A Small Biotech With Big Potential

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Small Biotech Takes Aim at Large Markets With Large Opportunities

You’ve probably never heard of Sienna Biopharmaceuticals (Nasdaq: SNNA), a small, clinical-stage biotech company based in Westlake Village, California. The company has just 47 employees and a market cap of around $54 million, and it trades only around 330,000 shares per day.

But some really big investment firms you undoubtedly have heard of are major shareholders. Plus, company insiders have recently been loading up on the stock, which currently trades around $2.00 per share. Recent insider activity includes…

• A 2.2 million share purchase by Director Kristina Burow
• A 100,000 share purchase by Director Robert More
• A 100,000 share purchase by Director Keith Leonard
• A 40,000 share purchase by CEO Frederick C. Beddingfield III, MD.

Dr. Beddingfield is one of Sienna Biopharmaceuticals’ top five largest shareholders, with a stake of more than 4%. While that’s not unusual for a clinical-stage biotech firm, what’s notable is that the company’s other largest shareholders include giant institutions such as Fidelity and BlackRock. The company’s largest shareholder, with a stake of more than 19%, is ARCH Venture Partners, a venture firm specializing in biosciences.

Name	Shares	Percent
ARCH Venture Partners	5,798,868	19.09%
Fidelity Inc.	3,171,015	10.44%
Partner Fund Management	1,591,902	5.24%
Frederick C. Beddingfield III, MD	972,428	3.20%
Victory Capital Management	800,000	2.63%
BlackRock Inc.	789,027	2.60%
Omega Fund Management	758,610	2.50%
Morgan Stanley	698,729	2.30%
Todd Harris, Ph.D.	570,991	1.88%
Wildcat Capital Management	295,613	1.40%

What are insiders and big, sophisticated investors like ARCH and Fidelity betting on with Sienna? That the company’s already accomplished management team is going to deliver relief to millions of people suffering from mild to severe forms of skin diseases.

The company currently has two drugs working their way through the FDA approval process, plus a third product that could be a real game changer in the $3 billion laser hair removal market.

Sienna is primed to take “multiple shots on goal with multiple therapeutic areas,” each one with “significant upside,” Dr. Beddingfield said at a recent investor conference.

Sienna Biopharmaceuticals’ current focus – and first “shot on goal” – is on treating and curing common skin conditions, such as psoriasis and atopic dermatitis. While most drug development is aimed at the most severe conditions, Sienna’s treatments are for people who suffer from mild to moderate cases looking for effective alternatives to steroids.

Using its proprietary “Topical by Design” technology platform, Sienna Biopharmaceuticals creates active molecules that are directed toward a specific target tissue and a select disease pathway. The upside for patients is that Sienna’s technology is designed to treat skin conditions with no steroids and minimal to no systemic exposure.

Regular use of steroid creams can literally thin your skin, which can result in myriad side effects ranging from hair growth to more serious issues such as high blood pressure and bone damage. Your skin, as it turns out, is your body’s most important immune system, and doctors are wary about long-term use of steroid creams.

Globally, $15 billion is spent annually on treating psoriasis and atopic dermatitis. Notably, more than 80% of the estimated 7.5 million people who suffer from these conditions have mild to moderate cases.

This vast majority of patients provide a large market opportunity that is largely overlooked by currently available treatments – similar to how Sienna’s stock is currently being overlooked by most investors. But that won’t be the case for long if the company’s treatments prove successful in upcoming clinical trials.

SNA-120, a psoriasis and pruritus (aka “itching”) treatment, showed statistically significant improvement in patients during Phase 2b clinical trials last year. The company plans to start two pivotal Phase 3 trials in the second half of this year.

Success in Phase 3 would quickly and dramatically catapult this stock out of the small cap category. The global market for psoriasis treatments alone is more than $11 billion, according to Grand View Research.

SNA-125, a treatment for atopic dermatitis, is currently in Phase 2 trials. You might not have heard of atopic dermatitis, but it’s one of the most common skin conditions – 28 million people suffer from it. Notably, 85% of them have a mild to moderate form of the disease and so would welcome a non-steroidal treatment. The global market for atopic dermatitis is currently $4 billion.

The company is also seeking FDA approval to market its other product, SNA-001. SNA-001 is designed to expand the $3 billion laser hair removal market to people with lighter hair colors.

Only 33% of the 53 million people who use laser treatments, waxing and other methods to remove unwanted hair have light hair. Lasers are typically ineffective for people with white, gray, blond and red hair. This part of the market is limited to using waxing and razors to remove their unwanted light hair. These methods yield temporary results and, in the case of waxing, can be costly to maintain.

SNA-001 uses a topical solution of silver photo particles, an ultra-efficient light absorber. The silver particles in SNA-001 are designed to work with the lasers already commonly used in clinics and laser centers today.

 SNA-001 “represents the first major breakthrough in laser hair removal in over a decade,” said Mathew Avram, M.D., J.D., the director of Massachusetts General Hospital Laser & Cosmetic Center, the director of dermatologic surgery and an associate professor at Harvard Medical School. “If cleared by FDA, SNA-001 would allow physicians and aesthetic centers to expand their current practices by bringing in new patients with blond, gray, white, light brown or light red hair who have resorted to waxing and shaving. Once available, I would anticipate rapid and widespread adoption of SNA-001.”

Sienna Biopharmaceuticals believes it has a “clear path to FDA clearance” for SNA-001, potentially later this year. The company is looking for a strategic partner to help sell SNA-001, most likely a firm already involved in the laser hair removal market.

Speaking of strategic partnerships, last year saw a number of large mergers in the biotech and pharma space, including Celgene’s (Nasdaq: CELG) $9 billion purchase of Juno Therapeutics and GlaxoSmithKline’s (NYSE: GSK) agreement to buy Tesaro for $5.1 billion. Big Pharma companies are always looking for new products and technologies, in part because many of their blockbuster drugs are off patent and facing competition from generics.

Here too, Sienna is well-protected with U.S. patent rights until at least 2030 on each of its three main treatments. Furthermore, initial tests suggest SNA-125 could also be effective in treating gastroenterological digestive disorders, while SNA-120 showed promise in treating ophthalmological and pulmonology eye and lung disorders.

In other words, these drugs might open up additional market opportunities beyond their initial targets. This is not uncommon in the world of drug development; remember, Viagra was originally created to treat high blood pressure and angina.

Given all these factors – a strong product pipeline, patent protection and its (current) small market cap – Sienna Pharmaceuticals might very well find itself in the sights of a midsize biotech company looking to make itself more appealing to a pharma giant.

Dr. Beddingfield, by the way, was formerly chief medical officer of Kythera Biopharmaceuticals, which was acquired by Allergan (NYSE: AGN) in 2015. Other members of the company’s board have previously held senior roles at Amgen (Nasdaq: AMGN), Allergan and Celgene – companies that have deep pockets.

It’s always risky to bet on a buyout. But when the core fundamentals are so promising, it’s icing on the cake. Icing made without steroids, of course.

Action to Take: Buy Sienna Biopharmaceuticals (Nasdaq: SNNA) up to $2.50. And use our customary 25% trailing stop to protect your principal and your profits.