Old article from oct 2015 but nice read to learn more abt the pipeline and progenics potential mid and long term
Progenics’ share price has suffered in the last couple of months due to the meltdown in the biotech sector.
Oral Relistor should be a significant growth driver in 2016 and beyond and Progenics is entitled to royalties in mid to high-teens and up to $250 million in milestone payments.
The company also has three pipeline candidates that could generate substantial revenues if they are approved.
Current valuation does not reflect the potential of oral Relistor and likely assigns little/no value to the pipeline.
The correction might not be over, but Progenics represents a solid opportunity for long-term investors.
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Progenics' (NASDAQ:PGNX) share price was down almost 50% from its summer highs, largely due to the correction in the biotech sector. The drug "price gouging" as seen in the eyes of the democratic presidential candidate Hillary Clinton has had an additional negative effect on the sector, and Valeant (NYSE:VRX) is one of the companies that were mentioned as the leaders of the aggressive pricing group of pharma stocks, which has brought negative publicity and Progenics might have been affected given its ties to Valeant, which is in charge of Relistor's commercialization. While the issues surrounding drug pricing will not go away anytime soon, I already expressed my views in recent articles on the stocks in the sector and will only repeat here that I believe that Clinton will end up doing little or nothing to change the situation in the industry, but I agree that the negative publicity is a short and medium-term negative for the sector. That said, the focus of this article will be Progenics and its upside potential, which I believe is significant based just on Relistor, while the pipeline also has the potential to generate significant revenues for the company and meaningful gains to Progenics' shareholders in the next 3 to 5 years. The sector correction may or may not be over, but Progenics around $7 provides ample opportunities for long-term oriented shareholders.
Relistor injectable inventory issues to be resolved by end of 2015, oral version to lead to significant upside if and when approved in 2016
Progenics is not seeing much from Relistor royalties in the last three quarters due to Salix's inventory issues. In the meantime, Valeant has acquired Salix and revealed plans to take the inventory levels from 4.5 to 5 months to just six weeks before the end of 2015. However, based on management comments on the Q2 call and the fact that Valeant reported Q2 revenue of just below $12 million, it seems that Relistor inventories came down to more appropriate levels. This means that royalties should trend higher in 2H 2015 and improve more significantly in 2016. Valeant revealed in the Q3 call that Relistor prescriptions are up a healthy 36% Y/Y in Q3, but I did not manage to find the actual revenue figures for Q3. Having Valeant as a partner instead of Salix is certainly a bonus for Relistor and I think that Valeant should be able to market the drug more successfully given its much broader reach and success in the field (apart from the pricing issues raised and discussed in the introduction of this article). The other difference that was observed by Progenics' management upon Valeant's acquisition of Salix was the fact that Salix was focused on discounting to increase sales, while Valeant is less inclined to do so, which translates to higher royalties going forward.
Relistor sales should also get a significant boost from the expanded indication. Relistor was approved for the treatment of opioid induced constipation (NYSE:OIC) in patients with chronic non-cancer pain in the U.S. in late September 2014 and the broader indication was approved by the European Commission in June 2015. This expands the addressable market considerably and should positively affect future sales.
However, the most important development surrounding Relistor is the oral version. Valeant and Progenics announced in early September that the FDA accepted their NDA for oral Relistor with a PDUFA date of April 19, 2016. The approval should be a significant event since the oral version will provide a much more convenient way to take the drug as opposed to a subcutaneous injection. Both Valeant and Progenics are very optimistic about the growth prospects of an oral version of Relistor, and Salix had expectations for peak sales of around $1.3 billion prior to being acquired by Valeant. Their expectations for the injectable version were around $300 million. Analysts are not as optimistic for oral Relistor, and see peak sales in the $500 million to $750 million range and fellow SA contributor Kanak Kanti De expects peak sales at $930 million. Getting the annual revenues to $500 million translates to around $80 million in royalties for Progenics along with $125 million in milestone payments ($50 million for approval of the oral version, $10 million when sales in a calendar year reach $100 million, $20 million for $200 million and $25 million for $300 million), while royalty rates range from 15% for the first $100 million, 17% for the next $400 million and 19% for annual revenues above $500 million. Progenics stands to receive a $50 million payment when sales surpass $750 million and $75 million when sales exceed $1 billion in a calendar year. If Valeant manages to increase oral Relistor sales to the levels mentioned above, Progenics' share price should increase substantially above the current levels.
Progenics is much more than just (oral) Relistor - a look at the pipeline
While the focus of this article and my long case for Progenics is Relistor (especially the oral version), the company's pipeline may also prove as valuable. There are three candidates in the pipeline:
1. 1404 (trofolastat) is "a radio-labeled small molecule which binds PSMA (prostate specific membrane antigen) and acts as an imaging agent to diagnose and detect prostate cancer, including metastases in other soft tissue and bone." The company has completed a global phase 3 study in men with high-risk prostate cancer scheduled for radical prostectomy. Phase 2 was successful and has established "the broad potential of 1404 to detect local and metastatic prostate cancer in a wide range of patients, from low to high-grade disease." In July, Progenics announced that it plans to advance to phase 3 trials by the end of 2015. The trial is designed to support commercialization in the initial target market in the U.S. The company plans to commercialize 1404 on its own and the addressable market points to even higher potential than Relistor. SA Contributor Kanak Kanti De estimates that 1404 could generate $2 billion in annual revenues by capturing 20% of the market. Progenics has also recently acquired Exini for $7 million in cash. Exini is "a developer of software solutions for medical decision support based on advanced image analysis" and should help with the efforts surrounding 1404.
2. PSMA ADC is "a fully human monoclonal antibody-drug conjugate designed to deliver a chemotherapeutic agent to cancer cells by targeting the three-dimensional structure of the PSMA protein." The company has completed the enrollment in a phase 2 open-label trial and the end of February announcement states that: "In the chemo-naïve cohort, treatment with PSMA ADC reduced tumor size and levels of PSA and CTCs (circulating tumor cells) evidencing strong anti-tumor activity. Among these chemo-naïve patients, one (3%) had a complete radiological response, four (14%) had a partial radiological response, 22 (76%) showed stable disease, and two (7%) experienced progressive disease." The America Cancer Society estimates that 30,000 men will die of the disease this year and that approximately 240,000 new cases will be diagnosed this year. Treatment options when ADT (androgen deprivation therapy) fails remain limited and the observed shrinkage of patient's tumors, the reduction in patients' PSA scores and the conversion of unfavorable levels of circulating tumor cells to favorable levels provide strong evidence of PSMA ADC's tumor activity, according to Progenics' CEO, Mark Baker.
3. Azedra is the company's radiotherapeutic product candidate in development "as a treatment for pheochromocytoma - rare tumors found primarily in the adrenal glands - and related paraganglioma tumors occurring in other tissues that recommenced dosing patients in a resumed phase 2 trial." Azedra has an orphan designation and fast-track status in the U.S. and there are currently no FDA-approved treatments for pheochromocytoma. Progenics acquired Azedra from Molecular Insight, which went bankrupt and did not finish the phase 2 trial, which Progenics relaunched in January 2015. The incidence of pheochromocytoma is 1 or 2 cases per 100,000 in the United States (around 3,000 to 6,000 patients), which means that Azedra is an ultra-orphan product candidate. Assuming a price tag of around $100,000 (it could be much higher but it is better to be conservative) and a 30% penetration rate at the low end of the patient range in the U.S. translates into $90 million in annual revenues. Getting the price anywhere near Alexion's (NASDAQ:ALXN) Soliris or Horizon Pharma's (NASDAQ:HZNP) Actimmune would likely result in annual revenues in the $400 million to $500 million range with the above-mentioned market penetration assumptions. These calculations exclude the opportunities in international markets, which represents another interesting opportunity for the company. If all goes well in the trials, Azedra could reach the market by 2017 and might represent a significant growth driver for Progenix.
All three products have large addressable markets and moderate success of just one product could be enough to justify Progenics' current valuation, even without Relistor.
Current market cap leaves room for significant upside based just on Relistor
Progenics' current market cap is around $460 million and its cash position was $99 million at the end of Q2. Quarterly cash burn in the last two quarters was around $10 million and should be much lower if and when Relistor ramps up. This is likely to happen in 2H 2016since Valeant will solve Salix's inventory issues by then and oral Relistor launch should also happen in that timeframe. Getting Relistor's annual revenue run rate north of $300 million will likely lead to a cash flow breakeven point for Progenics. This should happen in 2017, but Progenics will likely turn a profit in 2016, assuming that oral Relistor gets approved next year, as it will trigger a $50 million milestone payment. Given the current cash balance and the potential revenue growth drivers, I do not believe that Progenics will need additional capital and the risk of further dilution is minimal. If Relistor turns out to be a blockbuster, Progenics' current share price is certainly a bargain. Getting annual revenues past $1 billion results in royalties close to $200 million (plus the $200 million in milestone payments) and the company's market cap in such a case is likely to exceed $1.5 billion, which is more than 3x the current market cap and this is without applying a premium valuation to a growth asset and without assigning any value to the pipeline. Azedra alone could be worth more than $1 billion while 1404 may be even more interesting than Relistor. As mentioned above, SA contributor Kanak Kanti De believes that 1404 could generate $2 billion in annual revenues by capturing 20% of the market. The current share price is very attractive and Progenics has a good chance to reward its long-term shareholders with significant gains in the following years.
Prominent institutional holders; share price showing good relative performance
Progenics has a couple of interesting institutional holders. Two of them are specialized in health care stocks: Kevin Kotler's Broadfin has a 12.9% stake and Baker Bros have a 6.3% stake in the company. Other notable holders are Paul Tudor Jones with a 3.4% stake while Federated Investors have the largest stake in the company - 19.4%. These holders by themselves do not mean much for Progenics as they have passive stakes, but I like to see successful investors by my side when I decide to buy.
A look at the price chart reveals good relative performance when compared to the biotech sectors (NASDAQ:IBB). This is especially good to see considering Progenics' small capitalization since small caps often fall much more than their large cap peers.
Risk factors
Relistor is crucial for Progenics' success in the next two to three years. The approval and launch of the oral version should be the most important milestone for the company in the near-term and the uptake of the oral version should determine its share price to a large degree. Salix executives had high expectations for oral Relistor ($1.3 billion in peak sales), and Valeant is also basing its future growth expectations on stronger sales of Relistor in 2016 and beyond. If oral Relistor fails to live up to expectations (I would be satisfied with peak sales in the $600 million to $800 million range), Progenics' upside should be much more limited, but given the company's current market cap, a lot of the potential weakness already seems priced in. Pipeline developments are the other part of the risk-reward equation and if one or more products fail in clinical trials, it could negatively affect Progenics' share price. Balance sheet and liquidity should not be a problem since the company had $99 million in cash and equivalents at the end of Q2 and this should be enough to last more than two years with the current level of revenues. Down the line, the company might need more funds for commercialization of 1404, which it intends to do on its own. This could happen if Relistor fails to live up to expectations.
Competition is another risk factor, especially for Relistor. Movantik (Nektar-Astra Zeneca collaboration) was approved in September 2014 for patients with OIC, Cubist Pharmaceuticals has Entereg, which is in phase 3 testing for OIC in chronic-pain patients and Sucampo and Takeda have Amitiza. There are also other products in development and there is a number of OTC constipation products that are first line treatments for OIC. Progenics' management commented on the Q2 call that they think that Movantik's initial uptake is excellent (Movantik is an oral drug) and that there are more than 1,000 sales reps on the field and they are making a big impact. This is a negative for Relistor, which will not have an oral version until 2H 2016, but Movantik is making the space more known to the public, which is a positive aspect. I already discussed Amitiza's success despite Linzess grabbing a significant portion of the market, as Linzess' marketing campaign has significantly increased public and physician awareness. The same can happen with Movantik and Relistor. The competition in the oncology part is also increasing, and several companies are working on alternative treatments for castration-resistant prostate cancer, some of which are directed against PSMA - J&J's Janssen Biotech's Zytiga, Medivaton's Xtandi and Bayer's Alpharadin. Given the high level of competition in these areas, Progenics (and Valeant) will certainly have a tough time achieving the above-mentioned sales goals.
Conclusion
Progenics is one of the more interesting stories in the biotech sector at the moment and the selloff in the biotech sector has brought its share price to a very attractive place for long-term biotech investors. There are a lot of catalysts in the next two to three years that could push its share price significantly higher: a ramp up of injectable Relistor after Valeant resolves the excess inventory issues and on the heels the recently expanded indication, approval for oral Relistor in 2016 which triggers a $50 million milestone payment and which should lead to a significant revenue ramp up following the approval. Pipeline developments should also have a significant effect on Progenics' share price in the following years. 1404's phase 3 trials are expected to start in Q4 2015 and the company is currently evaluating Azedra in a pivotal phase 2b trial and it has an orphan drug and fast track designation from the FDA. If oral Relistor achieves sales north of $1 billion, Progenics stands to generate royalties close to $200 million, which is slightly less than half of the company's market cap as of this writing and could translate into significant gains for long-term shareholders, while 1404 may be even bigger than Relistor. The stock's relative performance in the last 12 months is also very encouraging and indicative of future outperformance as well and the stock is likely to reach a bottom in the following weeks, and maybe, it already did.
