Foamix’s equally impressive second product candidate, FMX103 also contains micronized minocycline hydrochloride suspended in the molecule stabilizing technology vehicle but at a lower 1.5% concentration for the treatment of moderate-to-severe papulopustular rosacea. Rosacea is a common disorder that mainly affects skin on the face, causing redness on the nose, chin, cheeks, and forehead which causes it to often be mistaken for acne, eczema, or a skin allergy. Over time, the redness can become more intense and blood vessels may become visible.
The company revealed that both Phase III clinical trials for FMX103 (Studies FX2016-11 and FX2016-12) had met each of their co-primary endpoints, demonstrating a statistically significant reduction in inflammatory lesion counts and IGA treatment success of approximately 50% from baseline and that it would also be filling an NDA before the end of the year.
Acne affects approximately 40 to 50 million people in the United States alone, of whom approximately 10 million suffer from moderate-to-severe forms. For most people, acne diminishes over time and tends to disappear or decrease by age 25. However, some individuals continue to suffer from acne well into their 30s, 40s and later.
According to a research report from Allied Market Research, the global acne medication market was worth roughly $8 billion in 2017, and is projected to reach $10.9 billion by 2025 which represents a CAGR of 3.9%.
Topical therapies may have dominated the market in 2017 in terms of administration as highlighted by the report but for mild-to-moderate acne and for maintenance therapy, a variety of treatment options including retinoids, antibiotics, BPO, and azelaic acid were popular. Oral medications are usually recommended as systemic therapies after topical treatments fail to evoke a response while cortisone injections may be used for treatment of severely inflamed or cystic acne.
Oral minocycline, such as Solodyn, has been widely prescribed for the treatment of moderate-to-severe acne. According to its product label, inflammatory lesions were reduced by only 44% at week 12, and a positive effect on the reduction of non-inflammatory acne lesions versus vehicle was not demonstrated. Add this to the fact that the there is a host of adverse systemic side effects of Solodyn such as diarrhoea, dizziness, drowsiness, indigestion, light headedness, loss of appetite, nausea, sore mouth, vomiting and it’s easy to see why FMX101 has the potential to upend the market.
Essentially, I expect the clear distinction of FMX101’s superior efficacy coupled with the lack of side effects to clearly differentiate it from currently available treatments for moderate-to-severe acne. As a matter of fact, Cowen analyst Ken Cacciatore reaffirms this observation explaining that given the wide use of oral minocycline, clinicians are eager to have this option.
For investors wondering just how massive the opportunity could be, the analyst states: “Foamix now has two approvable dermatology assets in FMX-101 for acne and FMX-103 for rosacea,” Cacciatore commented. “Our clinician checks continue to indicate that both have impressive product profiles and that both should find significant uptake, and lead to over $350 million peak sales each.”
Shares are trading at a bargain
Apart from Cowen, a number of other analysts have given their recommendation on Foamix which supports our investment case. For instance, Barclays believes that within a year, Foamix stock will be selling for $10. From $3 million in annual revenue today, the banker predicts Foamix could do as much as $272 million in annual sales by 2025E.
Credit Suisse analyst Vamil Divan on his part sees a high likelihood of regulatory approval for FMX101, applying a 90% probability of success (POS). The analyst rates FOMX stock an Outperform with a $9.00 price target, which implies nearly 200% upside from current levels. With an FDA approval in hand (100% POS), Divan says his price target will be boosted to $11.00.
To illustrate why the above targets are possible, consider this. Assuming a conservative case where peak sales of FMX101 top $200 million and applying a P/S multiple of 3X which is common for commercial drug companies, Foamix would be worth $600 million or about $10.6 per share. Despite the fact that Foamix is not yet profitable, there is no doubt that shares are currently trading at a bargain.
The company has maintained strong financial discipline with net loss for the three months ended March 31 coming in at $15.2 million or $0.28 per share compared to $26 million or $0.69 per share in the first quarter of 2018, representing a decrease of $10.8 million or 42% year over year.
Looking at the balance sheet, Foamix had cash and cash equivalents of $82 million as at March 31 compared to $99.4 million at December 31, 2018. Earlier this week, Foamix announced that it had secured up to $64 million in financing from Perceptive Advisors and OrbiMed. The financing consists of term loans of up to $50 million under a credit agreement, with $15 million provided immediately upon satisfaction of certain closing conditions, $20 million available upon the achievement of certain regulatory milestones and $15 million available upon the achievement of certain revenue milestones.
Additionally, Foamix will receive $14 million in gross proceeds from Perceptive Advisors through a direct registered offering of the company’s ordinary shares. “As we manage the transition of Foamix to becoming a fully integrated commercial organization it is important that the Company is financed appropriately. Combined with our current cash position, we believe these initial investments, along with future access to capital which this transaction provides, will allow us to fund the commercial launches for FMX101 and FMX103, pending FDA approval,” said Foamix’s CEO.
The current U.S. market for treatment of acne is huge and presents significant unmet needs of patients and healthcare providers to be addressed. We believe that the FMX101 product candidate for this indication, if approved, may provide a new treatment alternative for patients and healthcare providers who are unsatisfied with their current therapies while at the same time unlocking tremendous shareholder value. For now the stock appears to have bottomed creating a nice entry point for investors looking for a chance to more than double their money.
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