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Pernix: An Investor's Rationale to Staying Long

- By Joshua Rodriguez

I am letting you know from the beginning, I am long Pernix Therapeutics Holdings Inc. (PTX). While I may have gotten to the point where I play hide-and-seek with the daily share price fluctuations, I am far from throwing in the towel on this company. I am not stubborn to the point of becoming poor, nor do I enjoy frequent episodes of pain. Rather, I tend to have the ability to cut through the minutiae and get to the nitty gritty of the issue at hand. As such, despite Pernix's current issues, I still see significant upside value.

Do not call me crazy, but when I take a good, long look at Pernix, I see far more potential and intrinsic value in the shares than is currently being represented by the stock price.

From there to here

For many shareholders, the lingering pain of the reverse split still causes some sleepless nights, but from a strategic standpoint, it provided some much-needed ammunition, leaving a considerably low share count that can raise significant capital at current or even discounted prices. Far removed from the threat of being delisted, Pernix now trades at roughly $3.90 a share, battling back feverishly from the previous month's trading lows of $2.74. Additionally, with approximately 9.5 million shares outstanding, Pernix has a plethora of options available to keep the momentum going, inclusive of favorable court decisions, a stout IP portfolio and a pipeline of franchise quality drugs that can return considerable value shortly. For the number hawks, Pernix is scheduled to announce fourth-quarter earnings next Tuesday, so expect a lot of trading eyes to be focused on it that day. There is sure to be more funneled interest in management's comments than in results from months past.

Yes, I want to hear about growth and continued traction in the currently marketed drugs, but investors are looking to understand considerably more about the hardball being played with creditors. Investors want guidance as to the impact of the recent court decisions and the strategic options that are now in play based on the company prevailing in the Zohydro ER ANDA litigation.

In late February, the company announced it had received a favorable opinion in its litigation with Actavis Laboratories FL Inc. regarding a proposed generic version of Zohydro ER.

In a release, the company said a judge found Actavis' proposed generic versions of the drug infinged on Pernix's patents. As a result, the judge " entered an order enjoining Actavis from engaging in the commercial manufacture, use, offer to sell or sale in the United States, or importation into the United States of Actavis' Abbreviated New Drug Application (ANDA) product prior to expiration of the two patents."

Not only was the decision a potential windfall for Pernix, but it also served to validate the strength and longevity of the Zohydro ER patent portfolio. It further allows the company to advance the Zohydro franchise well into the future without the continued overhang of litigation and uncertain legal opinions.

For investors, the decision acted as a pressure valve release and the stock has been on an ascent ever since. The patents are strong and the litigation appears to be ending. Both patents are listed in the Food and Drug Administration's "Orange Book" for Zohydro ER and are licensed to Pernix by Recro Gainesville LLC. Recro and another generic pharmaceutical manufacturer, Alvogen Malta Operations Ltd., filed a stipulation of dismissal last year ending a patent infringement lawsuit it filed against Alvogen concerning its proposed generic version of Zohydro ER. Thus, for the time being, the shareholders and Pernix are worry-free.

Some good, some not so good

Those who have children know way too often after a child has one of these strong belly laugh attacks, it is quite frequently followed by a voracious cry. I am not sure why we were created in that fashion, but perhaps it is because our maker wanted to make sure we knew there was balance in life.

Such was the case at Pernix when investors were told the company had lost its arbitration case with GlaxoSmithKline (GSK) over the purchase of Treximet. On Feb. 3, the company announced it would pay GlaxoSmithKline $35 million plus interest. Since Pernix had already paid $16.5 million in escrow, it planned to negotiate further to conclude the matter.

On that day, the sun was definitely not shining on my face. But balance reared its beautiful face and by the time February ended, the sun was not only shining but the company's primary cash cow, Zyhodro ER, was fully back in play.

Such is life; you win some, you lose some. But by the time February came to a close, Pernix, in my opinion, was in a better place than at the start of the year. Removed are the storm clouds of legal uncertainty and, with a clear path for Zyhodro ER, Pernix can cut a deal on the remaining $18.5 million owed and concentrate on rebuilding its brand and delivering product traction and better financial results.

Where to now?

Pernix is not alone in the quest to be reincarnated as a sought-after stock. There are more than a handful of other drug stocks with a similar story, Valeant Pharmaceuticals (VRX), Infinity Pharmaceuticals (INFI) and Portola Pharmaceuticals (PTLA) just to name a few. Like Pernix, both Infinity and Portola have rallied back hard since the beginning of 2017. As for Valeant, the market and Congress still need a poster child, and they seem to have monopolized that position for now, sliding over 50% lower since the beginning of the year. Seeing there can still be some good in the bad, though, gives me hope. If there were a way to siphon and share some of that good karma away from Infinity and Portola, I would.

Maybe I am just an eternal optimist, but I no longer obsess about past Pernix transgression and focus even less on waiting for new skeletons to materialize from its attic. Heck, Pernix is its own concern, not a subsidiary of the Bates Motel. Investors, myself included, may finally be able to take a breath of fresh air and give the management team the time necessary to fully right this ship and create shareholder value.

If they want to spook the creditors, I am all for it; sell a couple million shares when needed, shore up the balance sheet and let the predators understand the company's value is there for the taking, but at prices far more than the current value. The Gordon Gekko, Blue Star Airline approach to divide and conquer is so totally 1980s. Scrapping the pieces of a viable company is old-school mentality. Investors today understand that while in extreme cases of distress, perhaps breaking up small pieces and salvaging them at pennies on the dollar makes sense. But there cannot be an argument made doing the same at Pernix makes sense.

The company has a franchise drug in place, a well fortified IP portfolio and a decent cash balance that can carry it forward during the next round of investor "fake news" and general market turmoil. Pernix's management are not new kids on the block and will ultimately deliver back shareholder value, and rightfully so since that is what they get paid to do. While high double-digit share prices may very well be a thing of the past, once management clearly proves the company is indeed heading in the right direction and churning all the pistons, then it is not unimaginable to believe share prices will not be printed at considerably higher prices than they are today.

I can take criticism, and I can take a loss. But just because I can handle it does not mean I deserve it. I am not the only believer in a Pernix turnaround. By the way the share price has been acting during the past month, many investors are also alive and well in the Pernix long camp. When stocks tick higher, retail investors are typically the last to know why. It is for that reason investors should keep a close eye on volatility and understand erratic stock behavior is not necessarily a bad sign. Rather, it is often a sign of significant news to come.

Admitting the problem is the first step in any recovery process. Pernix's management admitted to having a problem long ago. Since then, they have been working on a solution and, from an investor's point of view, appear to be making significant progress. For me, I cannot abandon a work in progress. As long as I believe Pernix is working diligently on a favorable solution and has a long-term vision for the company, hanging tight may be worth my while.

In the meantime, I will stay long and stay patient. If the stock continues to get beaten around, all I can say is, "Please, sir. May I have another?"

Disclosure: This article was written by Kenny Soulstring, and it reflects my own opinions and unique articulation. This article is not intended to offer investing advice, guarantee 100% accurate predictions or to be interpreted as providing a personal recommendation. What I can guarantee, though, is accurate research, thoughtful analysis and an enthusiasm about any stock covered.

I wrote this article myself and it includes my own research and expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

However, I am long PTX and may purchase additional shares within the next 72 hours.

[This article was originally featured on CNA Finance]

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