Memorandum

Biodel F4Q15 – Company suspends GEM program indefinitely and initiates legal proceedings against partner Unilife; BIOD-531 program temporarily on hold to preserve cash – December 22, 2015

Executive Highlights

  • Biodel has indefinitely suspended development of its Glucagon Emergency Management (GEM) auto-reconstitution rescue device, as it has been unable to resolve contract disputes against partner Unilife and has initiated legal proceedings against them.
  • The development program for BIOD-531 (U400 ultra-rapid-acting human insulin) is also temporarily on hold to preserve cash while Biodel evaluates “strategic alternatives.”

Biodel provided its F4Q15 update late last week in a call led by CEO Dr. Errol de Souza. Coming almost four months after its last update, the call focused entirely on the extremely dispiriting news that the company has suspended development of both lead programs, the Glucagon Emergency Management (GEM) auto-reconstitution rescue device and BIOD-531 (U400 ultra-rapid-acting human insulin). Biodel had announced in August that the timeline for the GEM product had been delayed by at least nine months due in part to contract discussions with partner Unilife. In this update, management shared that Biodel was unable to resolve those disputes and has now initiated formal legal proceedings against Unilife. The timeline for those proceedings is unclear but could potentially stretch to 1H17.

After a drop in share price, the company is now focused on preserving cash while it evaluates strategic alternatives to maximize value to shareholders. Management did not elaborate in depth on what those alternatives might be but suggested that a reverse merger with another company could be one possibility. Given this focus on preserving cash, Biodel has also temporarily suspended the phase 2 program for BIOD-531, but management stressed that this does not reflect a negative view of the product’s potential. Biodel had cash and cash equivalents of $40.8 million as of September 30.

We are very disappointed that the disagreements with Unilife could not be resolved, and that there was not better communication between the parties beforehand. Biodel management suggested during Q&A that the company could conceivably find a new device partner to leverage the investments made in the glucagon formulation. However, Biodel would have faced a challenging competitive landscape for the GEM product even if development had proceeded as planned, and any future product would have to compete in a market that will presumably include Lilly’s intranasal glucagon (recently acquired from Locemia) and Xeris’ auto-injector. Our hopes are somewhat higher for the future of BIOD-531, which could potentially appeal to a wide range of patients and fill a serious unmet need among patients with severe insulin resistance. Read on below for more details on these items and a transcription of Q&A from the call.

  • The legal proceedings against Unilife include a court case and an arbitration case. Biodel first initiated proceedings in August under the Connecticut Unfair Trade Practices Act. That claim is currently in court and could eventually lead to a trial that would likely occur in late 2016 or early 2017. Biodel also brought claims against Unilife under the American Arbitration Association in November; that process is projected to take 90 days but could last longer. It is not clear what role, if any, manufacturing partner Emergent has played in these disputes. Emergent is responsible for the final filling of the GEM devices, and Biodel cited unexpected delays on Emergent’s part as one reason for the original nine-month delay for the product.
  • A future Biodel glucagon product would likely face a market that includes next-generation products from Lilly and Xeris, and potentially from Zosano and Zealand. Lilly will likely be first to market with a next-generation glucagon, as it hoped to submit its newly acquired intranasal glucagon by early 2017 as of its 3Q15 update. Xeris’ auto-injector was expected to enter phase 3 by the end of 2015, but we have not heard updates from the company in some time. Zosano’s transdermal glucagon patch reported positive topline phase 2 results in late October, and the company is currently deciding how to prioritize that product vs. its other clinical programs (triptan for migraine and parathyroid hormone). Zealand has completed phase 1 for a liquid glucagon analog for severe hypoglycemia, and the program appears to be a high priority for the company based on comments at its Capital Markets Day in November.
  • Biodel recently restructured its phase 2 program for BIOD-531 in keeping with its increasingly broad view of the potential target population. The company initiated a phase 2a standardized meal challenge study in early November investigating BIOD-531 (i) against basal/bolus therapy with Sanofi’s Lantus (insulin glargine) and Lilly’s Humalog (insulin lispro) and (ii) in combination with Novo Nordisk’s Victoza (liraglutide) in patients with type 2 diabetes. The other ongoing phase 2 trial was evaluating BIOD-531 vs. Lilly’s Humalog Mix 75/25 in patients with type 2 diabetes and moderate insulin resistance. It was interrupted by a partial clinical hold from the FDA, which was removed in October, and Biodel had planned to hold off on recruiting new participants until 1Q16 while it evaluated the potential expanded target populations for the product. Despite the various setbacks, we remain optimistic that Biodel will be able to find a path forward for what could be a very versatile product.

Questions and Answers

Q: Can you give us an update on where you are with the proceedings with Unilife?

A: We initiated proceedings shortly after our last earnings call under the Connecticut Unfair Trade Practices Act. That is the claim that is in court before a judge but is ultimately a jury trial, and the process and proceedings and timelines for those proceedings are being established as part of the normal process. In conjunction with that, we have also brought contract claims under the American Arbitration Association pursuant to our agreement with Unilife. We instituted that in November. The process is usually different from a court case and you would expect it to be shorter, but there is no specific timeline at this time.

Q: So are you in the discovery phase or where are you? When could you potentially have a trial?

A: There will be significant back and forth until early in 2016. The trial would likely be sometime toward the end of 2016 or the first half of 2017.

Q: Would the outcome of the arbitration affect whether you go to trial?

A: They’re very much independent. The arbitration deals specifically with contract claims and the Connecticut case deals with unfair trade practices. The damages there are not limited by contractual limitations and liability. It allows for punitive damages and potentially recovery of attorney fees. Of course we’d have to be successful on all of our claims for that to be the case. The contract claims are being addressed in the AAA, and the agreement projects a 90-day process, but I can’t predict that it will take place exactly within that timeframe. It could be longer.

Q: Turning to your decision to suspend the studies, could you talk about what your strategy is there and for that portion of your pipeline?

A: We believe in the assets and the value of the assets, but given that we are looking at strategic alternatives based on incoming interest, we thought it would be best for the shareholders if we conserve cash while we evaluate those in the short term instead of committing to trials. It’s less of a decision about whether we believe in the assets we have. It’s just buying a little time to be able to review all our alternatives that would maximize shareholder value.

Q: Could you talk about your current cash position and your current liabilities?

A: Our current cash is about $40 million. In terms of liabilities, we have no debt and our total liabilities are approximately $1.9 million.

Q: In simplistic terms, you’re suing Unilife and you have an arbitration ongoing. Either you win or you lose. Is there a future with Unilife for this product regardless of the outcome?

A: We really can’t talk about the future of this program. We tried to go in and audit to determine our confidence that the device can be delivered, and unfortunately, we could not fully complete the audit to our satisfaction to be able to address your question. So it’s very difficult under the circumstances to provide any guidance in terms of the future of this program. In parallel, we’ve also been looking at how we could leverage all the investments we’ve made in the program at Biodel in terms of formulation development, toxicology, and clinical studies. Those might be applicable to other auto-reconstitution devices so we can maintain value in the investments we’ve made. That’s something we continue to make some progress on, but it would be premature to talk about any directions there. But on the GEM program, it’s been frustrating because we can’t give clear-cut guidance. We’ve been conservative by saying we don’t know what the future of the program would be.

Q: What would the alternatives you’ve mentioned be? Would you acquire assets and then decide those assets are more attractive than BIOD-531 and not focus on BIOD-531? Would you develop both BIOD-531 and those assets? Are you contemplating merging with a company? How does the share price going down precipitate a change in direction?

A: From Wall Street’s perspective, the strongest asset we have is our balance sheet, which is our cash position relative to our market cap. From that perspective, we are looking to see how we can leverage the strength of the cash position to be able to look at internal assets but also other options that might be available, like private companies that have synergistic assets and may be looking at a public option like a reverse merger. That’s why our intent at this point is to hire a strategic advisor to sort out the incoming interest we have received and to do it expeditiously. We believe in the assets that we have, but we want to make sure we don’t continue to drain the cash position. We will also look at other cost-cutting measures to make sure we maximize the assets. So a strategic advisor will be hired, and many of the options you’ve discussed will be considered in the short term to maximize shareholder value.

-- by Emily Regier and Kelly Close