Beacon Inc update on Prometic Life Sciences Inc. - Part II Therapeutics and Orphan drugs
However, both of these initiatives appear to be on
the cusp of adding significant value.
Orphan drug designation for plasminogen could
result in a $60 million drug from the soon to be
commissioned Laval plant – revenue that could
generate EPS of $0.10 on its own.
Other orphan, protein-based drugs in Laval would
further demonstrate the significant operating
leverage from that facility.
On its therapeutics side, PBI-4050 is to enter Phase 1
clinical trials in September 2013. Value of this drug
should begin to be reflected in the stock price.
Risk-return skewing even more positively. Maintain
Buy rating and target price of $1.00.
August 7, 2013 Page | 2 Doug Cooper| 416.643.3863 | firstname.lastname@example.org
ProMetic Life Sciences
“Free” Drug Option Has “Free” Drug Option Has “Free” Drug Option Has “Free” Drug Option Has “Free” Drug Option Has “Free” Drug Option Has High Intrinsic High Intrinsic High Intrinsic High Intrinsic Value
When we initiated coverage of ProMetic Life Sciences, we concentrated both our analysis and valuation work on its protein filtration business. It is that business that is providing the near-term revenue visibility as well as a significant revenue opportunity as ProMetic’s PPPS technology is specified into a growing number of drugs.
However, it is becoming increasingly clear that in addition to this aforementioned strategy, ProMetic is making large and quick strides to enter the drug market itself, concentrating on “rare diseases” through the Orphan Drug program. This Orphan Drug strategy will drive its drug strategy on both its Protein segment as well as its near-term strategy in its Therapeutic segment.
What Are Orphan Drugs?
An Orphan Drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition. The assignment of orphan status to a disease and to any drugs developed to treat it is a matter of public policy in many countries, and has resulted in medical breakthroughs that may not have otherwise been achieved due to the economics of drug research and development. For example, The Orphan Drug Act (ODA) of January 1983 was passed in the United States. Under the law, companies that develop a drug for a disorder affecting fewer than 200,000 people in the US may sell it without competition for seven years and may receive clinical trial tax incentives.
The National Institute of Health estimates that there are approximately 7,000-8,000 rare diseases affecting 25 million Americans. Since the passage of the ODA in 1983, the number of orphan drugs has increased from 10 to 382 in 2011. To treat this growing opportunity, more than 2,500 medicines have been designated “orphan drugs” and are in all stages of development. In fact, orphan drugs currently account for 22% of total drug sales with 35% of FDA-approved drugs in the last three years having this designation.
Interestingly, the market for specific orphan drugs can grow quite strongly as a result of:
a) New patients emerging when they learn of the new drug’s beneficial effect;
b) Patients live longer as a result of the drugs and as such, need to take it longer.
August 7, 2013 Page | 3 Doug Cooper| 416.643.3863 | email@example.com
ProMetic Life Sciences
Laval Facility’s Orphan Drug Strategy
ProMetic is still on track to open its new Laval manufacturing facility in Q4/FY13. Through this facility, ProMetic will be able to utilize its own “filtration” technology (i.e., the resins manufactured in the UK) to isolate specific proteins (aka the “bulk active ingredient) within plasma (i.e. the raw material). Such individually isolated proteins can then be sold to partner drug companies, such as NantPharma and could represent upwards of 30%-40% of the value of the end pharmaceutical. Recall that only selling the resins to its partner companies results in ~2%-4% of the value of the drug. This is what we referred to in our initiation report as “capturing more of the value chain”.
While it is still part of ProMetic’s strategy to sell the bulk active ingredients from Laval, it is also becoming very clear that it will pursue the manufacture and sale of orphan drugs as part of its strategy. One example of this is plasminogen.
In March 2013, the American FDA granted an orphan drug designation for ProMetic’s plasma purified human plasminogen drug. The orphan drug designation is for the treatment of hypoplasminogenemia, or Type 1 plasminogen deficiency (T1PD). If left untreated, plasminogen deficiency results in thick, woody growths on the eyes and can lead to blindness. The disease can also affect the ears, sinuses and tracheobronchial tree. Most affected cases are infants and children.
Management has indicated that it believes the T1PD market is ~$50-$60 million per year (~1500 patients). There is no current drug on the market. Given the fast track clinical trial approval process as part of the Orphan Drug program (12-15 patients), ProMetic believes it could have an available drug as early as 2015. Furthermore, to satisfy 100% of the demand of this market, management believes it would only take approximately 10% of the capacity of the Laval plant. Through the development and sale of its own T1PD drug, ProMetic would receive 100% of the value of the drug.
Given those economics, ProMetic will look to either develop or partner to manufacture and sell other protein-derived orphan drugs out of its Laval plant. Extrapolating the potential of the T1PD drug that could utilize 10% capacity would imply potential revenue of $500 million from the Laval plant. More likely, however, would be a combination of some orphan drugs combined with the sale of bulk active ingredients. As such, while we indicated in our initiation report that Laval could generate $150 million in annual sales, we now believe it could do materially higher than that as a result of ProMetic’s orphan drug strategy.
August 7, 2013 Page | 4 Doug Cooper| 416.643.3863 | firstname.lastname@example.org
ProMetic Life Sciences
Orphan Drug Strategy Not Confined to Orphan Drug Strategy Not Confined to Orphan Drug Strategy Not Confined to Orphan Drug Strategy Not Confined to Orphan Drug Strategy Not Confined to Orphan Drug Strategy Not Confined to Protein Segment
The other side of ProMetic’s business pertains to therapeutics and its lead drug, 4050. On July 11, 2013, the Company announced that it will be entering phase 1 of its clinical trial program starting in September 2013. While it was widely anticipated that 4050 was targeting the large Chronic Kidney Disease (CKD) market (27.5% of the US$343 billion US general Medicare market), it now seems that ProMetic will first seek an orphan drug designation for lung fibrosis. Clearly CKD remains the ultimate goal; however, ProMetic may be able to show “proof of concept” of 4050 much quicker through the lung fibrosis market. As Pierre Laurin, CEO of ProMetic indicated in its press release:
“While renal indications may represent the highest value on a long term basis, the development strategy pursued may also target other fibrotic indications as point of initial commercial entry. Pulmonary fibrosis for instance, is a good example of an interesting target for which PBI-4050 has demonstrated superior efficacy compared to the only other commercially available therapy”
Our due diligence indicates that the only other drug on the lung fibrosis market and which received orphan drug designation, is InterMune’s (ITMN – US) Esbriet (pirfenidone). To date, this drug is approved in the European Union. In its Q2/FY13 earnings release, InterMune reported Esbriet revenue of US$14.4 million versus US$5.5 million in the year ago period. Based on its LQA revenue run-rate of US$58 million and its market cap of US$1.4 billion, InterMune is trading at 24x.
If ProMetic is able to pursue an orphan drug designation for pulmonary (lung) fibrosis, it could have a competing drug on the market within the next couple of years. Not only would results emanating from its shortened clinical trial period provide increased revenue visibility, but they could also serve to fast-track other partnerships on much larger indications such as CKD.
August 7, 2013 Page | 5 Doug Cooper| 416.643.3863 | email@example.com
ProMetic Life Sciences
Excellent Risk -Return – Maintain Buy
While the shares of ProMetic have rallied significantly over the last week, we still believe the market is just beginning to understand its orphan drug strategy. As a point of reference, our model indicates that ProMetic could generate $52 million in FY14 sales and EPS of $0.05. The majority of these revenues and earnings accrue from its affinity resins with some movement up the value chain as a result of the Laval facility starting to sell bulk active ingredients. Based on our forecasts, the stock is trading at a P/E of 10x – certainly at the low-end of heath care related stocks.
However, as we have discussed in this note, ProMetic has many “call options” that from a fundamental perspective are starting to exhibit good value but are not yet priced into the stock:
a) ProMetic’s potential plasminogen drug is one example. With potential revenue starting in 2015, this drug could very quickly generate $60 million in revenue at very high margins. Assuming an 85% gross margin, such a revenue base for this drug could drop EPS of $0.10 (untaxed) on its own;
b) Other orphan drugs that could be developed in Laval could have similar economics and generate material EPS. We would highlight three US-based, early stage “orphan drug” companies (Aegerion Pharma - AEGR, NPS Pharma - NPSP and ViroPharma - VPHM) that have a medium market capitalization of US$2.2 billion.
c) Potential partnerships on its PBI-4050 drug, both on pulmonary fibrosis and CKD, could unlock very significant value.
Neither our current revenue model nor valuation includes any of these potentially very positive events. Over the coming months, we believe we could start to see some milestones achieved, which would signify that they are becoming more probable. As one or more of these starts to be priced into the shares of ProMetic, we believe the stock has the potential to trade materially higher. Consequently, the shares, in our opinion, continue to represent an excellent risk-return proposition. We maintain our Buy rating and target price of $1.00.