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Phosphagenics Still Patched In
FNArena News - September 17 2012

 - Bell Potter retains Buy rating on Phosphagenics
 - Broker sees upside from drug patch technology
 - Minor drug crystallisation issue should be resolved
 - Other markets such as cosmetics offer further growth potential

By Chris Shaw

Since 2006, Australian-listed biotech Phosphagenics ((POH)) has demonstrated its Targetted Penetration Matrix (TPM) technology can transdermally deliver therapeutic doses of drugs that until now have not had such a delivery option. Transdermal delivery means through the skin and the TPM patches of Phosphagenics have been shown to work efficiently without skin irritation or inflammation.

Success in developing the TPM patches leads Bell Potter to suggest Phosphagenics has the potential to develop the world's first patches for oxycodone, an analgesic drug, and for insulin. The former is estimated to represent a market of at least US$3 billion in the US, while the latter offers a potential US$14-$15 billion global market.

Earlier this year Phosphagenics announced its TPM/oxycodone patches had encountered a minor drug crystallisation issue, which saw the company retain Germany's Labtec to help deal with the problem. Bell Potter expects the matter will be resolved this year, allowing Phase III clinical work to begin in the first quarter of next year. This is about six months behind the previous timeline.

Bell Potter suggests the drug crystallisation in patches issue for Phosphagenics is an engineering problem rather than a research problem and so should be relatively easy to resolve. Bell Potter expects Phosphagenics will be on course to file for FDA approval for its patches sometime in 2014.

While the oxycodone opportunity is significant for Phosphagenics there are also other potential markets for its patches. As Bell Potter points out, in April the company signed a licensing agreement with Indian drug company Intas for the manufacturing and distribution of three TPM-based anti-ageing cosmeceutical products.

If the anti-ageing products in India prove to be successful, the broker expects a full line of dermatological products to be launched in the Indian market. This offers a potentially lucrative growth opportunity for Phosphagenics.

Distribution agreements for POH's cosmeceutical products in markets such as Australia and Europe have also been reached, while Bell Potter expects the products will also enter the US market later this year. 

From a financial perspective, Bell Potter notes cash on hand at the end of June of $21.6 million means POH is funded for Phase III trials with TPM/oxycodone. Any potential licensing deal would help fund the cost of the trial. 

Modest changes to the broker's earnings forecasts for POH have not impacted significantly on valuation. Bell Potter now has a base case value on the stock of $0.42, rising to $0.79 on more optimistic assumptions. This compares to a previous valuation range of $0.39 to $0.82. The broker has set its target price of $0.40 at the bottom of its valuation range.

With news flow for Phosphagenics is likely to be strong in the coming year, Bell Potter retains a Buy rating on the stock. A market capitalisation of less than $130 million means limited coverage of POH, as none of the eight brokers in the FNArena database provide research on the company.

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