Investment Thesis

Satsuma Pharmaceuticals (STSA) suffered a significant blow last week when its lead candidate – migraine treatment STS-101 – failed to show statistically significant differences from placebo in either of the co-endpoints – freedom from pain and most bothersome symptom – of its pivotal phase 3 EMERGE efficacy trial.

The trial failure had disastrous consequences for Satsuma’s share price, which collapsed overnight from a price of $24, to $4.5, trading at $4.4 at the time of writing. When biotechs flunk trials, the implications are often severe, and in Satsuma’s case, the failure will hit even harder since the company was pretty much all-in on STS-101 – there are no other candidates in its pipeline.

Wise after the event, analysts have slashed price forecasts for Satsuma stock. SVB Leerink has revised its target from $35 to $4, Credit Suisse Group from $33 to $4, and Mizuho from $32 to $4.

Although things look grim for Satsuma at present, and the market anxiously awaits an update from management concerning the company’s next steps, I believe there are 3 main reasons why risk-on investors might consider Satsuma to be an interesting investment opportunity.

The first reason is that the underlying science behind STS-101 has merit and has been proven to work – the onus is on Satsuma to understand why its rapid release nasal technology did not perform in the EMERGE trial. The second is that Satsuma is sufficiently well-resourced to regroup, try to discover what went wrong in the EMERGE trial and push again for approval. And the third reason is the market opportunity. Acute migraines are thought to affect some 39m people in the US alone, and yet, there is no truly satisfactory treatment commercially available, despite the global migraine market being projected to reach $3.7bn in size by 2023.

From an investment perspective, I believe that there may be more than a “dead cat bounce” to be gained from an investment in Satsuma. For example, in the below chart, I have highlighted the subsequent share price performance of 3 companies that have suffered high-profile trial failures within the past year.

Share price performance of Marinus Pharmaceuticals (MRNS), Cassava Sciences (SAVA), and Novus Therapeutics (NVUS) after trial failures vs. Satsuma. Source: TradingView.

Marinus’ stock fell from a price of $4.5 to $1 in July 2019 after its lead candidate ganaxolone flunked a late-stage trial in post-partum depression but has recovered to trade at a price of $3.12 at the time of writing, owing to positive phase 3 trial results from a recent trial of ganaxolone in a rare form of epilepsy.

Cassava Sciences (my June note here) failed to meet endpoints in a trial of its only candidate PTI-125, for Alzheimer’s, in May, but its stock has since rallied >100% after the drug delivered positive results from a revamped trial, and trades at $3.14 currently, from a low of $1.6 in August.

Novus Therapeutics stock currently trades at a price of $0.9 – up 134% from a low of $0.38 caused by the failure of its middle ear effusion nasal spray in a phase 2a trial in May.

I am not suggesting that Satsuma stock is guaranteed to come roaring back, and doubtless, there are many examples of companies failing to recover from a high-profile trial failure, but as I will discuss, Satsuma’s current situation is not as desperate as its stock price collapse might suggest, in my view.

I suspect that the company’s situation may get worse before it gets better, but if the stock were to drop further and trade between $2 and $3, I would consider that to be an attractive entry point, provided my due diligence remains up to date.

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STS-101: A Promising Candidate – But Tough To Bring To Market

STS-101 is a dry-powder formulation of dihydroergotamine mesylate (“DHE”), a synthetic version of ergotamine, and its migraine treating properties are well known and highly thought of – the difficulty has always been around how to effectively administer the drug.

Compared to Triptans (e.g. Imitrex) – which act as agonists for serotonin receptors at blood vessels and nerve endings in the brain and are generally regarded as standard-of-care for treatment of migraines – making sales ~$1.5bn per annum – although they are not officially considered to be a bona fide treatment or cure – DHE has several notable advantages.

In a recent corporate presentation, Satsuma lists these advantages as a longer treatment window, a lower risk of migraine recurrence, effectiveness in migraines with allodynia (a condition where pain is caused by a stimulus that does not normally elicit pain, often present in acute migraine attacks), effectiveness in Triptan non-responders, and a lower risk of overuse.

An injectable version of DHE was first introduced in the 1940s and in 1997, a liquid nasal spray formulation of DHE – Migranal – was approved by the FDA. Migranal – marketed and sold by Bausch Health – made $55m of sales in 2019.

Satsuma is not the first company to struggle to get a DHE treatment over the line – in 2013, Allergan (AGN) paid $1bn to acquire MAP Pharmaceuticals and its orally administered formulation of DHE, Levadex (MAP004), but the treatment was rejected by the FDA 3 times on manufacturing and delivery grounds. Satsuma has compared the efficacy of MAP004 to several approved migraine treatments in order to highlight the out-performance of DHE based treatments.

DHE migraine treatment MAP0004 vs. recently approved treatments. MAP wins on efficacy. Source: Satsuma corporate presentation.

Satsuma’s EMERGE trial was not a complete write off. STS-101 did show a slight improvement in both its endpoints at the critical 2-hours after dosing mark, in both its 3.9mg and 5.2mg dosage arms, and a statistically significant difference after 3 hours, with no adverse safety events reported. So Satsuma’s management needs to find out why a treatment designed to deploy rapidly took more than 3 hours to demonstrate statistical superiority to placebo.

The important question for Satsuma to answer is why it’s carefully developed dry powder and nasal delivery device combo, which achieved rapid and sustained DHE plasma concentration in a phase 1 trial, outperforming Migranal by nearly 2x in terms of drug exposure, could not deliver fast enough or strong enough results in its pivotal trial.

Satsuma Phase 1 trial results: mean DHE plasma concentration superior to Migranal. Source: Satsuma corporate presentation.

It’s an interesting (albeit academic) question as to whether Migranal would have prevailed in the EMERGE trial – which was the largest ever study of a DHE product, involving ~1,200 patients in total. It seems that STS-101’s strong pharmacokinetic profile did not translate into superior efficacy. Satsuma’s CEO and President John Kollins said in a statement that management were “surprised and disappointed” about the results.

Was management’s confidence misplaced based on the efficacy performance of MAP0004 – a drug that never made it to market? Did the company set the bar too high by agreeing to greater than 99% power for the freedom from pain endpoint and greater than 95% power for the freedom from most bothersome symptom endpoints? Was the trial (which took place at >100 different locations) mismanaged?

These are all questions that Satsuma can now consider at their leisure, as well as the secondary outcome measures from the trial: sustained freedom from pain, rescue medication usage, and pain relapse.

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Whilst it would be disappointing if management cannot find a reason for why STS-101 did not show efficacy faster (one of its chief selling points), the secondary measures plus post 3-hour results may provide sufficient rationale for a further pivotal trial, and ultimately, an FDA approval via the back door. Once approved, it would then be up to physicians and their patients to determine the optimal use case for STS101.

Satsuma Is Well-Resourced & Won’t Give Up Yet

The likelihood is that Satsuma will try again to get STS-101 over the line. In its Q220 10Q submission Satsuma reported current assets of $100.7m, and total liabilities of just $8.6m – including just $2m of long term debt.

With no other candidates to fall back on, and significant resources available, it, therefore, seems unlikely that Satsuma would throw in the towel at this stage. Satsuma’s cash burn in the first 6 months of 2020 was just $23m – hence, the company has an almost 2-year funding runway (and no trials to fund currently) before it has to worry about diluting investors or issuing debt.

Clearly, given the fact that the FDA has only approved one new DHE treatment since 1997, and rejected another – presented by a big pharma concern in Allergan – on 3 separate occasions, it is not easy to make a DHE derived product work.

Satsuma might look at its partnership with Shin Nippon Biomedical Laboratories, whose nasal device delivery technology has been developed over a 15-year period. The delivery device was thought to be one of the main advantages of STS101, alongside the mucoadhesive formulation that extended the period of contact with nasal mucosa to create a higher proportion of drug absorption over time – but on some level these features may have underperformed in a real-world setting.

The company could also look at its manufacturing process and the CMO’s it outsources to, or try to tweak its dry-powder formulation to see if the current version is compromising efficacy in some way.

I would also not rule out the possibility of just plain bad luck. The list of drugs that have required 2 or 3 goes before proving efficacy is long and includes Prozac, for example, or Biogen’s Alzheimer’s drug aducanumab, which the company shelved, then revived, and is still the subject of debate over its efficacy.

As such, Satsuma has nothing to lose – and much to gain – by trying again with STS101, and doubtless, that is what its investors will be pushing for, too. Satsuma has >50% institutional ownership, including RA Capital, who hold a 28% stake and whose managing partner, Rajeev Shah, sits on Satsuma’s Board of Directors. Other notable shareholders include Wellington Management Group (8% holding) and Citadel Advisors (6%).

Next Steps Management Needs To Take

Satsuma management have said nothing since issuing a brief statement thanking trial participants immediately after the EMERGE trial results were announced. This is not surprising, since what they do say will be of critical importance to the market and to the company’s share price.

At this stage, the company does not need to act hastily – the worst has already happened – but if it can carefully put together a case for a retrial – as e.g. Cassava Sciences did when responding to its Alzheimer’s trial failure with a presentation outlining concerns over trial management and a reassessment strategy (lifting its share price 15% in the process), then it can begin the process of rebuilding its credibility.

It may take several months for Satsuma to fully analyse results from a trial that nobody – management, analysts or investors – seemed to think would fail, given Satsuma’s $24 share price immediately before the crash. The company has an experienced management team and board, however, and as mentioned, a long funding runway. I think that management may look at the possibility of a late-stage trial targeting one of EMERGE’s patient subgroups: migraine with Allodynia, menstrually related migraine, severe migraine, and migraine upon awakening – to see whether they may present an easier path to approval.

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Doubtless, Satsuma will meet with the FDA to discuss results and to try and determine the optimal trial design to try to get STS101 to market. In its favour, the drug presents no safety concerns and is proven to make migraine sufferers feel better, just not in the required timeframe. Perhaps after looking at the results in more detail the post 3-hour efficacy data will prove to be the most persuasive argument. Or perhaps Satsuma could look to pitch STS101 against Migranal in a comparison trial.

Conclusion

As I hope I have outlined above, I think there are many reasons why, after quite possibly overvaluing Satsuma stock, the market is now undervaluing it.

I don’t think that Satsuma’s trial failure was too devastating, rather it seemed that way because it was so unexpected. Amongst the bad news, there are plenty of signs that STS101 could still become an effective commercialised drug addressing an area of high unmet need in the marketplace. Now it is up to management to pick through the trial data and determine an optimal strategy to use to pursue a retrial.

Since the company is well backed by institutional investors and has a long funding runway I believe Satsuma management are very unlikely to shelve STS101, and unlikely to go bankrupt – a worst-case scenario could be a company sale or sale of STS101 to another company at a discounted price.

But I favour the argument that management will try again with STS101, tweaking the formulation and delivery system, perhaps, or targeting a more niche indication. This will be costly but not prohibitively so. Satsuma’s initial thesis was that STS101 would blow Migranal and other products competing for approval – both Impel NeuroPharma and Promius Pharma, who have DHE based nasal sprays on a path to approval – out of the water, but that has not happened. It doesn’t necessarily follow that STS101 is worthless, however, just not as effective as management hoped, plus there is a lot of data still to work through from EMERGE.

I think the lack of near-term news flow will cause investors to panic and that Satsuma’s share price will probably decline further, and there is a good chance that it may never recover, but I rate the chances of a spike based on reassessment as equally high, hence I will be watching the company closely for signs of life and looking to open a position if the stock trades between $2 – $3.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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