Little Shop Of Wonders

Recent events don't dampen the prospects for BioMs Medical.

It's been a tough few months for shares of BioMS Medical (TSX: MS), a small Edmonton-based biotech company that has come a long way in developing and testing a promising new drug for the treatment of multiple sclerosis. First, there was the withdrawal in February of Tysabri, an MS drug manufactured by U.S.-based Biogen Idec and Irish drugmaker Elan PLC. The companies took it off the market in February after the drug was linked to three cases of an often-fatal brain disease–progressive multifocal leukoencephalopathy. Despite the fact that Tysabri is based on a completely different approach than BioMS's MBP8298, and although it was approved to treat a completely different form of MS–the Canadian company's drug is for treatment of the chronic progressive secondary form, Tysabri is for the relapsing remitting form–news of the recall spooked some investors into thinking BioMS's drug might be implicated as well. Then there was the shock that came when the University of Alberta, a major shareholder in the company, indicated that it would release as many as 500,000 BioMS shares onto the market. Finally, the company announced in the spring that it was ramping up plans to repurchase its stock, increasing the number of shares it could buy under a normal-course issuer bid to one million, from 200,000.

The result of all this is that BioMS shares, which were trading in May as high as $5, have been in a slump, now changing hands at about about $2.85. That's just off its 52-week low of $2.35, hit in July. But BioMS CEO Kevin Giese says that recent events don't dampen the prospects for the company or for MBP8298, which is now in pivotal Phase 3 trials. The drug in earlier tests delayed the advance of secondary progressive MS in all patients with the DR2 or DR4 immune response genes; patients with those genes comprise 75% of all people with MS. “We can never stop the progression of MS,” Giese says, but MBP8298 appears to “delay it for a long period of time.” He adds that some MS patients have been receiving MBP8298 on an experimental basis since the mid-1990s, for a combined total of more than 300 patient-years, with good results.

The origins of BioMS lie in the research of two University of Alberta scientists, Dr. Kenneth Warren and his research associate Ingrid Catz. Warren and Catz discovered that secondary progressive MS patients have higher levels of antibodies against the myelin basic protein, or MBP, in spinal fluid; they also found the antibodies target a specific part of the protein–an amino acid sequence, or peptide– in MBP. What MBP8298 does, Giese says, is synthetically replicate that peptide. By injecting it into patients–in trials, it is given intravenously twice a year–researchers “turned off” the attack by the body's own immune system. Giese says the drug essentially “re-educates” the specific immune cells that attack the myelin sheath surrounding nerves and cause MS.

Patients with the progressive secondary stage of MS comprise about 40% of the estimated 2.5 million people around the world diagnosed with the disease. Most patients move to the secondary progressive form after spending years in the relapsing remitting stage, during which the body can temporarily recover from attacks to the nervous system; Giese says about 40% of MS patients are in the relapsing remitting stage at any given time. (There is also a “primary progressive” form, in which the patient doesn't recover from an initial attack; it affects about 15% of the MS population.) Those with secondary progressive MS are an underserved population, Giese says, with virtually no drugs or treatments approved by authorities. Should MPB8298 be proven in Phase 3 trials to slow down the secondary progressive form, more trials would be performed to see if it can be effective in treating the other forms. Drugs now used to treat the relapsing remitting MS represent a US$4-billion market. Pricing of MBP8298 is obviously a long way off, says Giese, but it would likely fall somewhere between US$14,000 and US$23,000 annually, in line with other existing MS treatments.

Toronto-based analyst Maria Luckevich, of Fraser Mackenzie Ltd., agrees that all the recent “background noise” affecting the stock doesn't really impact the underlying value of BioMS or “the ultimate potential” of MBP8298. For starters, Luckevich says, the patients who got sick while taking Tysabri were victims of “opportunistic” infections–an event that might be expected with a drug believed to generally block the migration of immune cells into the central nervous system. BioMS's drug, on the other hand, targets only the subpopulation of immune cells that attack the myelin sheath, and this is “unlikely to render patients more susceptible to infection,” she says. Now, even the initial fears over Tysabri have seemed to calm down: the price of both Elan and Biogen Idec stock, which had fallen drastically since February, levelled after the companies said in August that they plan to ask U.S. authorities to let the drug back on the market, albeit with strong warnings about the risks for patients with weak immune systems.

Luckevich, whose firm led a syndicate that raised $41 million for the company earlier this year, also says the reality behind the University of Alberta's decision to sell a block of BioMS shares is far less alarming. It arises from an agreement between the two parties that allows U of A to sell when certain milestones are met–but the company always has the final say over whether a particular sellable block can be put on market. BioMS passed a milestone when it gained approval to initiate Phase 3 trials in Canada and the United Kingdom in 2004; that allowed U of A to sell 500,000 shares. The transaction was a “long and protracted process, and resulted in a perceived overhang on the stock,” she says. But the situation cleared up once the block traded in May.

As for the share buyback announcement–well, it came two months after the $41-million equity offering. Luckevich acknowledges “one would not normally expect a company that has recently filled its coffers”–with the goal of financing a major clinical trial–to use some of the money to buy back shares, “nor to be overly concerned with the stabilization of its share price.” She adds that while the company might be justified in considering its stock to be trading below “reasonable levels,” a large-scale share repurchase, if executed, “could be construed as unconventional, to say the least.” For his part, Giese says keeping the share price stable is important for a stock like BioMS, which can at times be thinly traded and, as a result, volatile.

In the end, Luckevich says she believes none of these events “changes the facts of the BioMS story.” (She has a Strong Buy recommendation on the stock, suggesting the company has a risk-adjusted net present value of $8.90 to $18.30 a share, using a discount rate on estimated future cash flow of 25% and 15%, respectively. She bases her figures on industry modelling that estimates 67% of drugs in Phase 3 trials eventually go to market.) The most significant event for the company in the near term, says Luckevich, would be announcing a partnership agreement with a large pharmaceutical company for the sales, marketing and distribution of MBP8298. While there's no guarantee that will happen this year, she suggests it could happen “sooner rather than later,” since the company has indicated it would like to negotiate a deal while its coffers are full.

The company has the go-ahead to enrol more than 550 patients for its Phase 3 clinical trials in Canada, the United Kingdom and, most recently, Sweden. Enrolment for that trial is expected to be done by the first quarter of fiscal 2006, and the trial would be complete two years after that. Early approval could also be granted, based on successful results from the first 200 patients, and that would allow sales of MBP8298 to begin in late 2008 on a fast-track basis.

With clinical trials just getting underway, however, Luckevich says it might be a good time for interested biotech investors “to quietly build a position at a very reasonable price.” She adds that “rarely does one see a company with a Phase 3 drug candidate that is getting so little public attention and that is trading at values that so poorly reflect [its] commercial potential.”