Acadia Pharmaceuticals Implies Sanuwave Could Triple On New Study Design

Apr 5 2013, 04:50  | 2 comments  |  about: SNWV.OB, includes: ACAD, ENDP, SHPG, SNN

By Nouvelle Asset Management: Disclosure: I am long SNWV.OB. (More...)

Acadia's (ACAD) robust data, after two unsuccessful Phase III studies, and the ensuing 325% rally in stock price foreshadows a spectacular success that could await Sanuwave (SNWV.OB) investors in less than twelve months. As Acadia's management works diligently to initiate a second Phase III study intended to demonstrate Pimavanserin's benefit in treating Parkinson's disease psychosis (PDP), Sanuwave prepares to show that dermaPACE is superior to placebo in healing diabetic foot ulcers. Sanuwave and Acadia share important attributes, including:

1. Targeting Multi-Billion Dollar Markets - Diabetic Foot Ulcers (DFU) is a $2 Billion Opportunity; Psychosis in Parkinson's disease is worth at least $1 Billion in the United States and >$2B worldwide.
2. Addressing Unmet Medical Needs - Therapies for DFU are limited in robustness and mainly "promote" healing, but do not treat the disorder; off-label use of antipsychotic drugs for PDP is known to counteract dopamine replacement agents and therefore impair motor function.
3. Broad Patent Protection Creating Potential for Expanded Labels- Acadia's agent could benefit patients with Alzheimer's psychosis, an opportunity estimated at 5X the size of PDP; dermaPACE could see application in treating pressure sores, burns and traumatic wounds, and chronic mixed leg ulcers, which is a $5 Billion market in the U.S. alone.
4. Positive, Long-Term Safety Data Suggesting "Adverse Events" Will Be A Non-Issue upon final study outcome and upon an NDA and PMA submission for Acadia and Sanuwave, respectively.

There is one other similarity - which Acadia's long-dated investors would attest to best - that both companies' initial registration, or Phase III, studies failed to show a "statistically significant benefit" in the experimental or active arm versus placebo. In fact, those three words in parentheses could have been taken out of either company's data announcement. But more importantly, analysis of the data showed that Pimavanserin and dermaPACE benefited patients receiving treatment - a flaw in the design of the studies led to an outcome suggesting otherwise. In July 2010, Acadia initiated a new Phase III study of Pimavanserin, this time designing the trial as a two-arm study, with the active group receiving the highest dose of drug (40mg) experimented with in previous studies (the other arm was the control group). Results from this study were announced November 2012, and clearly showed a statistically significant improvement in SAPS-PD score (primary endpoint):

The pimavanserin arm demonstrated a robust 5.79 point improvement in psychosis at day 43 compared to a 2.73 point improvement for placebo, representing a highly significant and clinically meaningful treatment difference of 3.06 points on SAPS-PD (p=0.001).

Sanuwave has similarly analyzed results from its Phase III study of dermaPACE in ~200 patients with diabetic foot ulcers and concluded that to compensate for the "placebo effect" it will need to boost treatment (which is effectively what Acadia did with its highest dose of Pimavanserin -40mg- in its active arm) by adding four additional bi-weekly treatment sessions until the 12-week data read-out is complete (per its annual report and found in various other sources).

Powering Study to Show Statistical Significance, Robust Efficacy

Specifically, the data from the initial diabetic foot ulcer study showed that:

1. dermaPACE showed a strong positive trend in the primary endpoint of 100% wound closure;
2. dermaPACE reached statistical significance at 20 weeks in the intent-to-treat (ITT) population with 36% of dermaPACE subjects achieving complete wound closure compared with 23% of control subjects (p=0.047);
3. 38% of dermaPACE subjects in the efficacy evaluable (EE) population achieved complete wound closure beginning at 20 weeks, compared with 21% of control subjects (p=0.018);
4. Subjects treated with dermaPACE achieved a significant increase in the rate of complete and/or ≥90% wound closure (p=0.0161) with 48% of dermaPACE subjects responding compared to 31% in control-group;
5. For dermaPACE-treated patients achieving ≥ 90% wound closure at 12 weeks, the median wound closure exceeded 99%.

As with Acadia's decision to use the highest dose of Pimavanserin in its third Phase III study, Sanuwave's safety data also supports "boosting" treatment to include bi-weekly dermaPACE procedures following an initial two weeks of treatment. Sanuwave's discussion of dermaPACE's safety data states:

There were no meaningful statistical differences in the adverse event rates between the dermaPACE treated patients and the control group. There were no issues regarding the tolerability of the treatment which suggests that a second course of treatment, if needed, is a clinically viable option.

Sanuwave's initial Phase III study concluded in 2011; the FDA rejected the company's PreMarket Approval (PMA) application stating that the primary endpoint, complete (100%) wound-closure at 12 weeks, was not met (at least not "statistically"). However, the FDA agreed with Sanuwave that:

1. dermaPACE benefited patients with diabetic foot ulcers;
2. The company should be allowed a bridge or abbreviated study;
3. It would support the company using Bayesian statistical principles to establish dermaPACE treatment benefit;
4. Sanuwave would need to enroll only ~90 patients to show statistical significance with dermaPACE.

Bayesian statistics will allow Sanuwave to overlay data from this new pivotal study with outcomes from its previous Phase III trial - similar to the way safety data is viewed by the FDA across all studies, with the added benefit that the previous data will power efficacy in this upcoming study.

This new Phase III study of dermaPACE is slated to start enrolling patients this quarter (Q2 2013) and take about 10 months in all to read-out. This means that in less than 12 months, Sanuwave investors could benefit from the same "turn of fate" that Acadia's investors saw last fall.

(click to enlarge)

The improvement in design further suggests that the study will see a positive outcome and position Sanuwave for FDA Approval - data from the previous study shows the hurdle to overcome may be small. For instance, when Sanuwave analyzed patients whose wounds healed ≥ 90% at 12 weeks (the primary endpoint), median wound closure exceeded 99%. As dermaPACE has shown a clear benefit, boosting patients (patients were NOT boosted in the original study) is likely to promote 100% wound closure at 12 weeks. This would ensure Sanuwave meets the primary endpoint in this pivotal study.

$150 Million Wound-Care Product Overcame the Same Challenges Facing Sanuwave Today and Was Bought For $750MM

In December of 1999, a small company called Advanced Tissue Sciencesannounced results from a study of a device intended to treat diabetic foot ulcers. The results of a study of trial showed that:

Although statistical significance was not achieved at the interim analysis, Dermagraft was healing more ulcers than the control treatment at twelve weeks for all patients and healed approximately twice as many ulcers as the control treatment in diabetic foot ulcers […].

In the context of DFUs, the results echo the outcome of Sanuwave's study of dermaPACE.

The release by Advanced Tissue Sciences goes on to state:

The interim analysis has been presented to the Food and Drug Administration (FDA) and further discussions are planned, particularly on how a strong interaction between ulcer duration and healing (p value = 0.017) should be considered in the clinical trial. […]The FDA had requested an additional controlled clinical trial be completed for Dermagraft in the treatment of diabetic foot ulcers.

The FDA initially rejected Advanced Tissue Sciences' PMA application for Dermagraft, a skin substitute made from human cells known as fibroblasts placed on a dissolvable mesh material, which added $153.8 Million to Shire's (SHPG) top line revenues in fiscal 2012.

Dermagraft was approved by the FDA in 2001 after an additional studyreported statistically meaningful results in patients treated with the skin substitute:

Dermagraft demonstrated significantly improved healing over conventional treatment. For the primary endpoint of complete wound closure by twelve weeks, 30% of patients treated with Dermagraft healed (39/130) compared to 18% of patients receiving control treatment (21/115).

Smith & Nephew (SNN), who had co-developed Dermagraft, eventually assumed control of the product, before selling the rights to Advanced Biohealing, who grew sales of Dermagraft to $146 Million a year by 2010. Shire paid more than 5X sales to acquire Advanced Biohealing and Dermagraft in May 2011. What had begun as a "failed" study turned into a notable success story in chronic wound therapy.

Differentiated Wound Therapy Technologies Have Historically Been Acquired at Huge Premiums

Other case studies further build a case for Sanuwave and suggest that (A) the outcome of Sanuwave's DFU study is likely to be positive and (B) small wound therapy companies with strong intellectual property and differentiated products are readily acquired by larger wound therapy companies.

• Healthtronics, the predecessor company to Sanuwave, wasacquired for $258 Million by Endo (ENDP) in 2010. Sanuwave's dermaPACE is based on the same technology that Healthtronics uses to lead all others in share of the $600MM lithotripsy market.
• Lifecell Corp. was bought for $1.7 Billion by Kinetic Concepts(KCI, now private) in 2008. KCI paid roughly 8.5 times Lifecell's FY2007 sales.
• Smith & Nephew paid $782 Million for Healthpoint Biotherapeutics in November 2012 to acquire the company's Santyl franchise, an ointment used to treat wounds.

The following table aggregates sales of leading wound therapy products, several of which we've already touched on.

Wound Therapy Competing Products

Company	Product (TYPE)	Sales Revenue	Year
Shire	Dermagraft (skin substitute)	$153,800,000	2012
Kinetic Concepts	V.A.C Franchise* (Negative Pressure Wound Therapy applies suction to debride and manage wounds	$1,400,000,000	2010**
Integra Life Sciences	Bi-Layer Wound Matrix * (wound dressing)	$199,904,000	2012
Organogenesis	Apligraf* (skin substitute)	>$100,000,000***	2012
Smith & Nephew	Negative Pressure Wound Therapy, Santyl (topical gel), Allevyn, others*	$1,000,000,000	2012
MEDIAN		$199 Million

*Includes revenue using product outside of Diabetic Foot Ulcer treatment;
**Last fiscal year reported publicly, company went private in 2011;
***Company is private, based on information released by company

Investors should note that not one product offered in the table (above) "treats" wounds, rather, they're designed and marketed as devices that "promote" and help "manage" wounds. Sanuwave's device, dermaPACE, has a differentiated mechanism that induces biological response in the body that repairs the wounds innately. This mechanism, using acoustic shock waves created by dermaPACE, is both well understood and widely accepted as millions of patients have been treated using this technology with procedures such as lithotripsy for decades. Further, dermaPACE is cheaper to use than Negative Pressure Wound Therapy and other leading therapies, which creates a compelling opportunity for entry and poses significant threat to competitors.

(click to enlarge)

Source: Sanuwave Corporate Presentation

What Are The Risks?

Risk associated with development-stage companies is mostly contained in two caveats, i. financing risk and ii. product development risk. Both Acadia and Sanuwave will need to raise additional capital unless either of the two partners their product(s) or is acquired by another company. Both companies have, however, raised enough money to provide a significant bridge to their next catalyst(s), respectively. For instance, Acadia will likely report data from an ongoing study or from the second Phase III trial with Pimavanserin before needing to raise debt or sell equity. Sanuwave, similarly, is expected to announce a licensing deal and initiate the follow-on study with dermaPACE. While these catalysts will not provide additional sources of capital directly, the market will have a better grasp on the efficacy behind the two companies' respective products and value them accordingly. The second risk, product development, is one we've addressed extensively in this article. Both technologies appear at least somewhat de-risked because of the robustness of prior data, i.e. Pimavanserin, and extensive use in other indications, i.e. dermaPACE. Both also have years of data showing safe use in humans. That being said, the risk(s) present here are what drive opportunity and the potential for an extraordinary return on investment for those who chose to bet on the technologies' success.

Valuation Explains Why There's Tremendous Upside

Pimavanserin in Parkinson's disease psychosis drives a valuation in the neighborhood of $1 Billion if successfully developed. The market opportunity is estimated at 25-50% of Parkinson's patients, who number 7-8 Million worldwide. As noted, there's tremendous value in an expanded label to include use of Pimavanserin in Alzheimer's psychosis, which is an opportunity perhaps 5 times the size of PDP. As data from ongoing studies in other indications is released, positive results will drive valuation north of $1 Billion. If investors assume ~90MM shares are outstanding on a fully-diluted basis, the target price of $1B yields a price-per-share of $11. An analyst at Jeffries rates the company a "buy" with a $13 price target.

Brian Marckx , an analyst with Zacks, values Sanuwave at 2X 2016 sales, which I believe is low given the growth opportunity. In fact, our findings show that companies with a differentiated, proprietary wound care product are acquired for 4-8X sales (see acquisitions by Shire, Endo, Smith & Nephew, Kinetic Concepts). If we assume 1% peak sales penetration in the diabetic foot ulcer market, and value those sales at a 4x multiple (lower range), Sanuwave is worth at least $80MM to an acquirer, or a 360% premium to the last few days of trading. A simplified table demonstrates this (below).

Diabetic Foot Ulcer Market (U.S.)

Peak Sales Penetration	Valuation w/ Multiple
	Low (4x)	Mid (6x)	High (8x)
1%	$80,000,000	$120,000,000	$160,000,000
1.25%	$100,000,000	$150,000,000	$200,000,000
1.5%	$120,000,000	$180,000,000	$240,000,000
1.75%	$140,000,000	$210,000,000	$280,000,000
2%	$160,000,000	$240,000,000	$320,000,000
2.25%	$180,000,000	$270,000,000	$360,000,000

As Sanuwave expands its label for dermaPACE to include other wounds and non-healthcare indications (see corporate presentation), the valuation expands dramatically. There are only about 21.5MM shares outstanding, with warrants and options mostly priced above $3, therefore anti-dilutive at these prices. Any one of these scenarios (which assume dermaPACE successfully completes clinical studies) suggests there is an enormous information arbitrage opportunity with Sanuwave. While the risk (as discussed, above) is factored into the valuation, the upside is clearly not (notice we assumed the most conservative valuation from our valuation table).

Conclusion

Sanuwave epitomizes an opportunity similar to that seen with Acadia before release of data from its Phase III (the "020") study of Pimavanserin. Because the market had not factored in the potential for strong, positive data, shares of Acadia tripled on the unexpected news. Sanuwave is in a similar position to reveal surprising efficacy with dermaPACE in the diabetic foot ulcer indication in about one year. The study is a rare abbreviated trial (per the FDA's suggestion) similar to the one used to support approval of Shire's "Dermagraft" (see discussion of "Advanced Tissue Sciences). Our analysis of the risks and potential upside suggest that shares could at least triple on positive data and trend higher if or when Sanuwave expands the indications pursued with dermaPACE. Either company could also be a potential acquisition target if robust data is demonstrated throughout, since both companies are targeting large, unaddressed medical needs with highly differentiated drug/device offerings. To Sanuwave's benefit, dermaPACE's mechanism of action has been studied for decades and is generally well accepted, non-invasive and believed to be safe. Further, dermaPACE could offer significant cost savings versus competing therapies (see chart under competitive analysis), which creates an economic incentive for healthcare providers to readily adopt the device. And, as we've demonstrated, differentiated, robust wound therapy companies are generally acquired by larger companies at substantial premiums, which explains why there are few such companies in existence (we drive this fact with examples from Shire, Endo, KCI, and Smith & Nephew, although there are others). Our research clearly demonstrates that the market has inefficiently priced shares of Sanuwave, and that it is likely the company will see a substantial revaluation upon significant milestones anticipated over the next 12 months.