We wrote on DiaMedica Therapeutics (NASDAQ:DMAC) over a year ago, laying out the bull case for the stock and why we thought it deserved the attention of investors. Please refer to our previous article for our full thoughts, but in short it was a ~$100M market cap company entering the last stage of FDA trials aiming to bring the first therapeutic breakthrough for stroke therapy to America in over 20 years. The drug was DM199 and it is the only known synthetic version of the naturally occurring KLK1 protein.
What got us excited about the prospects of a future approval of DM199 was that KLK1 has already been in use through Asia for many years to treat stroke patients. The KLK1 used in treatments throughout Asian though are derived by very crude standards and extremely expensive. While DM199 is completely synthetic and cheap to produce. Along with this, DMAC at the time had recently raised $30M in a PIPE transaction to bolster the balance sheet in order to fund themselves through the data readouts from the ReMEDy pivotal phase 2/3 trial.
We also highlighted in our original report that the current treatments for stroke patients in the United States is extremely limited, with most sadly never receiving any type of treatment. DM199 looked to completely upend that, as it would have a wider window than any current procedure and be extremely easy to administer as it is given through IV drip. This urgency of a need for a new treatment for strokes was highlighted by FDA granting DM199 fast track designation.
Ultimately, we thought DMAC offered a great risk/reward on bringing a synthetic version of an already proven drug to America to help serve the massively underserved stroke market. While we did point out that DMAC’s management had a recent blunder in running a trial through the misstep in population selection during its phase 2 REDUX trial, we thought management had learned from this mistake. As it turned out, it was not the case.
What Went Wrong
FDA Pause Because Of Hypotension
On July 6th DMAC announced that the FDA had put their ReMEDy stroke trial on pause. The stock sharply fell the following day by over 37%. The FDA placed the trial on pause due to 3 instances where patients experienced hypotension (low blood pressure). The depressed blood pressure levels of the patients all return to normal once the DM199 IV infusion was stopped.
This announcement shocked investors, as there had been no safety concerns or even red flags that came up during the phase 1 and 2 trials of ReMEDy. However, DMAC called out what they believed was the root of the problem.
IV-Bags and Delays
DMAC management stated that they believed the sole source of the hypotension was caused by the switch in IV bags for the trial. DMAC switched to PVC IV-bags due to the supply shortages of the previous type of IV bags used in Phases 1 and 2. Their theory is that, the previous IV bags allowed for the DM199 proteins to bind to the IV bag itself, which ultimately meant lower dosage of DM199 received by patients. While the new PVC IV bags do not allow the DM199 proteins to bind to the bag, which leads to higher dosages to the patients eventually resulting in the hypotension.
While this is a lot to understand, our biggest takeaway from this is that DMAC management did not exhibit the awareness needed when conducted FDA trials. In our conversations with medical professionals, it is well known that the type of IV bag administered can fundamentally change the dosage that the patient receives. We acknowledge the fact that DMAC likely had no choice but to go forward in the trial with new IV-bags, but what shocked us and shook our confidence in management is that they were not aware of the possible or even likely scenario that a new IV-bag would critically change the dosage a patient receives.
Following the initial pause by the FDA, it was expected DMAC would be able to have the ReMEDy trial back up in running by the end of 3Q or the end of 2022. CEO Rick Pauls seemed confident that himself and management understood the roadmap for getting the pause lifted when they spoke with investors for the 2Q earnings call:
This study also reaffirmed that the DM199 protein does not bind to the IV bag made from PVC, as used in the ReMEDy2 trial. With the results of the study, we believe that we have a data to provide to the FDA to support our rationale for the cause of the hypotensive events and the rationale for revising the IV dose level for the ReMEDy2 trial.
Essentially, we will propose revising IV dose levels to match the actual IV dose given in the ReMEDy1 trial, in which DM199 was well tolerated in 46 stroke patients in the DM199 arm.
We’re confident that the change will mitigate the risk for these clinically significant hypotensive events and hope that the FDA agrees.
…When that letter came in, I think we were encouraged. There wasn’t anything really beyond basically summarizing what happened on these three patients. And the FDA is looking for what our recommendation in terms of the plans going forward.
However, this confidence was misplaced and our confidence in management took another hit when on October 26th it was announced that the FDA was not lifting the clinical hold and that DMAC would need to provide additional data on the IV infusion to prove that was the cause. While we do acknowledge the requests are relatively mild versus a possible complete restart of the trial back to phase 1, it is still net/net a negative. This decision further pushes out when the restart of the trial could begin to most likely Spring 2023, but possibly as early as February 2023. We also note that even when the trial restarts, DMAC was already having trouble enrolling patients for the trial which would lead us to suspect this FDA hold will only add to the problems of enrolling patients in the future.
Our confidence in DMAC’s management team to bring a potentially life-saving stroke drug to market has significantly diminished since we last wrote. We have now witnessed three separate times where management exhibited poor execution in running a successful drug trial. First, with allowing the wrong population groups into their REDUX Kidney trial. Second, not understanding that the change in IV bags could cause a major change in the effective dose the patient receives. Thirdly, not fully understanding what the FDA wanted to lift the clinical pause and further delaying the entire operation.
While we still firmly believe that DM199 could be a revolutionary drug that leads to billions in revenue on a yearly basis, we are not sure if the current management team has the capabilities to successfully bring it to market. For us to change our stance, we would need to see clean and clear execution of getting the ReMEDy trial off hold and better enrollment numbers once it restarts. We believe it is also important to point out that CEO Rick Pauls’ open market purchase for 20,000 shares in November is a positive sign. We view it as a strong initial step in restoring investor confidence.
DMAC is currently a pre-revenue company and therefore burning cash. What this means is DMAC can only go as far as its cash runway allows it to. DMAC ended 3Q with $36.1M in cash and is currently burning ~$3M a quarter. This puts DMAC’s current cash runway at 12 quarters. This is a solid position, as DMAC has no immediate need to raise more capital in order to fund its operations. However, with the pause in the trial and the additional data they need to provide to the FDA – this could accelerate the cash burn and further put pressure on the stock.
The Bull Case and Final Thoughts
While we have turned decisively neutral in our view and hold a “wait and see” perspective on DMAC, the bull thesis we originally laid out is still in play. DM199, if approved, still stands to capitalize on a multi-billion dollar market that is craving for innovation. The stock is de-risked in the sense that it is currently trading at cash, meaning the market capitalization is roughly equal to the cash. However, that cash will continually shrink into the future which will continually drag down the market capitalization if the correlation between the two remain.
DMAC has been left for dead by investors and the market is pricing in a failure of the business. While the potential value of what DM199 could be is still intact, the roadmap for realizing that value has increasingly become more difficult. Along with that, our confidence in a clean and successful execution by management of that roadmap to value realization has been diminished significantly. Executive leadership in the microcap space is vital. For that reason, we will remain on the sidelines until our confidence in the ability to successfully execute the ReMEDy trial is restored.
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