Liminal BioSciences: Under New Management And Chasing Ryplazim Approval (NASDAQ:LMNL)

Investment Thesis

Liminal BioSciences five-year share price performance. Source: TradingView

Liminal BioSciences (NASDAQ:LMNL) has undergone a complete transformation over the past 18 months – including a change of name, from Prometic Life Sciences.

Prometic had found itself so badly in debt that management elected to issue billions of new shares to its creditors to raise financing and eliminate the debt – a deal that worked out very badly for existing retail shareholders and is discussed in detail here.

The company also sold off its bioseparation business for $45m, parted ways with several board members, its CEO and chief business development officer, appointed a new CEO and senior management team, and added three new board members.

Whilst these events constitute a black mark against the company and serve as an ongoing red flag warning to anybody thinking of making an investment into Liminal, there are also reasons to believe that the slimmed-down company’s shares – which now number 23.3m after a 1000-1 share consolidation – may be on a long-term uptrend.

The company is now focused primarily on two drug candidates – Fezagepras, a small molecule, oral anti-fibrotic agent targeting liver, lung and kidney fibrosis, and Ryplazim, a naturally occurring protein indicated for treatment of type 1 plasminogen deficiency and potentially other therapeutic applications including hereditary angioedema (“HAE”), wound healing, and idiopathic pulmonary fibrosis (“IPF”).

Liminal’s share price has also recently spiked (from $10.6 to $23.7) on news that the company has initiated a convalescent plasma collection program from patients who have recovered from COVID-19, which it is thought may lead to the development of a treatment option for the disease.

Liminal’s shares currently trade at a price of $17.51, a 35% premium to their price at the beginning of 2020, and with the company in a financially much healthier position, under new management, and preparing to resubmit a biologics license application (“BLA”) for Ryplazim in Q320, which is thought to have a high chance of success, I believe there may be sufficient price catalysts in play to push the share price higher, making acquiring a position in Liminal a promising – albeit highly risky – investment opportunity.

Research suggests that the market for anti-fibrotic treatments is a multi-billion-dollar opportunity that could encompass treatments for highly prevalent diseases such as diabetes and, as such, is a crowded field with many big pharma concerns prepared to make substantial investments in promising treatments. Roche (OTCQX:RHHBY) [SWX:RO], for example, paid $390m upfront and will make up to $1bn of milestone payments as part of an acquisition deal it made in late 2019 for early-stage anti-fibrotic medicine developer Promedior, whilst its idiopathic pulmonary fibrosis treatment Esbriet makes blockbuster sales (>$1bn per annum).

Liminal is in need of a development partner like Roche, and if it can avoid further financial woes and maintain progress with its own promising pipeline, it may well be capable of attracting one. I see this as perhaps the company’s best opportunity of leveraging its assets. Long term, I am cautiously bullish.

Company Overview

Liminal operates out of three “talent hubs” in Laval, Quebec, Canada, where its headquarters are based, Cambridge, UK, and Rockville, Maryland, USA.

The company’s ownership structure, despite the recent changes and down-sizing, remains complex. As we can see from the table below, Liminal appears to have numerous subsidiary companies which is perhaps an unwanted complication given its/Prometic’s recent history, although all appear to be focused on either small molecule development or plasma-derived therapeutics, reflecting its current focus.

Liminal subsidiary company and ownership interest. Source: Company form 20-F / A.

After converting its $229m of debt owed to creditor Structured Alpha LP (“SALP”) into equity, Liminal is majority owned by SALP, which is itself majority owned by Thomvest Asset Management with Consonance Capital Management – from whom the company raised $75m via a private placement at the same time as the debt restructuring, owning a ~14% stake. In July, Liminal de-listed from the Toronto Stock Exchange, having joined the Nasdaq in October 2019.

Stefan Clulow, MD of Thomvest, has become chair of Liminal’s Board of Directors, whilst Consonance’s Dr. Benny Soffer has been designated Liminal’s board observer.

Liminal’s management team is now led by Kenneth Galbraith, CEO, who is also the Managing Director of Five Corners Capital, and has a lengthy history within the biotech industry. According to his company bio, Galbraith served as chairman of AnorMED, a company specializing in developing hematology, HIV, and oncology treatments that was acquired by Genzyme Corp in a $600m deal, and has served on the boards of many more early-stage biotechs, including Zymeworks (NYSE:ZYME), Angiotech Pharmaceuticals, Aquinox, Alder BioPharmaceuticals (NASDAQ:ALDR), Tekmira, and Cardiome Pharma.

The new management team has moved quickly to cut costs. The company earned a small amount of revenues ($0.5m) in Q220 from selling its plasma inventory, whilst reducing R&D expenses from $22.3m in Q219 to $15.8m in Q220. Admin, selling and marketing expenses were reduced by half to $9m, thanks to reductions in share-based payment expenses and payroll, and finance costs fell 45% year on year from $3.3m to $1.9m, giving an overall net loss of $27.8m compared to $135.9m in Q219.

Despite the dilution hit that retail investors were forced to take during the company restructuring, it can at least be said that Liminal appears to be in much better shape today than it was one year ago. The question is can the company now deliver on the drug development front?

Candidates

Liminal BioSciences product pipeline as at Aug ’20. Source: Corporate presentation.

Ryplazim

As we can see above, Ryplazim, administered by intravenous injection, is the most advanced of Liminal’s candidates, having completed a pivotal phase 2/3 trial, meeting both of its primary endpoints.

The company is preparing to resubmit a BLA to use the congenital replacement therapy as a treatment for the ultra-rare disease congenital plasminogen deficiency, which causes the abnormal accumulation of lesions, usually around the eyes, which can cause blindness, as well as other regions including the ears, sinuses and genitourinary tracts.

The original BLA was rejected by the FDA on Chemistry, Manufacturing and Controls (“CMC”) grounds, which ought to be resolvable given that Ryplazim met its primary endpoints in its pivotal trial, achieving a 100% success rate in targeted increases in the plasma level of plasminogen, with all 10 patients enrolled in the trial achieving complete healing of all lesions within weeks of treatment, using IV doses of 6.6mg/kg. Additionally, the FDA has already granted Ryplazim Priority Review status, Orphan Drug designation, and Rare Pediatric Disease designation.

Liminal anticipates a PDUFA date for Ryplazim in Q121, and if approved, Ryplazim will address a small market of between 500 and 1,000 patients, the company estimates. There are no other approved treatments on the market, and besides allocating a small sales team to work with payors and try to secure reimbursement deals, Liminal will look to secure a commercial partnership with a larger pharma to cover its costs and support its attempts to secure further approvals for diseases including HAE and IPF, which would enlarge the total addressable market (“TAM”) by as much as 10-15x.

The likely market size for Ryplazim in congenital plasminogen deficiency was estimated by the previous management to be in the region of $130m, which would be enough to cover all of the company’s current costs and push Liminal towards profitability, although, as mentioned, the company’s preferred option may be to enter a revenue-sharing arrangement with a larger commercial partner, with the potential to earn milestone payments should further approvals be secured.

Fezagepras (PBI-4050)

The next cab off the rank for Liminal will be Fezagepras, an orally administered anti-inflammatory and anti-fibrotic agent that works by regulating the activity of macrophages, fibroblasts, myofibroblasts and epithelial cells.

Fezagepras has secured an orphan drug designation for both IPF and Alström Syndrome (“AS”) – another very rare disease (affecting ~1,200 patients worldwide) which causes childhood and adolescent obesity, type-2 Diabetes, hypertension and multi-organ fibrosis.

A phase 2 clinical trial in AS is ongoing, using an 800mg daily dose and enrolling 12 patients to date (according to Liminal’s website). After 36 weeks of treatment, patients have shown statistically significant improvement in the measure of liver stiffness, a mean reduction in liver MRI data, reduction in cardiac fibrosis, and major reduction of key urine biomarkers of ongoing kidney injury.

Reduction in liver stiffness in patients with Alstrom Syndrome. Source: Corporate presentation.

Not only does this bode well in terms of scoring an approval for Fezagepras in AS, it suggests that the drug may be used to target multiple further indications going forward. Tests in mouse models have shown pre-clinical activity of Fezagepras in the lung, liver, kidney, heart, pancreas and skin.

A phase 1 dose-escalation study is slated for H220 (the optimal dose is considered to be 2,400 mg), after which Liminal hopes to initiate phase 2 studies in selected fibrosis indications – most likely in liver, respiratory and renal fibrosis.

Additionally, Fezagepras’ mechanism of action activates two types of protein coding genes – Peroxisome Proliferator Activated Receptor Alpha (“PPARA”) and Free fatty acid receptor 1 (FFAR1). FFAR1 is a validated target for treatment of Type 2 Diabetes whilst activating PPARA – a ligand-activated nuclear receptor – may set Fezagepras apart from many other fibrosis treatments being developed by rival biotechs, Liminal believes.

Fezagepras, then, whilst some way away from a pivotal trial in any indication, potentially holds a great deal of promise, and as with Ryplazim, Liminal will surely make it a priority to try to secure a lucrative development partner for its candidate as it targets a variety of indications.

IPF is an obvious target, and a sizeable market with only two currently approved treatments: Roche’s Esbriet, and Boehringer Ingelheim’s Ofev, both of which make blockbuster sales, although Esbriet’s patent is due to expire next year, which is why the company moved to purchase Promedior and its anti-fibrotic pipeline.

Many other companies have tried and failed to release IPF treatments, including Gilead (NASDAQ:GILD) and Biogen (NASDAQ:BIIB), which only pushes the potential value of Fezagepras – if it can prove its mettle in later stage clinical trials – higher. Diabetes is another market to target over the longer term, as is non-alcoholic steatohepatitis and fibrotic kidney disease.

In short, the promise of Fezagepras is such that, should trials progress well, Liminal could quickly turn itself from an early stage biotech with a questionable reputation, into a mid-sized concern with two or more approved treatments, or one more major pharma partner, or indeed, an acquisition target with a high sale price.

Earlier stage candidates and the COVID-19 opportunity

Liminal completed the acquisition of a selective Oxo-eicosanoid receptor 1 (OXER1) antagonist R&D program in Q220, which may be useful in the treatment of Eosinophilic-driven diseases such as chronic obstructive pulmonary disease, nasal polyposis, and atopic dermatitis, as well as gastrointestinal diseases, whilst an existing candidate – GPR8 – moves outside of the immune system to treat fibrosis across the brain, heart, muscle, colon, thymus, spleen, kidney, liver, intestine, placenta and lung.

These two candidates give Liminal’s pipeline a progressive feel, and multiple points of attack, hence overall, I would rate the company’s pipeline as above average for an early-stage biotech; with an experienced management team to boot albeit a little too heavily weighted on the financial/fundraising side, a lot would appear to rest on the shoulders of Dr. Jeffrey Smith, Liminal’s strategic medical advisor.

But the team is nothing if not enterprising, seizing upon the opportunity to leverage the plasma collection capabilities of the company’s subsidiary, Prometic Plasma Resources, to join the COVID-19 Plasma Alliance to “contribute to the acceleration of the development of a potential new therapy for COVID-19.”

In truth, it is probably easier to find a biotech that has participated in some form of COVID-19-related initiative or other than one that hasn’t, but personally, the convalescent plasma collection opportunity is one that I feel has potential, as I discussed in a recent post on XBiotech (NASDAQ:XBIT), another promising drug-developer.

Liminal’s participation in the Plasma Alliance (Liminal’s center in Manitoba has been licensed by the FDA and Health Canada whilst another in Amherst New York is subject to BLA approval) certainly helped the share price break its cycle of under-performance and finally provided some reward for Liminal investors.

Price Target and Conclusion – A Much Better Looking Opportunity Although Markets Are Challenging

Biotech stock prices have taken a battering over the past 10 days or so, perhaps due to a lack of new catalysts related to COVID-19, but even if Liminal’s plasma-collection scheme does not sustain current price highs for long, the approval of Ryplazim in early 2021 ought to more than offset any losses, not just because of the addressable market of ~$130m, but also because it would mark a long overdue step-change in progress at Liminal, justifies the recent downsizing and debt restructuring and attracts the attention of commercial partners.

If Liminal can follow this up with more positive data from trials of Fezagepras, the situation will become even more promising. The company would then have a potential blockbuster treatment in sight if it decided to go it alone – which is highly unlikely in my view given management’s financial background and desire to secure commercial partnerships – or be in a strong position to negotiate with bigger pharma concerns.

What would constitute a good price for the company? Based on the $1.4bn Promedior deal, a deal worth significantly in excess of $1.5bn would seem reasonable, given there are a range of candidates on the table, but Liminal might prefer a licensing deal, and the opportunity to do as other developmental firms, Arrowhead (NASDAQ:ARWR) and Dicerna (NASDAQ:DRNA) in the RNAi space, for example, and sign multiple agreements with different development partners. It is also worth bearing in mind that Roche paid more than $8.3bn to acquire Esbriet in 2014, as part of its deal for InterMune.

I may be getting ahead of myself. A worst-case scenario would see Ryplazim fail to secure approval, and Fezagepras disappoint in trials, but the downside risk is lower than many similar opportunities in my view. Management has done these types of deals before, the company now has few financial concerns (its biggest creditors pretty much own the company), and there are multiple opportunities to develop.

Additionally, any catalyst in the fight against COVID-19 could see Liminal’s stock price spike again – it could easily double or triple if plasma collection becomes the new treatment paradigm.

Overall, then, I rate Liminal a buy. Despite its recent controversies, the down-sizing appears to have been relatively well-executed, and although it may take a while to rebuild trust with retail investors, this may well be keeping the current share price artificially low. I would be looking at buying below $20 and holding in anticipation of Q121 Ryplazim approval, Fezagepras phase 2 trial data, and newsflow related to commercial partners.

COVID tailwinds offer the (unlikely but not to be dismissed) potential for extreme upside, and although there is a reasonable risk that a quiet period for the company could see the stock retreat to <$10, as far as early-stage biotech investing goes, given where the company was when it changed name in Oct 2019, this downside risk looks to be manageable.

If you like what you have just read and want to receive at least 4 exclusive stock tips every week focused on Pharma, Biotech and Healthcare, then join me at my marketplace channel, Haggerston BioHealth. Invest alongside the model portfolio or simply access the investment bank-grade financial models and research. I hope to see you there.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LMNL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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