There are two things every investor looks at when considering taking a stake in an early-stage company: product and management. A great product is not going anywhere without an experienced management team. In the same way, an experienced management team will struggle to bring in revenues on a poor product.
One company that ticks both boxes is Blake Insomnia Therapeutics Inc. (BKIT, Financial).
Let's start with management. When company CEO Birger Jan Olsen recognized at the turn of the century that medical compliance was a major issue in the osteoporosis space, one that was costing both pharmaceutical companies and physicians money, he invented a system that would dramatically improve compliance. It was simple and cheap to implement.Γ Here is the pitch deck. He sold it to big pharma incumbent Roche Holding Ltd.Γ (RHHBY, Financial) for an undisclosed sum.
Shortly after the sale, he created i-Butler, which is a system designed to help mentally impaired individuals communicate with health care professionals. He also has a mind-mapping technology called Mindmetic on his patent roster.
Long story short, he builds products that solve problems. And just as importantly, he has β on numerous occasions β raised capital to get these products built and on the shelves before exiting by way of a big-name acquisition of the patents and products in question.
Which brings us to the product.
Olsen's mother is an insomnia sufferer. Despite numerous rounds of prescribed sleep aids, she was still suffering. Then Olsen set out to do what he has done in other elements of his business life β solve the problem. This is not a problem unique to Olsen's mother, of course. Millions of individuals suffer from stress-induced insomnia in the U.S. alone. There is a commercial opportunity, and he aimed to tackle it. Olsen recognized one thing β that while his mother's sleep aids were not helping, or induced side effects were not worth bearing for a decent night's sleep, one thing helped her sleep: a third-generation beta blocker called Nebivolol. Nebivolol is used primarily to slow down the beating of the heart (as is the primary aim of all beta blockers) so as to reduce blood pressure. Olsen theorized that this slowing down of the heart must somehow be improving his mother's sleep profile and got to work trying to figure it out.
He uncovered a study that detailed the difference between third-generation blockers like Nebivolol and earlier generation blockers. Specifically, those earlier blockers do not inhibit nighttime melatonin production, while those in the latter category do. He then theorized that stress-induced insomnia is the result of a cycle of processes:
- Sufferer experiences stress
- Stress cases physical symptoms
- Physical symptoms increase awareness
- Increased awareness exacerbates stress
- Back to stage one
Putting the study together with this process cycle, Olsen figured out that if he could create something that broke the cycle between numbers two and three, the physical symptoms would not be severe enough for the patient to become aware of them, leading to improved sleep.
The output that came from all of these inputs is a drug called ZLX-1. It is essentially a third-generation beta blocker, but one for which Olsen has filed a patent for the use of this beta blocker to treat stress-induced insomnia. With the patent application in place, he is building a company around the product, which he has since renamed Zleepax, and is raising capital to get the drug through the clinical testing required to bring it to market in the U.S. and Europe. The company, of course, is Blake Insomnia Therapeutics. Olsen has taken the framework he applied to his previous projects and applied it to solving the problem of ineffective and obstructive side effect profiles of current standard of care sleep treatments. Identify the problem, create an innovative solution, raise capital, get the product to market, exit.
Right now, he is in the raise capital and get the product to market phases.
Therein lies the investment thesis. The drug needs funding to carry it through the mid-to-late-stage trials it will need to complete before it can start to generate revenues. Phase I studies are not necessary since the active ingredient of the drug is an established beta blocker. Straight away, this removes a large portion of the time and cost associated with getting this asset to market. Phase II studies will kick off this year and should be completed in mid to late 2018. The target is to enroll between 75 to 300 patients, something that Blake should have no problem doing based on the incidence rate of this condition, and the endpoints will revolve around safety and clinical benefit. A phase III study will follow, enrolling around 300 patients, and will target cementing the efficacy profile of Zleepax. Commercialization, assuming the trials run smoothly, should come in 2019.
Blake is looking to raise single-digit millions of dollars, which the company believes will cover all of the development costs between now and commercialization. It may not need that sum however. If the drug demonstrates clinical benefits in phase II, chances are we will see some big-name interest. Generally, that is where things really start to pick up the pace in the biotech space. The market for a drug like this is very large, 75% of the 9 million individuals in the U.S. taking prescription sleep medicine are dissatisfied with their treatment, and large companies will not want to drag their heels and miss out on an opportunity to gain exposure to a drug that might solve this mass scale dissatisfaction.
It is not a sure thing, of course. The drug may not translate to large-scale trials and may struggle to demonstrate the clinical benefit that early-stage studies suggest. Blake may not be able to find a partner and shareholders might have to foot the bill for a marketing strategy when the drug hits the shelves. These are standard biotech risks, however, and at its current market capitalization, there is a large potential upside that, for many, will outweigh the downside.
Disclosure: The author owns no stocks mentioned in this article and does not intend to buy shares in any companies discussed.
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