Pharmos: The countdown begins on cannabinoid study

December 08, 2004

Gitit Pincas , Globes (Israel)

The clock is ticking for Pharmos (Nasdaq:PARS) By the end of the year, the Phase III clinical trial results for Pharmos's dexanabinol treatment for traumatic brain injury (TBI) will be revealed. This is the event that has driven the company since the 1990s, and maybe even earlier. If Pharmos passes this hurdle, then dexanabinol will reach the market in the first half of 2006, at which point, the sky's the limit.

Pharmos chairman and CEO Dr. Haim Aviv, who also serves as its chief scientist, is the man most identified with the company. He would not necessarily agree with the definition associated with the company 'as all-or-nothing', nor with market assessments over the years that the results of dexanabinol trials were a matter of life and death for the company.

'We have so many other things in the pipeline,' he says. 'The importance of dexanabinol is true, and the indications derived from the results of its clinical trials are important, but Pharmos has less prominent developments that are also in various development stages.'

Whatever the case, one fact is beyond dispute. If the results are positive and unambiguous, Pharmos will enter a promising $1 billion a year market (half of which is in the US), through the front door. If the clinical trial fails or is only a partial success, it will be very hard for Pharmos to achieve its dream. It will be put back at least three years, and revert to the standing of a small start-up. If that happens, the best economists and analysts, who currently stand shoulder-to-shoulder with the company, will find it difficult to justify its market cap of $320 million.

Teva Pharmaceutical Industries Ltd. (Nasdaq:TEVA; TASE:TEVA) is frequently referred to as the 'people's share'. Pharmos has similar popularity in miniature. Everyone talks about it, has heard about it, and no matter where you go, you'll find someone who has invested in it. That shareholder will be happy to tell you how he bought the share for $1 in 1995, or how he missed it at $13.50 when Nasdaq was at 5,000. How many investors know what dexanabinol is, is less important.

Three scenarios

The coming weeks will be the most critical in Pharmos's history, and the fact that it's come this far requires analyzing three scenarios. The first will be called the 'clear skies' scenario, in which the Phase III clinical trial is a resounding success, and Pharmos submits dexanabinol to the US Food and Drug Administration (FDA) for approval. The second scenario will be called 'partly cloudy with intermittent showers', in which the results of the clinical trial are clear, but not throughout the study. The third scenario will be called 'overcast and stormy', in which there is no proof, no clarity, and hopes are dashed.

Aviv has not kept his vision hidden from investors in recent years, including his great hopes for converting his drug discovery company into an industry giant. But as the decisive moment approaches, he has tried to avoid great expectations. He has no information about the results of the clinical trials, and he knows well that there's no point in building up expectations.

'The optimistic scenario is for clear results from the Phase III clinical trials. Within a year, we'll apply for an FDA approval for dexanabinol, and receive it 12 to 18 months later,' says Aviv. 'In the middling scenario, the results are not clear. There is a possibility that a sub-population will not support the hoped-for results, or that the results will be partial. The conclusion in that case is that it will be worthwhile to develop the drug, but its horizon will be pushed back two years. It is also possible that we'll have to repeat all or part of the Phase III clinical trial.'

In the worst-case scenario, which is believed to be the least likely, there are no clearly proven results. 'There have already been cases in which Phase II clinical trials were successful, but Phase III trials overturned the results,' says Aviv. 'But I don’t think that if dexanabinol fails, the company will have no future. It should be remembered that we're developing other products. But it's true that dexanabinol is the most advanced product, and has ramifications for investors who look at the long term. The fact that we're working to create more assets will be enough to justify our value, even with TBI.'

What will happen if the worst-case scenario comes to pass? 'Even if that happens, it will not possible to delittle our experience or the capabilities of a company with $60 million in cash, but I certainly agree that these circumstances would put the company back two or three years. People need to know that the warnings we include in our documents are not simply lawyers' pontification. There is no way to know whether success will be 100%.'

Except for Teva's Copaxone for multiple sclerosis, Israel has never developed a drug with major public importance that has achieved blockbuster sales status. Although the FDA has approved drugs for Savient Pharmaceuticals (Nasdaq:SVNT) (which Aviv also founded, by the way), and Serono's (NYSE:SRA; SWX:SEO) interferon is an Israeli discovery (although the Israeli company had no sales), as is Omrix Biopharmaceuticals' fibrin sealant, only Copaxone has had such a massive effort directed at such a huge market at such a promising stage.

Aviv, a molecular biologist from the Weizmann Institute of Science, co-founded Pharmos in 1990. Ten year earlier, he co-founded Biotechnology General (later remained Savient), which held the title as Israel's sole profitable biotechnology company for six years. One of Aviv's hobbies is to invest in Israeli biopharmaceutical companies, not all of which does he care to name. He is the main shareholder in Avitech, and is a board member of Ben Gurion University of the Negev and Weizmann Institute's commercial arm, Yeda Research and Development Company Ltd..

The weighted results of the Phase III clinical trial for dexanabinol will be announced in the coming weeks. 860 patients at 70 medical centers will participate in the double-blind trial, i.e. a control group test, in which neither the researchers (the doctors and Pharmos) nor the subjects know which patients have received dexanabinol, and which received a placebo. None of the parties can extrapolate from the results.

A $1 billion market is definitely large, and there is no current adequate drug to treat TBI, which is why the FDA has eased many conditions for Pharmos. A rough estimates forecasts a gross profit margin of 85% on sales and net profit margin of 35-40%. In other words, $350-400 million in potential profits a year for the company that can reach the whole market. These are projections, not concrete figures, but therein lie the investors' hopes.

Competition for dexanabinol is very limited; it doesn’t exist at all right now. 'We have a lead of at least five years over other companies,' says Aviv, in response to a question about competition. 'There is no chance that anyone will follow us.'

Both Pfizer (NYSE:PFE; LSE:PFZ) and Bayer (NYSE:BAY; LSE:BYR; XETRA:BAYG) were once in the running. So far as is known, Bayer has completed Phase I clinical trials for its BAY-387271 drug, but progress is uncertain.

Other developments

Pharmos's pipeline includes the next generation of dexanabinol, to treat cognitive impairment in patients after bypass surgery. Aviv says the results of the drug's Phase II clinical trial are 'promising and impressive.' Anyone seeking a short-term success for this drug should look elsewhere. In view of its high risk at the early stage, any talk about marketing is five years in the future.

Investors are also hopeful about Pharmos's drug for pain relief, the same area of Merck & Co.'s (NYSE: MRK) Vioxx, which was recently taken off the shelves. Pharmos has carried out preclinical trials of its treatment, which has the temporary name PRS 211.375, and hopes to begin Phase II clinical trials within six months. However, it is quite possible that Pharmos will have to expand the Phase I trial or repeat parts of it. It will initially test the drug on patients suffering from cancer and severe back pain. The drug is also expected to help reduce inflammation.

Pharmos is also conducting studies on the entire spectrum of materials related to receptors, and is working on other molecules that mimic the mechanism of cannabis. It can be stated in this context that Sanofi-Aventis (NYSE:SNY; Euronext:SASY) recently announced a cannabis-based appetite depressant, but it's a ant-agonist, compared with Pharmos's drug, which is an agonist compound.

Another promising area, one that Pharmos declines to talk about much, is a treatment for multiple sclerosis, an area where Teva's Copaxone has $1 billion in sales a year.

It can be said that all the drugs in Pharmos's pipeline are in the very long term of many years. Dexanabinol for TBI is its only drug that will ready in the foreseeable future.

TBI is a leading cause of death and disability in industrialized societies. Annually within the US, there are about two million emergency room visits for head injury, roughly 300,000 admissions for head trauma, nearly 52,000 deaths and approximately 80,000-90,000 cases of severe long-term disability. The annual cost of acute care and rehabilitation in the US for new cases is estimated to be as high as $10 billion. Additionally, survivors of severe head injury often face five to ten years of intensive rehabilitative treatment and lifelong disability. Lifetime treatment costs can reach $4 million. A study by the National Foundation for the Brain estimates the annual societal cost in the US for TBI is $48.3 billion.

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