Evofem (EVFM) And The Phexxi Launch

Insight Small-Cap Research put a STRONG SELL rating on Evofem Biosciences (OTC:EVFM) back in August of 2020 writing, “Investors should avoid shares of Evofem Biosciences as the risk of substantial loss is high.” Kudos to him/her on the prescient and accurate assessment. Shares have declined 99% since that time. Some investors may think Evofem is a buy after such a precipitous decline. However, the risk of substantial loss or even bankruptcy is still high. Today, high cash burn, dilution risk, a suboptimal product profile and low sales figures are reasons investors should NOT invest. The company is on the cusp of a data readout due in October which could add an additional indication. Today’s article assesses the current situation, and whether this catalyst could alter the course after the company was recently delisted from NASDAQ.

Cash Burn has been Consistently Very High

In the article written two years ago, the author noted “The current run rate of operating expense is $52MM (2019 R&D of $22M and G&A of $30.5M) which, in my view, is quite high for a pre-commercial single product company.” They also expressed concerns about the costs of commercialization. “On the 4Q conference call, management said they anticipate the annualized cost of the salesforce to be approximately $35M, and on top of that, they expect to have DTC expense in the range of $30-50M.” Management suggested an annual run rate of $65-85M after launch but the actual annual rate appeared to be in excess of $110M. (Selling and marketing costs were $23.9 M in the fourth quarter of 2020, $30.5 M for Q1 2021, $27.2 for Q2 2021, 30.5M for Q3 2021) Management exceeded their own expectations, at least in terms of spending.

In response to a question on limited access to Phexxi asked during the interview posted on the Evofem website, the CEO stated, “Unfortunately, some of the largest plans in the U.S. are obstructionists. They are not following the guidelines. They are not allowing women, sometimes vulnerable women to get access to these contraceptive products.” In this case, an expensive ($35 m) DTC campaign surely did not make sense if payer coverage was not in place.

The figures cited above are just sales and marketing and total quarterly expenses were $45M-46M in some quarters. This is not a lean company. This spending has been funded by multiple raises and investors have faced incredible dilution.

The company has approximately $20m in cash on hand despite recently reducing spending. Given the company spent $30.5M last quarter, more dilution is likely. The balance sheet is in critical condition and cash is running out. Financial discipline is essential when running a company. In my view, financial discipline has been lacking.

Sales Figures are Shockingly Low

The investor presentation cites a multi-billion dollar market opportunity for current and late stage investigational indications. Evofem has set the bar by which their performance can and should be measured. The FDA approved Phexxi in May of 2020 and the company made a huge investment in a very expensive launch which included a DTC campaign. Sales should be very significant by now given the time that has elapsed. Q2 2022 produced sales of $6M, and the company predicts $30-$35M in product sales for the year. After a very expensive launch, this is not in my view, “success.”

On a video interview on Evofem’s website, the CEO responded to being asked why should someone invest in Evofem. “We already have been quite successful because we have an FDA approved product.” Investors, who the CEO should be accountable to, succeed when the company becomes profitable. In my view, this comment reveals a fundamental incongruence between her view of success and what an investor values-a return on their capital.

This is a launch that in no way rewarded investors for the high level of spending on the launch. Investors need to seriously reflect on what peak sales figure can be anticipated when the product has already been presented to physicians via sales calls and to the public via a DTC campaign and providers are simply not writing many prescriptions. $6M in sales is pocket change for a company spending so heavily on sales and marketing activities. In addition, the company owes mid single-digit royalties to Rush University Medical School adding additional financial stress.

The FDA approved Phexxi in May of 2020. In Sept of 2020, the CEO sold a large chunk of her shares at an average price of $3.26, which equates to $48.90 when adjusted for the May 2022 1:15 reverse stock split. A CEO selling into a launch is an unusual move in my view and surely does not instill investor confidence. She too may have been prescient. The shares now trade at 34 cents.

The Product Profile is a Problem and the Sales Figures Support that Conclusion

The 7-cycle cumulative pregnancy rate for Phexxi was 13.7%. In an era where some will encounter a greater difficulty accessing abortions, this is simply not a desirable figure. While some have suggested the recent ruling may increase sales, in fact, it may decrease sales of less effective products. Phexxi surely does not compare favorably to hormonal birth control options or IUDs in terms of efficacy. Phexxi may become a niche product for women who are willing to compromise on efficacy for a non-hormonal option.

The side effect profile is also suboptimal. Evofem needs patients to refill their prescriptions and report back favorable experiences to their gynecologists. In the package insert, vulvovaginal burning sensation impacted 18.0% of women. Vulvovaginal pruritus (itch) impacted 14.5% of users. Among male partners of subjects who used Phexxi for contraception, 9.8% reported symptoms of local discomfort (burning, itching, pain, and “other”). Hormonal birth control does have side effects, but so does Phexxi. The CEO said on a recent investor call that, “We brought something new to market, it’s different and it’s better.” That may be her opinion but the package insert approved by FDA notes a high rate of pregnancy and a high rate of side effects. Doctors read package inserts and they speak to patients who are pregnant and/or experiencing side effects.

Can STI Prevention Data Boost Sales?

Some may argue this is all going to turn around when there is a data readout from the phase 3 trial in the prevention of chlamydia and gonorrhea this fall. In fact, the CEO recently said on a call, ” The big catalyst and value inflection will come in October. We expect to report topline data in the prevention of chlamydia and gonorrhea.“

Assuming good data, gynecologists may view this prevention feature as a real benefit in some high risk patients. But, the patients who can benefit are a subset of the women the average GYN sees. Not all patients have a high risk of contracting a sexually transmitted infections (STI).

The CEO stated on a recent call about the NASDAQ delisting that, “The STI indication will double our market opportunity.” Then added, “Every, single sexually active person is at risk.” In fact, gynecologists are aware that people who are in mutually monogomous relationships with partners who do not have these infections actually have NO risk whatsoever.

In addition, barrier methods and testing of partners are still likely to be recommended by GYNs to prevent STIs. In a recent interview posted on Evofem’s website, the CEO said, “We will be the only product to prevent chlamydia and gonorrhea.” According to the CDC, “The physical properties of latex condoms protect against diseases such as gonorrhea, chlamydia, and trichomoniasis by providing a barrier to the genital secretions that transmit STD-causing organisms.” Clearly, Phexxi is not the only product that offers protection against STIs.

One promising and overlooked development is EVO-200 for recurrent bacterial vaginosis (BV). BV is the most common infection in women of childbearing years and the treatment options result in a high rate of recurrence. There is a true unmet need for better treatments and there are few companies working on this indication. If EVO-200 shows efficacy, this may be a very attractive market with few competitors. This product could generate very significant sales, if effective. Unfortunately, this is in early stage testing.

In the recent interview, the CEO mentioned partnerships around the world offering global access to Phexxi. Given the launch dynamics in the US and the lower prices paid ex-US for medicines, this is unlikely to generate significant revenue.

Conclusions

Management launched a drug where they view a multi-billion dollar market opportunity. Investors should judge management on the results ($6m in quarterly sales) they have produced based on the bar they set. The management team surely can’t blame the poor sales figures on limited resources for the launch.

The company is years away from breakeven and on a perpetual collision course with insolvency due to the cash burn for marketing a product that does not seem to be selling well. The STD prevention indication is likely going to be useful to a subset of women, but in my view, is unlikely to dramatically increase sales. With a 6 month FDA review, promotion would not likely begin until the second half of 2023.

“My life’s work has been figuring a way to deliver access to women while delivering for shareholders,” said the CEO on the recent investor call. While her intentions may have been good, and women do have an additional option, the results for investors have been terrible. Evofem becoming profitable anytime soon appears as likely as seeing a unicorn.

On a recent investor call, the CEO said, “We are going to continue to deliver as we have and we are going to figure out what is the very best and expeditious way to continue delivering shareholder returns.” Shares are down 99 percent in the last 2 years. Investors surely do not want the company to “continue to deliver as we have.” I rate EVFM a strong sell- but selling will now be on the OTC market as EVFM shares have been delisted from NASDAQ.

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