Cleveland On $AZRX: Could The Sky Really Be That Blue?

[Foreword: Intrepid BioPub contributing editor Cleveland here sets his sights on a comprehensive, painstaking critique of AzurRx’s capital structure. Cleveland is among the most famously organized people one will meet in a lifetime…..as he can spend weeks gathering data from disparate sources and from under upturned stones, and concentrate on that data like a Zen monk until it is perfectly organized. Cleveland hates chaos. But he also doesn’t care for bloviated biotech. As you know we’ve been amping up $AZRX for weeks here on suspicion a takeover by a larger pharma may be imminent. Here Cleveland examines whether that makes sense: he assays the plausibility of the rumors based on a crystalline emotionless line-by-line just-the-facts analysis of the company. We revere Cleveland’s contributions to this publication….and are transfixed by them, nailbiters as many of them tend to be.—KSS, London, 9 April 2019]

AzurRx BioPharma, Inc. (NASDAQ:AZRX) a financial drill down….after a flurry of recent activity. What’s Up?

by Cleveland 

Company Overview: A “potential therapy which proposes that by taking a pill, it will replace an enzyme that the body is missing. It proposes no challenge to the body’s inmate mechanisms, no tweaking or stimulating responses, no so far evident toxic side effects. A pill instead of any complicated IV or radiologic regime. Rather old-fashioned simple type of therapy.” Thank you Karen.

Exocrine Pancreatic Insufficiency (EPI) results in those who have had their pancreas removed or who have conditions such as cystic fibrosis or chronic pancreatitis whereby they lack secretory digestive pancreatic enzymes, resulting in the inability to digest food properly or maldigestion. This deficiency can be responsible for greasy diarrhea, fecal urge and weight loss. Occasional patients have pancreas exocrine insufficiency without an underlying cause, too.

These individuals are treated with replacement enzymes known as pancreatic enzyme replacement therapy or PERT. All approved replacement enzymes for PERT treatments are porcine or pig derived from pig pancreases. The pancreas is removed from the pig, dried and ground into a powder that is then encapsulated in pills.

There are approximately 90,000 patients in the U.S. with EPI caused by chronic pancreatitis according to the National Pancreas Foundation and more than 30,000 patients with EPI caused by cystic fibrosis according to the Cystic Fibrosis Foundation.

“The overall PERT market has experienced robust 19% CAGR since 2013, surpassing $1.2 billion in estimated annual sales in 2018.”

AbbVie’s FDA approved (2009) Creon is the leading porcine based PERT treatment with a dominant market share of 70% and 2017 sales of $ 831 million. Abbvie has a market cap of $123 billion. Allergan’s Zenpep has approximately 17% market share and has a $49 billion market cap. Together, these two options represent 87% of prescriptions for individuals with EPI.

How is AbbVie and Allergan going to stay competitive in the PERT market with the advent of AZRX’s MS1819? See table below for overview of companies involved in the PERT market.

AZRX’s MS1819 treatment for EPI is the FIRST non-animal derived PERT. Current approved PERTs require the patient to swallow up to 38 pills per day versus AZRX’s MS1819 5 pills. MS1819 is a “yeast commonly found in cheese and olive oil, and also used widely in industrial processes, limiting safety concerns.”

There has been a breathtaking flurry of activity over the last several weeks at AzurRx BioPharma, Inc. (NASDAQ:AZRX) which changes the company in a positive manner. What do these activities portend for the future of the company? Why now? What’s up?

1) On February 14, 2019 AZRX placed $2 million convertible 10% note at $ 2.50 share with a maturity date of December 31, 2019. The note was placed with the company’s principal shareholder whose affiliated entities control approximately one-third of the company.

2) On February 20, 2019 AZRX announced that it dosed the first patients in the Company’s Phase II study to investigate MS1819-SD in Cystic Fibrosis patients with exocrine pancreatic insufficiency. What is important is this trial will be completed by mid-year 2019. This trial has been sanctioned by the Cystic Fibrosis Therapeutics Development Network. The Phase II study with 30 patients is both quick and relatively cheap in biotech industry terms.

3) On March 27, 2019 AZRX expanded commercialization rights to MS1819-SD as a result of the acquisition of intellectual property surrounding MS1819-SD from Laboratoires Mayoly Spindler, SAS for cash and over 700,000 shares of AZRX. This puts AZRX in complete control of MS1819-SD. This transaction which Mayoly had no interest in consummating for years enhances the value of AZRX and was important to complete. Why now?

4) On April 2, 2019 AZRX sold through Alexander Capital 1.294 million shares at $2.13 per share netting $2.563 million with no warrants, a first for the company. This offering brought cash to $5.6 million with the company burning $ 400,000 a month. Why no warrants? What has changed? See the AZRX Capital buildup since 2014 below and note that every financing included warrants.

Comments about the Company:

1) Edmund Burke Ross and his affiliated companies ADEC Private Equity and EBR Ventures (“Ross Entities”) are the major shareholders and financiers of AZRX. Mr. Ross was introduced to AZRX by Chris Laffey of Alexander Capital who has been the principal agent for capital raising for AZRX. As recently as February 14, 2019 ADEC provided $ 2 million 10% convertible debt at $2.50 a share due at year end 2019. Per my review the Ross Entities have paid substantially higher than the current market price of AZRX of

$ 2.50 for their position in the company. For example, in October 2016 they purchased 1,031,268 shares for $ 4.8 million or $ 4.65 per share. I estimate that the Ross Entities upon exercise of their warrants will have invested well over $17 million in AZRX.

Mr. Ross was a Partner at former Secretary of the Treasury William E. Simon’s Wesray Capital from 1983 to 1991 which acquired approximately 30 companies (Gibson Greeting) with combined revenues of $ 15 Billion.

https://en.wikipedia.org/wiki/Wesray_Capital_Corporation

2) CEO/President Thijs Spoor was previously an equity research analyst at JP Morgan and Credit Suisse covering the biotechnology and medical device industries. Mr. Spoor holds a Pharmacy degree from the University of Toronto and a MBA from Columbia University.

3) Dr. James Pennington, the Chief Medical Officer who started with the Company in May 2018, at age 75, spent ten years on the faculty of Harvard Medical School.

4) IMHO the Company is being built to be acquired. The clinical trial sizes are small with 30 or less patients and are quick and cheap. With the completion of Phase II at the end of the second quarter what will the company do? Phase III or be acquired? Major Shareholders and insiders control over 44% of fully diluted shares. This is substantial. The Ross Entities have been building their AZRX position for years.

***AzurRx Shares and Major Shareholder Summary

Note: Edmund Burke Ross and ADEC Private Equity ownership positions are partially duplicated per Company—unsure the amounts.

https://www.dropbox.com/s/5aw88nifxfl3r9r/ONE%20h04061233.pdf?dl=0

Major Insider Positions

Johan M Spoor CEO President 539,835 shares 100,000 options Total 639,835 shares and options

Maged S. Shenouda CFO 62,500 Shares 54,167 options Total 116,667 shares and options

Dr. James Pennington Chief Medical Officer May 2018 Start 75,000 options

Edward J. Borkowski Director 379,126 shares 52,641 options/warrants Total 431,587

(former CFO Mylan MYL 14 Billion Market Cap)

***AzurRx Capital Buildup https://www.dropbox.com/s/uvkpb2ik0z6qtzw/two%2004041714.pdf?dl=0

***Edmund Burke Ross—

https://www.dropbox.com/s/q3vaez4cw4j0eow/Three%2004041714.pdf?dl=0

http://nebula.wsimg.com/1e41908f7b36261966cc4f4f65e26f4f?AccessKeyId=78F8B454D06058AB0AFC&disposition=0&alloworigin=1

https://prabook.com/web/edmund_burke.ross/843188

***Father of Edmund Burke Ross https://vineyardgazette.com/obituaries/2005/01/28/edmund-b-ross-85-bred-thoroughbred-horses

Additional information about the ongoing Trial MS1819-SD with cystic fibrosis patients can be found at:

https://clinicaltrials.gov/ct2/show/NCT03746483?term=ms1819&rank=2

Disclaimer: This discussion should not be regarded as investment advice or recommendation as to any course of action. There can be no assurance that the information presented here is accurate or complete. The biotech discussed herein is extremely high risk as is the investment in all biotech companies. Copyright 2019 by Cleveland and by BioPub. May not be reproduced without author’s permission. Readers are advised that many editorial board members at BioPub hold long positions in $AZRX. BioPub has no pecuniary relationship with either AzurRX or its officers.