This Small Biotech Is About To Take Off – Evofem Biosciences, Inc. (NASDAQ:EVFM)
Evofem Biosciences (EVFM) is a late-stage, clinical biopharmaceutical company based in San Diego, CA. The company’s mission is to help women take charge of their sexual and reproductive health. In November of 2019, Evofem submitted a New Drug Application to the Food and Drug Administration for Phexxi, formally known as Amphora. This is a first in class, non-hormonal contraceptive gel. The Prescription Drug Free User Act date is May 25, 2020, just under two months from today. This will be a major binary event that will move the stock of Evofem violently in one direction or the other. Based on the breadth and depth of the clinical trials, safety profile and impressive clinical data, I think the chances of approval are high, and warrants at least a small, speculative investment at current levels in the $4-5 per share range.
On March 12, 2020, Evofem announced that the FDA had granted conditional approval of the brand name Phexxi (L-lactic acid, citric acid, potassium bitartrate). This is a Proprietary Multipurpose Vaginal pH Regulator. The lead indication, and the one that is awaiting an FDA decision, is for the prevention of pregnancy. The company also just completed successful phase 2 trials for Phexxi for the prevention of chlamydia and gonorrhea. Evofem has scheduled an end-of-phase 2 meeting with the FDA to discuss phase 3 trial design and a regulatory path to approval for this additional indication. In addition, the company has also indicated that it may pursue the development of other MVP-R gel candidates for the reduction of bacterial vaginosis.
In 2016, Evofem submitted an NDA for the approval of Phexxi for the prevention of pregnancy. The FDA issued a complete response letter rejecting their application. The main problem was the discrepancy of efficacy data between the US cohort of patients and a Russian cohort. The FDA subsequently confirmed a new efficacy trial design focused exclusively on participants in North America. The company completed the new phase 3 trial in 2018, which met all primary endpoints and demonstrated non-inferiority to the hormonal birth control currently on the market. Evofem subsequently submitted the new NDA in November 2019, and the FDA decision will be announced by May 25, 2020. The company is preparing for commercial launch in June 2020, pending approval of Phexxi.
This product is a highly differentiated form of birth control. The gel prevents pregnancy in two ways. It maintains the natural acidic vaginal pH of 3.5 to 4.5, even with the introduction of sperm or other microbes. At these levels, sperm cannot survive. Phexxi also inhibits motility, or the ability of an organism to move itself independently using metabolic energy. In other words, sperm cannot propel itself enough to penetrate the cervix where egg fertilization and pregnancy occur. Maintaining the body’s natural pH levels also makes the vagina inhospitable to certain other microbes, such as those that cause chlamydia and gonorrhea, hence the potential for the additional indication of preventing these sexual transmitted infections.
In the confirmatory trials required by the FDA for the potential approval of Phexxi for the prevention of pregnancy, the gel proved non-inferior, or as effective as oral, hormone-based birth control. The drug had few minor side effects and no serious adverse events. This is a major advantage over the standard hormone-based birth control pill, which often causes weight gain, headaches, sore breasts, irregular period, mood changes, nausea and decreased sexual desire. The intended labeling will state that Phexxi can be used on demand, immediately before intercourse, or up to one hour before intercourse. The company also stated that the gel will have the additional benefit of acting as a lubricant for increased sexual satisfaction. Also, as part of the mission of Evofem, this form of birth control puts women in control of their own sexual and reproductive health. If approved, Phexxi would be the first novel form of birth control introduced to the market in decades.
Institutional and Insider Ownership
There has been positive insider activity and institutional ownership. In the previous twelve months, insiders have purchased over nine million shares or over $40 million worth of Evofem stock. Institutions own around 65% of the company’s shares. I consider both of these to be bullish for the stock. In June of 2019, Evofem closed on a second tranche of financing worth $50 million. The first tranche worth $30 was closed in April. PDL, Invesco Asset Management and Woodford Investment Management provided these funds. The three companies received a combined total of 11.1 million shares at a price of $4.50. In addition, the three financing partners received seven-year warrants to purchase roughly another three million shares at a price of $6.38. I think it is helpful to see where institutions are pricing Evofem’s stock. This gives me more confidence that the shares at the current price are attractively valued. Only three Wall Street analysts have issued price targets on the stock in the last three months, and the average target is approximately $12 a share.
Financial Position and Valuation
When considering the financial aspects of small biotechnology companies which have no revenue or profits, the main two metrics I value are cash on hand and the cash burn rate, or the rate that the company is depleting their cash. My main concern is to determine whether a company has enough cash to fund its operations for the foreseeable future without having to go to the capital markets, issue more shares of their stock, and dilute the value of current shareholders’ holdings. At the end of December 2019, Evofem had roughly $23 million in cash and cash equivalents. The company’s total expenses, including R&D and general and administrative expenses totaled a little over $52 million. This is obviously a negative when evaluating this stock as a potential investment. I expect that the company will either go to the debt or equity markets for more funding soon. My best guess is that they will do so shortly after the approval of Phexxi, which should coincide with a significant spike in the share price. This is a common practice within this sector. A company can get the funding they need while minimizing the negative impact on the stock price. In addition, investment banks and other institutions are much more willing to provide funding at more attractive terms if a company has just received an FDA approval. Dilution is a major risk to investing in Evofem, and one that will heavily influence my trading strategy.
Valuing these tiny, unprofitable biotechnology companies is always tricky. Evofem currently has a market capitalization of approximately $230 million. The company estimates that there are approximately 45 million women at risk of unintended pregnancy. Based on the company’s market research roughly 17 million of these women are seeking an alternative, or would be open to a non-hormonal form of contraception. Evofem is confident that they can achieve a 5% penetration of this market which equates to 885,000 users. They estimate that each user will generate $1,200 of revenue which equates to about $1 billion. I am very conservative with my valuation of these speculative biotechs. I tend to look at the projected revenue and assign that dollar amount as the potential market capitalization of a company. That equates to a value of $1 billion, or roughly $18-20 a share. I think, assuming approval, this company could reach that level in a couple of years. Short term, however, I believe the stock will bounce to around $8-10 a share upon approval of Phexxi. In general, biotech companies with approved products and revenue trade at roughly four times their enterprise value. Evofem’s current enterprise value is $215 million. Using this approach would yield a market value of $860 million, or about $17 a share. While I don’t expect the stock to reach that price in the short term, long term I think it is a real possibility.
Make no mistake, an investment in Evofem is very speculative. I strongly recommend that whatever amount of money you invest, you can afford to lose. I have a saying, “I only invest an amount that if I lose, it would hurt my feelings, but it wouldn’t hurt me financially.” The greatest, immediate risk is that Phexxi will not be approved by the FDA in May. As I stated before, the share price will move violently to the downside if the decision is negative, probably settling in the $2 range. Another big risk with this stock is dilution. It is practically assured that Evofem will issue more shares shortly after approval. Commercialization of Phexxi will start almost immediately following approval, and this will be expensive. In addition, the company is planning to begin a phase 3 pivotal trial for Phexxi for the prevention of sexually transmitted infections and a phase 2 trial for the treatment of bacterial vaginosis. The company decreased its expenses in the most recent quarter and still burned through over $50 million in cash. With a large pivotal trial, another phase 2 trial and a nationwide launch of a new product, their expenses will rise. With only $23 million left in cash, dilution is coming. Of course, even if Phexxi is approved in May, there’s no guarantee that the launch will be successful. If Evofem cannot penetrate the contraceptive market as they anticipate, the stock price would suffer greatly. Another risk is that planned upcoming clinical trials may be unsuccessful, which means there would be no label expansion. Despite the numerous risks, I believe an investment in this stock is a solid, albeit speculative investment. One in which I anticipate will at least double my investment.
In ordinary times, almost like clockwork, the share price of these micro-cap biotechs advance significantly as the date of a binary catalyst, like an FDA decision, approaches. As a matter of fact, many investors use the strategy of buying the stock well in advance of the catalyst, holding it for the run up to the catalyst, and then selling their shares prior to the actual binary event. I usually use a combination of strategies. If the stock appreciates significantly, I usually sell at least half of my shares before the catalyst, lock in profits and hold some shares for the potential pop in share price. I have used this countless times, and it’s been a great strategy to employ. Of course, with the pandemic driving the markets, these are not ordinary times. I am not sure we will be getting a significant increase in share price prior to the FDAs announcement. With that said, I am very comfortable holding these shares through the PDUFA decision in May. If we do get a nice increase in price prior to the decision, especially if the stock were to get close to my price target, I will probably sell some of my shares. Either way, I anticipate selling all of my shares shortly after the decision is announced, most likely on that same day. I think the company will issue more shares immediately, and once the euphoria subsides and the market adjusts the share price due to dilution, I may buy back my shares to hold long term.
Evofem has finally reached a major turning point for the company. I think there is a high probability that Phexxi will be approved on May 25, 2020. This is a major catalyst that should propel the stock into the $8-10 range. Longer term, the stock could be worth $20 a share just based on the contraceptive indication. The company plans, at some point in the near future, to seek marketing approval for Phexxi in the European Union. In addition, in phase 2 trials, Phexxi was very effective in decreasing the risk of contracting chlamydia and gonorrhea. If Evofem eventually wins approval for these additional indications, then a $20 long term price target may prove quite conservative. While there are inherent risks in investing in small biotechnology companies, as well as specific risks investing in Evofem, I believe at this price level, the risk/reward profile is attractive. Dilution of shares is almost certain soon after approval, and I plan to close my position shortly after the FDA decision.
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Disclosure: I am/we are long EVFM. 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.
Additional disclosure: Investing in small/midsize biotechnology companies involves substantial risk. Potential investors should use this article as a starting point for their own research and due diligence. Before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. This article is for general information purposes only, and should not be relied upon as a formal investment recommendation.