Botanix Pharmaceuticals: Insight Series
SG Hiscock & Company
Leaders in high-conviction investing. Specialising in AUS Equities and Property Securities. Est 2001.
by Phillip Li , Assistant Portfolio Manager, SGH Australian Small Companies Fund
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Active management applied to commercial medication investing
Active managers, including SG Hiscock & Company, make decisions about buying, holding, and selling assets within our investment portfolios. These decisions can only be made with conviction thanks to our rigorous research process, which involves assessing businesses through our quality lens, particularly around management quality, business quality, and earnings quality.
As Portfolio Managers of the SGH Australian Small Companies Fund, we apply this rigour to all investments. Ultimately, our goal is to invest in high-quality businesses, thus maximising the returns for our investors whilst managing the risk level we take.
This investment insight article covers a recent investment in Botanix Pharmaceuticals (ASX: BOT) and details our investment considerations.
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The investment opportunity in Botanix Pharmaceuticals
Botanix Pharmaceuticals , a small-cap dermatology company, develops and commercialises novel treatments for common skin diseases and infections.
Botanix's first product is Sofdra, which targets primary axillary hyperhidrosis, a disorder currently with limited effective solutions. Recently, Sofdra successfully secured regulatory approval via the US FDA, which validates its clinical potential. As a result, the company capitalised on this milestone by completing an equity raise. The SGH Australian Small Companies Fund participated in this raise.
Now that the company has secured sufficient funding to execute its commercialisation strategy, we believe the business has the potential to rapidly reach cashflow breakeven point, enabling a substantial re-rate, thus delivering substantial share price returns to early investors, of which we are one.
Warren Buffett: "By failing to prepare, you are preparing to fail. The more you know and the better prepared you are, the more likely you are to succeed."??
This article will take you through our thinking as we assessed the investment opportunity.
Identifying key factors of success
Evaluating the market opportunity for Botanix Pharmaceuticals
1. Hyperhidrosis – what is it?
In layman's terms, it can be described as excessive sweating - far surpassing normal thermal regulation. Sufferers can experience episodes of varying frequency, length, and degree. The symptoms are unrelated to weather, exercise, or stressful conditions, and the bouts can often appear out of the blue. Therefore, managing the condition can be challenging. Hyperhidrosis typically onsets during childhood or adolescence and is considered to be a lifelong disorder. A survey by the International Hyperhidrosis Society found that 88% of patients had symptoms that remained the same or worsened with age.
2. A high unmet need.
Current treatments for hyperhidrosis, such as commercial-grade deodorants, can be largely unreliable. Other efficacious treatments can be both costly and highly invasive for patients. Thus, we believe there is a high unmet need for accessible, low-cost, efficacious treatments/products to address the condition.
3. A large market size.
The market for quality treatment for hyperhidrosis is large. For example, in the US alone, about 10 million people suffer from hyperhidrosis. Around 3.7 million people actively seek treatment from a dermatologist's office. Importantly, many of these people (some 7 million) have been previously diagnosed, which helps them secure insurance (payor) coverage for reimbursement. Botanix recognises this unique dynamic and has developed a two-tiered go-to-market strategy designed to reach the full 10 million patients (more on this later).
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Tangible proof of commercial success
In Japan, a?large pharmaceutical company, Kaken Pharmaceuticals, licensed the same chemical compound as Botanix's Sofdra. Whilst past performance is not necessarily an indicator of future success, it's safe to say that a positive track record is always a preference.
Holding the rights to Asia Pacific, Kaken launched the asset under the commercial name "Ecclock" in late 2020. This demonstrates its substantial commercial success. Ecclock is now in its third year of sales and continues to rise and attract new patients.
Source: Botanix Pharmaceuticals - Official Website
A highly experienced management team
As investor Peter Lynch once said, "You can't just buy a stock based on numbers. You have to buy the company, and the company is run by people. Great management teams are key to long-term success." We strongly emphasise the organisation's management team as a key success factor when considering an investment, particularly for small companies. Botanix’s highly experienced management team is a rare strength for an early-stage company preparing its first commercial product. The founder of Botanix, Matt Callahan, has a history of assembling capable management teams. He recruited Executive Chairman Vince Ippolito and CEO Howie McKibbon, who previously held senior roles at Anacor Pharmaceuticals and Medicis Pharmaceuticals. Both companies later secured substantial acquisitions. Notably, over the course of their careers so far, the Botanix team has been collectively responsible for the development, approval, and commercialisation of over 30 dermatology products.
This high-performing leadership line-up and their combined experience give us confidence that the team is aware of any key pain points and bottlenecks that require additional preparation and focus to ensure a successful launch of Sofdra. We have already witnessed this through the team's skilful navigation of the market for Sofdra's anticipated launch, including the early engagement with commercial payors and the development of a unique go-to-market digital strategy.
Evaluating the go-to-market approach
1. Botanix's compelling dual-prong sales strategy.
Botanix is driving adoption at dermatologists' offices through a direct sales force. Its direct-to-consumer strategy, unprecedented in dermatology, further strengthens this approach. Through its partnerships, Botanix plans to bypass traditional distribution channels and enable eligible patients to qualify and obtain access to Sofdra via a telemedicine platform, with the prescription (incl. refills) delivered straight to the patient's door. In our view, this streamlined access for those suffering from what can be an extremely discomforting (and at times embarrassing) condition should drive rapid adoption of a broad patient base, not to mention increased patient adherence when it comes to refills (given the convenience). As mentioned, direct sales forces actively target traditional dermatologists. This approach enhances Botanix's ability to efficiently capture the potential 10 million-patient market, driving robust revenue growth.
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2. At an attractive price point.
Thanks to the management team's foresight to target early engagement, the business already initiated numerous discussions with commercial payors well before Sofdra secured FDA approval. In the company's latest update, Botanix confirmed that they have now successfully finalised all contractual terms with all its key US commercial payors (including government programs such as Medicaid). Achieving such a critical milestone within a mere 6 months of FDA approval is no easy feat. Management's initial (Net) price target was USD400-500 per (monthly) prescription, not to mention the business model's mechanics to enable $0 patient out-of-pocket cost. With Botanix confirming that these financial objectives have been met, this is yet further proof in our thesis that the lack of a price barrier will also help support rapid patient adoption.
Validating our hypothesis through on-the-ground evidence
We consider evidence-based analysis a crucial element of our research process. As part of our deep dive to assess Sofdra's likelihood of becoming a commercial success, we spoke with numerous dermatologists across the US, who reinforced our hypothesis that there could be a strong appetite for a solution like Sofdra. This is in part due to Sofdra's superiority over current solutions, which are either simply not effective (clinical grade deodorants), cost prohibitive (various old, repurposed drugs), or treatments that are considered invasive by patients (e.g. Botox).
Risk vs. Reward
When considering investments, we value having a margin of safety from a valuation perspective. This approach enables us to manage risk more effectively. In this case, our internal valuation modelling, which considers a wide range of factors, including sensitivities in pricing, patient adoption and adherence rates, and other various operational risks, provided us with confidence that a successful Sofdra commercialisation could potentially transform Botanix into a multi-bagger investment for our portfolios.
Final Remarks for Botanix Pharmaceuticals
Actively evaluating every aspect of our stock holdings is part of our disciplined investment process that we apply across our company holdings. As we've demonstrated in this investment, we have thoroughly assessed the quality of the management team leading the development and rollout of Sofdra. The addressable market is vast, and we gain comfort from similar offshore success. The company's strategy to engage with commercial payors early on has since proven to be well-executed, and last but not least, the company's unique dual-prong sales strategy – in our view, should ultimately drive strong success given the much more seamless access to end patients. These elements collectively strongly indicate that Botanix Pharmaceuticals offers a compelling investment opportunity. We are delighted to have invested in it.
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Thank you for reading this article in our Insight Series.
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Disclaimer
SG Hiscock & Company has prepared this article for general information purposes only. It does not contain investment recommendations nor provide investment advice. Neither SG Hiscock & Company nor its related entities, directors or officers guarantees the performance of or the repayment of capital or income invested in the Funds. Past performance is not necessarily indicative of future performance. Professional investment advice can help you determine your tolerance to risk as well as your need to attain a particular return on your investment. We strongly encourage you to obtain detailed professional advice and to read the relevant Product Disclosure Statement and Target Market Determination, if appropriate, in full before making an investment decision.
SG Hiscock & Company publishes information on this platform that, to the best of its knowledge, is current at the time and is not liable for any direct or indirect losses attributable to omissions for the website, information being out of date, inaccurate, incomplete or deficient in any other way. Investors and their advisers should make their own enquiries before making investment decisions.
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