Transdel Pharma Worth a Look - Analyst Blog

Initiating Coverage

We are initiating coverage of Transdel Pharmaceuticals (TDLP) with an Outperform rating and price target of $2.50 per share. We believe that TDLP-110, currently known as Ketotransdel, has the potential to be a meaning share gainer in the treatment of acute soft tissue pain.

Ketotransdel (10% w/w ketoprofen transdermal cream) has significant advantages in the treatment of sight-specific pain over traditional oral medications such as Cox-2 inhibitors (Celebrex), oral NSAIDs (ibuprofen, naproxen) and acetaminophen due to the lack of systemic exposure. As such, risks to the heart, the gastrointestinal track, the liver and the kidneys are substantially reduced.

Additionally, the company’s proprietary transdermal delivery system (TDS), Transdel, offers improved safety and tolerability over currently approved NSAID patches and creams. In our view, Ketotransdel is at least a $200 million product in the U.S., with upside to $300 million or beyond depending upon marketing, distribution and potential label expansion into osteoarthritis (OA) and musculoskeletal pain.

Transdel has completed one phase III clinical program with Ketotransdel for the treatment of acute soft tissue pain. The trial completed enrollment at 364 patients in July 2009, and offered top-line data in October 2009. The data demonstrated statistical significance (p<0.05) in its primary endpoint utilizing a Per Protocol (PP) (n=252) analysis, and a favorable trend in the full Intent-To Treat (ITT) analysis.

In January 2010, management conducted a further in-depth analysis of the full patient population and identified 35 patients who did not meet study entry criteria at the time of randomization, mostly due to the use of recreational drugs during the clinical testing. Analysis of this new modified ITT population yielded statistical significance on the primary endpoint at p=0.038. Additionally, pain curves over time show consistent separation between treatment groups reaching statistical significance in favor of Ketotransdel, using both the original and modified ITT population.

During the phase III program, Ketotransdel also demonstrated an excellent safety and tolerability profile. In particular, there were no Ketotransdel treatment-related gastrointestinal, cardiovascular, renal, hepatic or other clinically relevant adverse events reported. Ketotransdel was well absorbed through the skin, and in support of the safety and tolerability only minimal blood concentrations of ketoprofen were detected in a subset of patients who underwent blood sampling for pharmacokinetic (pk) analysis.

We believe the market has yet to fully understand the acceptability of the modified ITT population analysis and is thus skeptical this first phase III program. Our understanding of the ICH-E9 guidelines are that Transdel’s exclusion of the 35 “non-qualifiers" will be accepted by the U.S. FDA, and the modified ITT and PP analysis showing Ketotransdel is both a safe and effective drug is validated.

This data will be presented as a poster at the 13th World Congress on Pain to be held August 29th to September 2, 2010 in Montreal, Canada. The abstract is titled, “Efficacy and Safety of Ketoprofen 10% Cream in the Treatment of Pain Associated with Acute Soft Tissue Injuries (Phase 3 Study TDLP-110-001)." We think once the market sees the actual data presentation and begins understands management’s modified ITT analysis, the stock will react accordingly.

The next step for management is to secure a development and commercialization partner for Ketotransdel. With a clean safety and tolerability profile, and one positive phase III trial in the books, we believe that management will be able to secure this partnership before the end of the year. The product offers significant advantages over competing topical treatments, including King’s Flector Patch and Novartis’ Voltaren Gel. This should attract a specialty pharmaceutical company interested in pushing Ketotransdel into the second confirmatory phase III program in 2011, with a potential U.S. 505(b)2 application set for 2012.

Stock Undervalued

We value Transdel at approximately $2.50 per share. We arrive at this target by conducting a discounted (risk-adjusted) valuation analysis on Ketotransdel to a potential licensing partner. We have used five previous deals for transdermal pain medications (Astellas and NeurogesX with Qutenza, Covidien and Nuvo Research for Pennsaid, Endo and Novartis for Voltaren Gel, Alpharma and IBSA for Flector Patch, and Alpharma and IDEA AG for Diractin) as a roadmap for what a potential deal for Ketotransdel may look like. We conclude that management should be able to secure an upfront payment on Ketotransdel in the area of $15 million, with potential backend milestone payments totaling $50 million or more.

We see peak sales in the U.S. for soft tissue pain at $200 million. Off-label use, and the potential that a partner eventually conducts a clinical program in OA to attempt to gain an OA-associated pain approval, can bring the peak sales on Ketotransdel to $300 million or above. NPV of Ketotransdel at this time equates to a stock price of roughly $2.50 per share. This value does not ascribe any value for the cosmeceutical business, including the deal with JH Direct, which we view as upside to the story.
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