DMAC - DiaMedica Therapeutics: Risk-Reward Favors Following Insider Optimism

2023-08-06 04:08:12 ET

Summary

• DiaMedica Therapeutics is a clinical-stage biopharmaceutical company focused on developing recombinant proteins to treat life-threatening diseases.
• Its main clinical candidate, DM199, is undergoing evaluation in a Phase 2/3 study for the treatment of acute ischemic stroke.
• The company recently addressed its near-term funding needs through a $37.5 million private placement and received FDA approval to lift the clinical hold on its pivotal trial.
• A full investment analysis follows in the paragraphs below.

The unseen enemy is always the most fearsome .”? George R.R. Martin

Today, we take a deeper look at small cap developmental concern that has given shareholders a rollercoaster ride over the years, as can be seen below. The stock has a big recent rally. However, given the potential of the market it is targeting, the developmental approach it is taking and the fact the company recently addressed its near-term funding needs; the stock seems to merit a small holding until the day commercialization gets closer. An analysis follows below.

Company Overview:

DiaMedica Therapeutics Inc. ( DMAC ) is a British Columbia domiciled, Minneapolis headquartered clinical-stage biopharmaceutical concern focused on the development of recombinant ( synthetic ) proteins to treat life-threatening diseases. Its sole clinical candidate, glycoprotein DM199, is undergoing evaluation in a pivotal Phase 2/3 study for the treatment of acute ischemic stroke [AIS]. DiaMedica was formed in 2000 and went public in 2018, raising net proceeds of $14.8 million at $4.00 per share. Its stock currently trades just under $2.75 a share, translating to an approximate market cap of $100 million.

DM199

The company’s raison d’etre is DM199, a recombinant form of the human tissue kallikrein-1 (KLK1) protein that the body produces naturally in the kidneys, pancreas, and salivary gland. KLK1 is a key contributor in the regulation of blood flow and vasodilation, while also playing a role in reducing inflammation and oxidative stress. Lower KLK1 levels are associated with initial stroke events and are a predictor of recurrence post-first stroke. DiaMedica believes it has the potential to preserve “ at risk ” brain tissue by increasing cerebral blood flow in AIS patients. The only current pharmaceutical intervention is Roche’s ( RHHBY ) Activase, a tissue plasminogen activator ( tPA ) (approved back in 1996) that must be administered within 4.5 hours of symptom onset.

Also, mechanical thrombectomy, in which the clot is removed using catheter-based instruments, can be employed for large vessel occlusions, but many patients are ineligible due to the location of the clot. Due to their in-built limitations, these approaches only address ~20% of the ~700,000 AIS cases in the U.S. every year. DiaMedica estimates the total domestic market opportunity for this indication at ~$10 billion.

In Asia, forms of KLK1 derived from human urine and pig pancreas are approved to treat AIS, chronic kidney disease, retinopathy, hypertension, and other vascular disorders, but they have not cleared the requisite regulatory hurdles in the U.S. The dearth of KLK1 therapy domestically is not from a lack of trying. When DiaMedica went public in 2018, its management stated that at least five concerns had attempted (and failed) to create a synthetic version of KLK1 for the clinic. DM199 crossed the clinical threshold in 2018, but its most recent (and potentially final) leg of the AIS journey has been challenging.

In a placebo-controlled Phase 2 study (ReMEDy1) that was readout in 2020, DM199 demonstrated statistically meaningful improvements on several stroke scales versus placebo in a patient subset that had not received mechanical thrombectomy. Furthermore, of the 25 patients in that subgroup receiving DiaMedica’s therapy, only two died; whereas five of the 21 patients on placebo expired.

From this data, DM199 was granted Fast Track Designation from the FDA in September 2021, with the company initiating a pivotal Phase 2/3 study (ReMEDy2) that same month. In the trial, 340 mild-to-moderate AIS patients are being randomized 1:1 to receive either intravenous DM199 or placebo within 24 hours of the onset of AIS symptoms. Patients subsequently receive two subcutaneous injections of DM199 per week for three weeks, or placebo. Mild-to-moderate is defined as 3–20 points on the 15-item, 42-point National Institutes of Health Stroke Scale (NIHSS). Further, excluded are patients with large vessel occlusions and those who have received tPA or other thrombolytic. ReMEDy2 originally had two primary endpoints: physical recovery from stroke at day 90 as measured by the modified Rankin Scale (mRS); and the rate of ischemic stroke recurrence through day 90. The mRS scale is a 0-6 point scale, with 0 denoting no symptoms and 6 indicating death. An interim readout is due at 140 patients.

That as a preamble, the trial was placed on a clinical hold in July 2022 when three patients experienced transient acute hypotension, or a sudden drop in blood pressure, after DM199 was infused intravenously. Although a known adverse event associated with KLK1 treatment, no patients experienced acute hypotension in the ReMEDy1. Management deduced that the IV bag, which was changed due to supply chain issues in ReMEDy2, was the culprit. Large differences in protein binding between the two IV bags (polyolefin versus currently used PVC) altered the amount of DM199 administered to the patient. As a remedy, DiaMedica proposed lowering the dose from 1.0 µg/kg to 0.5 µg/kg, completing a Phase 1c study in healthy volunteers (as well as supplemental in-use studies requested by the FDA) to buttress its proposal. After a protracted review, the company prevailed, with the FDA officially lifting the hold with the new IV dosing – the subcutaneous injection protocol does not change – on June 23, 2023. Also, the trial has been modified for a single primary endpoint: mRS (0-1) at day 90. That said, no timetable for an interim readout has been forwarded.

Share Price Performance

Shares of DMAC were already depressed when the first news of the clinical hold reached the market, owing to slower than expected trial site activations. Still, the company’s stock fell 38% to $1.26 a share in the subsequent trading session and basically remained rangebound between $1 and $2 until the company issued a May 15, 2023 press release stating that it believed the lift on the clinical hold was imminent. Shares of DMAC rallied 22% from $1.62 to $1.98 that day.

Other Indications

The nearly one year of pivotal clinical trial limbo put a strain on DiaMedica’s balance sheet, impacting the advancement of any other indications for DM199. The company completed a Phase 2 chronic kidney disease study in March 2022, but the results were not overwhelming enough to provoke management into anything but “ evaluating next steps ”. That said, DM199 is expected to enter a Phase 2 trial for a to-be-disclosed cardio-renal indication in 2H23.

Balance Sheet & Analyst Commentary:

Funding for that study and the continuation of ReMEDy2 was recently increased through a $37.5 million private placement executed at $3.40 a share concurrent to the clinical hold lift announcement. When those proceeds are added to the $28.7 million of cash and marketable securities it held on March 31, 2023, DiaMedica should have enough capital to carry it through FY25. The company used $5.1 million in the first quarter of this year to support all operating activities.

In response to the lifting of the clinical hold, Oppenheimer upgraded the company from a hold to an outperform, joining the bullish views of Lake Street and Craig Hallum, who both have it rated buy. Their price objectives ($7, $8, and $12, respectively) reflect plenty of upside.

The private placement added to the share count by 41%, but that did not prevent four DiaMedica executives from participating on the transaction, although their price was $3.91 per share, equivalent to the closing price of June 20, 2023. Collectively, the CEO, CFO, Chief Business Officer, and one board member purchased 100,514 shares.

Verdict:

There are several other players in the clinical AIS space, although none taking DiaMedica’s KLK1 approach. Biogen ( BIIB ) has tPA BIIB131 in early-stage development; Athersys ( ATHX ) has a MultiStem cell therapy undergoing Phase 3 evaluation but failed to achieve its primary endpoint in a Phase 2 study; and Acticor Biotech SAS out of Paris is conducting a Phase 2/3 trial for its platelet aggregation inhibitor, but it is designed for administration within the first 4.5 hours of stroke onset. That leaves DM199 with a reasonably clear path to becoming the first approved pharmaceutical therapy in the AIS indication in 27+ years, and the first one for use beyond 4.5 hours.

It goes without saying that there are still plenty of unknowns. It does appear as if the PVC bag was the culprit in the ‘ over-administration ’ of DM199, but until the trial re-ramps in earnest, there is still a chance for additional hypotension adverse events. Furthermore, the timing of interim results is unknown as is the FDA’s ultimate reaction, if the data is approvable. However, with a market cap net of cash of ~$50 million and a pivotal trial candidate treating a $10 billion domestic opportunity, the risk-reward favors following the insider optimism and making DMAC a small 'watch item' investment pending further developments.

In a world of diminishing mystery, the unknown persists .”? Jhumpa Lahiri

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