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  • jenniferremington1990 jenniferremington1990 Jan 9, 2013 8:55 AM Flag

    Risk / Reward Looks Good

    While I am not sure I agree with the rosy projections here about price increases etc, the basic premise that there is a good deal of room to raise prices + EU approval suggests to me that they can do the unthinkable and attain a profit. Or at the very least they should be able to get close to break even and command a normal 7 to 10 X Annual Rev valuation.

    Right now they're doing $5 to $6 Million revs per quarter (this is not including the benefit of recent price increases which they haven't been able to fully pass through due to existing contracts that will expire soon / have expired recently). From the CEO on the last conf call:
    "As I mentioned earlier, our third quarter KRYSTEXXA sales were partially driven by our price actions. Over the past six months we’ve been able to increase the price of KRYSTEXXA by 29% and we have just begun to see the impact of our pricing actions. As many of you know, it can take quite some time before the benefits of a price increase can be seen in the average selling price. And now six months later, we’re just beginning to see the impact. Our pricing strategy assumes elasticity, which continues to hold true to form and we will continue to analyze the marketplace for future price actions."

    With EU approval and no price increases that should realistically jump to $8 to $9 Million. If you factor in the 30% increase in prices recently then that would equate to about $10 to $12 Million per quarter.

    It's pretty clear that they should be able to raise prices fairly significantly. Again per their last call:
    "I can also tell you that of the two price increases that we’ve taken which have amounted to nearly 30% in price increases that the reception and the feedback has not done anything to curtail the use of the product or had made people take a second thought before prescribing. We have not really seen any type of negative feedback from physicians or patients when it’s come to this."

    So if they are able to pass through an additional 50% increase then you're looking at a run rate of about $60 to $72 Million per year right now. Obviously this will increase over time as the number of patients using it grows.

    In looking at the valuation of the company, assuming a $65 Million annual run rate and 80% margins, the company would be fairly close to break even. They would probably lose about $10 Million (this assumes benefit of $50 Million cost reduction over 2011 costs). Typically drugs with unmet medical needs and long patent lives (i.e., Krystexxa expires in about 10 years I believe) are purchased for around 7 times revenues. This would equate to roughly $450 Million on what I believe could be a rev run rate by the end of the year.

    Not bad risk/reward for a company trading at $85 Million.

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