Dermira announced the highly anticipated data for their Phase 3 acne drug this morning. They failed. Big time. Dermira did not show statistical significance in any of their 3 primary endpoints. The company now expects to discontinue their acne program. DERM shares are down 60%+.
Our Options Trade Is Up 78%
Back in mid-January we suggested
- Buying March 16, 2018 $40 Call for $2.50
- Buying March 16, 2018 $17.50 Put for $2.00
With this strategy we had an outflow of $4.50 in total. We can now sell these positions for $8 (a 78% return). Our trade protected us on the downside as long as DERM traded under $13/share. Currently, DERM is $9.50 and our $17.50 put option is profitable.
The Data Was a Colossal Disappointment
The most surprising part of the Phase 3 data was the higher responses in the vehicle arms. Below is a breakdown of Phase 3 active/vehicle data and a Phase 2 overview.
None of these co-primary endpoint results were statistically significant. To compare, Phase 2 data showed statistical significant results in nearly all the active arms and endpoints. The one arm that did not show significance during Phase 2 was the 7.5% QD (once-a-day).
What Caused This Failure?
Dermira management did not shed much light on the causes of failure during their conference call. However, investors will point to two main points:
- Phase 3 vehicle arm used BID dosing (twice a day) rather than the combined BID+QD (once a day) dosing that the Phase 2 vehicle used. Theoretically, twice a day dosing should have increased the Phase 3 vehicle arm lesion count decline and thus increased the baseline. Given that Phase 3 vehicle arms showed greater responses, this could have been the cause.
- Phase 3 was testing a new dose: Phase 3 dose was 5% BID (twice a day), which hasn’t been tested before. This dose was in-between the 4% & 7.5%, which were tested in Phase 2 and showed statistically significant results.
What Now?
The company has a June 30, 2018 PDUFA for their candidate glycopyrronium tosylate, targeting excessive sweating. Allergan’s Botox is generating ~$65M in annual revenue for the same indication. We think the remaining regulatory risk and follow-on commercial risk makes this a difficult pipeline candidate.
Even if we were to assume the excessive sweating candidate is granted approval and is able to penetrate the market, we place a value of $200M on this candidate. We think this is rather bullish, though.
Dermira showed year-end 2017 cash of $550 million and $279M in convertible debt. This leaves net cash at $271M. With 42M shares outstanding, that results to a net cash balance of $6.45/share.
Dermira also has an injectible candidate for atopic dermatitis that has Phase 2 topline data in 1H 2019. We expect management to shed more light on this in near future.
We place total value (net cash and pipeline) at about $470M (or $11.50/share). At a current price of $9.50/share, we’re staying away from Dermira.
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