HUGE.CN: FSD Pharma is conducting Phase 1 clinical trial of FSD-201 for inflammation and has FDA approval for a Phase 2a clinical trial design for the treatment of COVID-19 patients

By Steven Ralston, CFA

CSE:HUGE.CN | NASDAQ:HUGE

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FSD Pharma HUGE HUGE continues to evolve into a specialty, biotech pharmaceutical R&D company as management advances its strategic objective of developing, over time, a pipeline of FDA-approved synthetic compounds that target the human endocannabinoid system. Through the acquisition of Prismic Pharmaceuticals in June 2019, FSD Pharma attained the exclusive, worldwide rights (except for Italy and Spain) of the micronized formulations of palmitoylethanolamide (micro-PEA and ultra-micronized-PEA), which targets the CB2 receptor of the endocannabinoid system.

FSD Pharma has initiated Phase 1 human safety and tolerability trials for FSD-201, an ultra-micronized formulation of PEA and has received FDA approval to design a Phase 2a clinical trial to treat patients with a suspected or confirmed COVID-19 diagnosis.

Ultra-micronized-PEA Phase 1 Safety and Tolerability Trial for Inflammation

FSD-201 ultra-micronized-PEA is the company's lead candidate, which is undergoing a Phase 1 randomized, double-blind, placebo-controlled human safety and tolerability clinical trial at Alfred Hospital in Melbourne, Australia utilizing single and multiple ascending doses of ultra-micronized-PEA (FSD-201, formerly PP-101) in normal healthy volunteers. Animal safety and pharmacology studies will also be performed. PEA is a naturally occurring anti-inflammatory agent that is be expected to be effective in many inflammatory ailments, including chronic pain, and arthritis (particularly early stage osteoarthritis), among others. Micronization of PEA improves its oral bio-availability, and this micronization technique is protected by patents until 2030. The Phase 1 study in Australia is progressing with three single ascending dose cohorts having been completed as of May 14th. Thus far, all three dose levels have been well tolerated without any serious adverse events having been reported. Management anticipates that the clinical portion of the study will be completed during the second quarter of 2020. The clinical study is being completed in accordance with FDA-approved guidelines.

FSD-201 Ultra-micronized-PEA Phase 2a Clinical Trial for COVID-19-related Inflammation

On June 3, 2020, FSD Pharma announced that the FDA has given permission to the company to design a proof-of-concept study for the use of ultra-micronized PEA (FSD-201) as a treatment for COVID-19 patients. The life-threating stage of COVID-19 is characterized by an acute, elevated inflammatory response in the lungs that too often leads to death. Management became aware that some Italian physicians/scientists supported the use of ultra-micronized PEA to treat the symptoms of COVID-19 due to the drug's mechanism of action and its anti-inflammatory profile. Therefore, FSD Pharma is pursuing the advancement of ultra-micronized PEA through the regulatory process as an anti-inflammatory agent. Management expects that a clinical trial will demonstrate ultra-micronized PEA's capability to down-modulate the immune response, particularly the cytokine storm that is associated with the inflammation and subsequent damage to lung tissue in hospitalized COVID-19 patients.

Historically (between 1969 and 1979), PEA used to treat patients with influenza and the common cold in Czechoslovakia. At the time, six randomized, double-blind, placebo-controlled clinical trials were conducted that demonstrated PEA was safe and effective for the treatment of respiratory infections.

Management expects that the clinical trial to be a randomized, controlled, double-blind, U.S. multicenter study. The study is expected to assess the efficacy and safety of FSD-201 at two dose levels (600mg and 1200mg twice-daily) plus SOC (Standard of Care) versus SOC alone in symptomatic patients over a treatment period of 14 days. The primary endpoint is to see if FSD-201 plus SOC improves the clinical outcome, particularly reducing the length of time to attain symptom relief.

Management is selling non-core equity positions and is raising new capital to fund the company's pharmaceutical R&D programs.

On February 24, 2020, FSD Pharma announced the sale of its 12% equity interest of Cannara Biotech (85,003,750 Class B shares) to a consortium of buyers for over $7.7 million in cash. FSD Pharma received 75,000,000 Class B shares of Cannara Biotech when the company entered into a Partnership Agreement with Cannara Biotech on June 19, 2018. In addition, FSD Pharma acquired an additional 12,000,000 shares by Cannara participating in a private placement that closed on July 24, 2018. With a cost of $1.0 million, the $7.7 million in proceeds represented a 670% return on FSD Pharma's investment in Cannara Biotech.

In addition, on November 22, 2019, FSD Pharma sold its 2.2% equity interest (including warrants) of High Tide for total cash proceeds of $614,520.

In May 2020, FSD Pharma sold 5.0 million shares of its 13,562,387 share position of Pharmadrug Inc. Cash proceeds were CDN$400,000. The buyer has the option to purchase another 5.0 million shares at CDN$0.10 per share from FSD Pharma through June 26, 2020.

These sales strengthen FSD Pharma's cash position. Management's goal is to increase the company's cash position to roughly $50 million by monetizing non-cash assets and raising capital in order to fund the company's pharmaceutical R&D program.

In addition, the company has the reclassified the Cobourg facility, related equipment, all biological assets and inventory on hand as assets held for sale. The Cobourg facility is a 620,000 square foot building complex that was a former Kraft food production plant. The facility is listed for sale at an asking price of $19.9 million with leaseback on 40,000 square feet of grow area required. 25,000 square feet of the facility are covered by the following licenses:

• ACMPR Cultivation License in the Province of Ontario

• Standard Processing License in the Province of Ontario

• Sale for Medical Purposes License from Health Canada

• Full Sale for Medical Purposes License from Health Canada

Valuation

Valuation analysis of pharmaceutical R&D companies is a very challenging exercise, since many are pre-revenue entities in the development stage. In addition, almost all these companies are reporting negative EBITDA and net income. However, the pursuit of FDA-approval for therapeutic compounds creates unique opportunities to invest in pharmaceutical R&D companies with immense potential.

Empirically, there appears to be subsets of pharmaceutical R&D companies, one of which can be defined by several quantitative and qualitative factors, particularly those with a market capitalization below $1.0 billion and trading on a major exchange (NYSE, NASDAQ and/or the CSE) with a reasonable, single-digit P/B valuation. This subset usually captures a range of well-funded pharmaceutical R&D companies that have met the financial hurdles becoming listed on a major stock exchange.

In the life cycle of nascent pharmaceutical R&D companies, the appropriate valuation methodology migrates from one metric to another. Initially, as a company's strategy gains acceptance, investors willingly fund operations during the emerging stage through private placements to qualified investors. Through these financings, the company's book value increases and the company receives much needed capital to fund growth initiatives. If management successfully executes its strategy, the company's book value will increase through operational activities. Furthermore, in the embryonic pharmaceutical R&D company space where strategic alliances are commonplace, strategic partnerships and alliances have spurred cross-ownership investments, which reinforce business relationships. The values of these investments are reflected on the balance sheet, impacting the company's book value. Currently, the P/B valuation range for well-funded pharmaceutical R&D companies is between 1.27 and 3.98. With the expectation that FSD Pharma's stock will attain an industry average P/B ratio of 2.88, our comparable analysis valuation price target is $16.45.

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