WHITEFISH, MT / ACCESSWIRE / July 14, 2015 / There are a number of reasons investors worldwide love dermatology companies. For starters, support of innovation has been key in gaining a far better understanding of skin conditions and advancing effective, safe therapies capable of becoming standards of care. Of course, Wall Street loves upside potential. At a more granular level, the logic underscoring dermatology as a good investment is quite diverse. As David M. Steinberg, Managing Director Equity Research at Jeffries, puts it, dermatology products have several general attributes: 1) shorter development timelines; 2) lower clinical trial costs; 3) perceived lower regulatory hurdles; 4) high cash pay components for aesthetics; 5) a recent track record of success; and 6) a really active M&A market, which Mr. Steinberg described as a second way for shareholders to win. Oculus Innovative Sciences' (NASDAQ: OCLS) CFO Bob Miller and CEO Jim Schutz expanded on Steinberg's view in the company's June earnings call, adding 7) derm has strong pricing, product margins, and insurance coverage; 8) it is a concentrated call point, meaning companies don't need an enormous sales force to cover; 9) derm has fast sales ramps; and 10) dermatology has great valuations or multiples on revenue.
Patents and Exclusivity: More Reasons to Love Derm
FDA exclusivity and patents work in a similar fashion, even though they are different in the origination process. The U.S. Food and Drug Administration's Code of Federal Regulations Title 21 (more specifically Section 314), the section created in the Hatch-Waxman process, affords derm companies a minimum of three years of monopoly-like marketing exclusivity upon FDA drug approvals. The term is lifted to five years if the FDA deems the product meets the definition of a new chemical entity. During this period, no generic or competitor can sell the same active for the same indication. As mentioned in #7 above, with strong pricing, margins and reimbursement, being shielded from competition is sweet spot for a derm product to capture market and establish a brand.
Patents are derived through a very different procedure. They are granted by the U.S. Patent & Trademark Office anywhere along the development lifeline of a drug and can encompass a wide range of claims to protect intellectual property throughout the life of the patent. As such, they can run concurrently with FDA exclusivity, or even before FDA approval, to fend off competition.
The situation changes slightly for dermatological medical devices (which under FDA rules include certain gels and sprays). The primary pro is that FDA approval of a derm medical device can come at a fraction of the clinical development cost of new drugs and years faster. The main con is there is no FDA exclusivity for medical devices, so patents really matter.
Case in point, Oculus Innovative Sciences just announced the issuance of a US patent for the use of hypochlorous acid (HOCl), the main ingredient in Oculus' Microcyn technology, for the treatment of atopic dermatitis (eczema). The news is important because OCLS now has the benefit of an FDA approved medical device with solid human clinical evidence and a new patent, which could be a winning combination for the company.
Additionally, Oculus received a U.S. Patent (No. 8,834,445) in 2014 for the treatment of peritonitis using HOCl. That patent enabled Oculus to set the stage for the Ruthigen (NASDAQ: RTGN) spinoff and IPO, which was targeting the use of HOCl as a surgical rinse on abdominal surgeries including peritonitis. Patents matter.
The beauty is the way that patents and FDA regulations can be leveraged to keep capital expenditures down and block competition in a huge global market. There are more than 3,000 identified skin conditions and diseases affecting millions of people daily across the planet, creating a growing medical dermatology market that was estimated at just over $24 billion in pharmaceutical sales in 2014. This forecast and others appear in Dermatological Drugs Market Forecast 2014-2024: Future Prospects for Leading Companies, published in April 2014.
Evidence of the Hot Dermatology Market
Jeffries recently crowned Anacor Pharmaceuticals (NASDAQ: ANAC) as one of its top growth stocks to buy, reiterating its buy rating this month and $80 price target. Anacor's first approved drug is Kerydin, a topical solution indicated for treating onychomycosis of the toenails. Anacor last year partnered with PharmaDerm, the branded dermatology division of Novartis (NYSE: NVS) company Sandoz, for distribution of Kerydin in the United States. From the Anacor pipeline, investors are watching for results from Anacor's Phase 3 trial of crisaborole, an investigational non-steroidal topical PDE-4 inhibitor, being evaluated in the trial as a treatment for atopic dermatitis. Results could further catalyze shares of ANAC, which at $79 have already risen more than 140 percent in 2015.
The trend towards derm companies has benefited the IPO space as well. Dermira (NASDAQ: DERM) came public last fall, a time when there was some waxing and waning in the biotech sector, yet was able to boost its offering from an original target of $75 million to rake in $125 million. Dermira is partnered with the UCB Pharma S.A. on the TNF blocker Cimzia, which is being studied in three Phase 3 programs (CIMPASI-1, CIMPASI-2 and CIMPACT) for the treatment of moderate-to-severe plaque psoriasis. Following its successfully completed Phase 2b trial, Dermira has its sights set on initiating a Phase 3 trial of the topical anticholinergic product candidate DRM04 for hyperhidrosis – or excessive sweating – by the end of the year. Further, the first patient in a Phase 2b trial of DRM01, a topical sebum inhibitor, for patients with acne vulgaris was dosed in April. Data from this trial is expected in the first half of 2016.
In the global space, Cosmo Pharmaceuticals, an Italian drugmaker listed in Switzerland, intends to bank some profits by lowering its stake in its dermatology unit Cassiopea from 97 percent to about 50 percent with the upcoming IPO of Cassiopea on the SIX Swiss Exchange. Current Cassiopea investors, including German billionaire Dietmar Hopp's dievini fund, are expected to gobble up a portion of the shares divested by Cosmo. Cosmo CFO Christoph Tanner says Cassiopea, whose lead product is a steroidal ester androgen antagonist called Winlevi for acne, will go to market for at least 100 million francs (US$107 million). Cassiopea is a company currently with only three employees and a few skin drugs in mid-stage trials. Valeant Pharmaceuticals (NYSE: VRX) has first refusal on Winlevi should Cassiopea outlicense the drug.
Shares of Oculus Innovative Sciences, the aforementioned specialty pharma with a family of derm products built on its Microcyn technology, have been on the upswing since bottoming in May, energized by a better-than-expected quarter and FDA clearance for its novel Alevicyn SG Antipruritic Spray Gel. The product launch is getting underway this month in the U.S. for both prescription and over-the-counter indications as a treatment for a variety of dermatoses, including radiation and atopic dermatitis. Atopic dermatitis is a particularly attractive market. According to the National Eczema Association, the itchy chronic rash affects about 18 million Americans, including around 11 percent of infants and children.
The new Alevicyn product joins a clutch of products in Oculus' portfolio of marketed therapeutics spanning wound management, skin care, scar management and other derm applications. The company, which is much smaller than most peers with its ~$24 million market capitalization, also has characteristics often seen only in larger firms, such as an animal healthcare division full of new products being sold by a freshly restructured sales model and new marketing channels.
Oculus has eleven interesting medical device approvals in a hot dermatology space with a veteran sales force, solid human clinical evidence and now, an issued patent to create blued sky exclusivity, indicating that things may get really interesting for the company. Simply put, patent exclusivity plus effective derm medical devices without all the costs of new drug applications equate to a compelling future in a large and growing market.
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