Pharmaxis

Pharmaxis is an Australian drug development company formed in Sydney, Australia. The company has developed an expertise in developing drugs for inflammatory and fibrotic diseases, and a focus on myelofibrosis.

The company was formed in 1998 and became public on the Australian Stock Exchange in 2003, to this date on 21^st April 2022, the company’s share price is 10 cents per share. As Pharmaxis is a drug development company, they are currently developing a drug (PXS-5505) for treatment of bone marrow cancer myelofibrosis and recently had a new drug discovery to stop scars forming after surgery or trauma, called the PXS-6302.

There are only two product sources from their drug development that produces revenue for the company; one is called Bronchitol, which treats for Cystic Fibrosis by inhaling dry powder, and two Aridol which tests lung function to help diagnose asthma. Pharmaxis main drug market is in Australia, United States of America, Russia and other Western Europe and Asian countries.

There are other drug development in the pipeline that is undergoing testing and approval.

Recent news about Pharmaxis

Surprisingly, proactiveinvestors.com is the main news website providing information about Pharmaxis. Apart from the recent developments of Bronchitol and Aridol distribution rights, Pharmaxis led by Professor Fiona Wood has dosed its first of fifty patients with established scars.[1] It is reported that the scar tissue problem is estimated at US$3.5 billion per year in its global market demand.

The drug PCX-6302 is in its early stages of clinical trials and Pharmaxis is conducting a three month study to assess the safety and tolerance of the drug. Furthermore they will study the scar-tissue of the patient to understand the impact of the PCX-6302. As Pharmaxis is currently receiving revenue from their two established drugs Bronchitol and Aridol, they are receiving a National Health and Medical Research Council (NHMRC) development grant to fund the pre-clinical trial.

Financial Statement background

During the annual 2021 report, Pharmaxis principle is the continuance of activity of research and development and commercialisation of healthcare products for fibrotic, cancers and inflammatory diseases. As a drug development company, it is understandable that research and development,  sustaining a healthy pipeline of newly developed drugs and cost minimisation of drug distribution will assist the continuance of operation for Pharmaxis.

Recently on 1^st July 2021, Pharmaxis announced that it had sold the Australian Bronchitol and Aridol distribution rights for $2 million. I had to understand what is distribution rights? Put simply, Pharmaxis went into a distribution agreement to allow another supplier the right to distribute goods and services to clients or customers in a distinct territory.[2] For example, Pharmaxis has partnered to work with Chiesi, a global pharmaceutical company, headquartered in the US to distribute Bronchitol. Interestingly, Pharmaxis has partnered with GEN, a pharmaceutical company based in Russia. Due to the current European market conditions and the war between Ukraine and Russia, which shifted a worldwide relationship between Russia and the world, could this impact Pharmaxis revenue in the future?

To provide an example on Pharmaxis results of operation for 2021, see below their Bronchitol sales for the year ending 30 June 2021:

There has been a significant sales reduction in Australia, Western Europe and Central and Eastern Europe due to the COVID-19 global pandemic. Revenue generated by Russia in 2021 was due to the delay of shipment of a $1.1 million order originally scheduled for June 2021, did not ship until July 2021. The information provided in relation to shipment of Russia rings an alarm to me. As the information was provided, it is vague on as to why it was delayed? No mention as to why, and I can only assume that Pharmaxis delayed shipment so the $1.1 million revenue could be recorded in 2021 and not 2020 to show a balanced year on year performance.

As for Aridol sales ending in 30^th June 2021:

Some countries remained balanced, though due to the Covid-19 pandemic and different regulations, sales slowed.

It is important for Pharmaxis to have a healthy pipeline of drug developments. As mentioned, Pharmaxis is working on PXS-5505 for Myofibrosis and other cancers such as liver and pancreatic cancers, melanoma and glioblastoma. PXS-6302 for scarring treatment, PXS-4728 for neuro inflammatory though there is no ongoing research investment in this project due to the risk of drug dose compounds. PXS-5382 for treatment of chronic inflammation in kidney fibrosis, liver disease and in some other cancers, though there is no ongoing research investments in this project, and PXS-4699 for treatment on devastating genetic disorder Duchenne Muscular Dystrophy (DMD), though Pharmaxis and MTPConnect require further preclinical data before commencing the program. It is interesting to note that based on their information, only two drugs out of five are promising to be distributed to the market in future. My question is, what is the cause of their limitations to not perform all five drug developments? When it comes to a drug development industry, all I can think about is the limitation of funding, possible limitation of grants and regulation approvals before drugs could be distributed to the general public.

Challenges for Pharmaxis

As we know, the COVID-19 has impacted the business operations of Pharmaxis. COVID-19 is known to reduce revenues, increase operation costs such as freighting, and decrease overheads for example, employing work from home measures. The financial statement has identified two significant factors that impacted Pharmaxis:

• Several countries advised companies to limit lung function testing to more severe cases due to health risks arising from patients exhaling multiple times, hospital patients were moved to tele-health appointments, and pharmaceutical company representatives we not permitted to present to clinicians to present new products.
• Significant amount of international flights were made difficult to secure transport of the company’s products overseas for temperature controlled aircrafts. Cost of transportation have increased.

Financial Statement Analysis

There are several areas that have captured my attention with Pharmaxis. Being a drug development company, it is important for the company to improve its revenues by securing contracts for their newly developed drugs, looking for ways to reduce their operating costs due to the COVID-19 pandemic, have a strong balance sheet and having a sustainable cash flow for continuance business activity.

Revenue from continuing operations increased by $10.7 million dollars, with the biggest increase occurring in other revenue. Milestone payments contributed to other revenue because of the approval of Bronchitol in the US to supply the product for the launch.

I had one confusion when analysing Pharmaxis financial statement. Pharmaxis had a significant gain in foreign exchanges resulting in $407,000 gain. So what is foreign exchange gain or loss? Once again my investigative nature goes into discovery mode to understand this aspect of the company. Based on the financial statement definition, it is the result of transactions from the translation at year-end exchange rates of monetary assets and liabilities. To my understanding the US/AUS exchange rate worked in favour for Pharmaxis when distributing Bronchitol.

One more area of the financial statement that caught my attention is the Statement of Cashflows. I have high interest in the company’s Cash flows from operating activities. Pharmaxis received $5.433 million worth of grant receipts from governments,  $13.8 million of receipts from Chiesi US FDA milestones and $1.3 million of proceeds from distribution rights. In my opinion, cash flow is imperative for Pharmaxis to continue operations of drug development.

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[1] https://www.proactiveinvestors.com.au/companies/news/972562/pharmaxis-confident-of-capturing-global-market-for-scar-reduction-with-first-patients-dosed-in-study-972562.html

[2] https://www.dundaslawyers.com.au/distribution-agreements-an-introduction/#:~:text=A%20distribution%20agreement%20(Distribution%20Agreement,usually%20in%20a%20distinct%20territory.