Pozen reported $31.8 million in cash and investments as of June 30, 2014. We remind investors that back in December 2013, Pozen paid a special cash distribution of $1.75 per share to all stockholders of record as of the close of business on December 30, 2013. On its second quarter conference call, Pozen noted that has been working to reduce operating expenses to maximize profitability and reduce cash burn ahead of PA approval. The company made the strategic decision not to start new development programs that are not fully funded by a partner. The press release states, “Our board of directors and management team continue to explore potential ways to return value to our stockholders, including future cash distributions when we accumulate surplus cash as a result of receiving milestones and royalties from our commercial partners.”
Pozen is basically telling us – once PA gets approved, expect more cash distributions (or dividends if distributed in a year with positive net income). The approval of PA hit a minor hiccup, but we believe the issue was minor and with the application now back under review launch expectations by Sanofi remain the same. Therefore, we still expect PA approval in December 2014; this entitles Pozen to $20 million in combined pre-launch milestones from Sanofi U.S. that would further strengthen the cash position. The first $10 million is for approval (which we model in the first quarter 2015) and the second $10 million is for “commercial-readiness” (which we model in the second quarter 2015).
We’ve done some initial modeling on what Pozen will look like with PA on the market in 2015 along with our best estimate for what Vimovo royalties will look like in the coming years. We think Pozen could generate as much as $60+ million in free cash flow starting a few years. Based on the current share count, with equates to over $2.00 in potential free cash flow per share earmarked for future cash distributions.
At the current stock price, these dividends would equate to a 31% yield, and that includes no payment of surplus cash currently on the books. You can’t find that kind of “high-income yield” anywhere in the market! Pozen’s stock should be trading at $11+ per share based on the future projected cash flows and return of capital to shareholders. We note this is only $1 per share lower than our previous estimate prior to Horizon’s news on Vimovo coverage. Below we present a quick snap-shot of our DCF model.We understand there is risk based on the fact that PA has yet to be approved, but we think this is a low hurdle to overcome given the only issue outlined in the CRL was a small deficiency at the third party manufacturing facility and it looks like that has been resolved. Pozen stated in its press release that they have substantial agreement with the FDA on the product labeling. We think approval for PA in December 2014 will be a major catalyst for the shares, and investors can buy Pozen today with roughly 70% upside to our DCF-derived price target.
We also note that our modeling above has Pozen paying taxes starting in 2017. Our assumptions could be increased by 1/3rd if Pozen decides to sell to a tax advantaged organization, similar to what the company did when it monetized the Treximet royalty to Canada’s CPPIB Credit Investments in November 2011. That sales price of Treximet royalty for $75 million was around 35% higher than we factored in our DCF model due to tax implications. As such, we see the sell-off yesterday as a significant buying opportunity for investors.
Jason has really nailed it on POZN, very complete and balanced coverage. I don't know of a safer play in the biospace with more upside and income to boot! I was fortunate to make another buy today at 7.40 before the close, coupled with first buy at 6.99 the day HZNP crashed when their drugs were added to the exclusionary list of PMB's.