Javelin Pharmaceuticals, Inc. (JAV)
update from sumzero,com
Company:
Javelin Pharmaceuticals, Inc. (JAV)
Submitted By:
Steven Cordovano (Highland Portfolio Management) on Jul 07, 2009 at 07:05PM
Recommendation:
Long
Expected Timeframe:
One year to two years
Thesis
Javelin Pharmaceuticals:
Better Than a Poke in the Arm with a Shot of Dyloject.
Making profitable returns on drug development has to be one of the most difficult tasks in the money management business. It can sometimes make the myth of Sisyphus look like a child’s fairy tale because at least Sisyphus survives to roll the stone up the hill another day.
Paying for my PHD from the School of Hard Knocks was probably more expensive than Harvard, but what I have learned after more than one face removal is that the way to minimize the risk is to look for companies where the market has already extracted the hype—which is when shareholders are hyperventilating, or to look for situations where companies are developing new formulations of existing, well known compounds. Javelin Pharmaceuticals (JAV) is just such a story that fits the bill on both counts.
The company’s first compound is called Dyloject, an injectable form of Dyclofenac which is a non steroidal anti inflammatory drug (NSAID) , that has shown spectacular results in 2 phase 3 trials and recently demonstrated excellent results in an open label safety study that the company intends to file in support of their NDA. Dyclofenac as anyone with a back problem might know, is often given in a pill form and commonly in Europe post operatively as an IV infusion, marketed as Voltaren. Dyloject has recently been approved for post operative use in the UK for moderate to severe pain and is now a competitive alternative to Voltaren. Dyloject has a substantial cost advantage to Voltaren in that it is given as an injection rather than an IV drip. It is estimated to cost about $150 per patient to treat post operative pain with IV administration. This more than makes up for the cost of the Dyloject and doesn’t even consider complications relating to hospital borne IV infections. Javelin will file the US Dyloject NDA by the end of the year.
The second compound that will be reporting top line phase 3 data very shortly (within a week or so) is called Ereska, an intranasal formulation of Ketamine. Ketamine is officially classified as an NMDA receptor agonist. NMDA receptors are found in the central nervous system and are involved in the perception of pain. Blocking these receptors creates an analgesic effect. The drug has been used for over 30 years (in human and veterinary medicine) as an anesthetic in higher doses which can create a dissociative anesthetic effect. At higher doses it can also cause hallucinations, which makes it a favorite of street vendors where it is known as Special K. Javelin’s intranasal formulation of Ereska makes it difficult, if not impossible to abuse because the mucosal membrane can only absorb a limited amount of the drug and not enough to give it much if any street value.
Because Ketamine is a well known compound, the FDA originally was going to allow the company to file an NDA for Emergency and Military use based on the results of 4 pharmacokinetic studies (PK Studies), but abruptly changed their minds and compelled the company to do a conventional phase 3 study. The reasons appear to have more to do with FDA politics than anything that was seen in the PK studies. The reviewing division happens to be the same one that approved Vioxx. The downside of that for shareholders was a costly (dilutive) delay that had them doing deep breathing exercises. The upside if the drug shows satisfactory results will be no small consolation prize in the form of a much wider label than what was originally contemplated.
The US Department of Defense has contributed $4MM to the development of Ereska because they have a need for a fast acting non-sedative remedy for combat related injuries. The 10 to 50mg dose range has already been shown to have an excellent analgesic effect that it does not suppress the respiratory system. Meta analysis that the company has already presented showed no changes to the oxygen saturation levels in the blood. Because Ereska is non-sedating, a wounded soldier could alleviate the pain of a combat related injury and still be able to fly a helicopter or operate a weapon. Additionally, because it works on the central nervous system receptors, Ereska has shown the ability to prevent a condition known as phantom pain which is the phenomenon whereby people can experience pain in a lost limb.
For all of the above reasons, Ereska would make a superior first choice to administer if an unfortunate event were to occur where hundreds of people were injured in a public place. Without time to adequately triage patients, Ereska could offer temporary relief from traumatic injuries.
Another major benefit of low dose Ketamine, is that when used in combination with morphine it can reduce a common side effects of morphine which are gradual resistance, nausea and constipation. While Ereska will not be approved with this in the label, there is a fair amount of peer reviewed data that substantiates these characteristics so there is a strong possibility that it will be used off-label in chronic pain especially break though cancer pain. It has been widely reported that break through cancer pain effects approximately 95% of all cancer patients. Patients report unpredictable episodes of pain that onset very quickly and reach a peak in around 5 minutes. These episodes can last between 30 to 60 minutes. This is a tremendously large opportunity for Javelin which could make the market for Ketamine many times larger than my initial estimates.
Dyloject vs Ereska
In order to understand the market for both Dyloject and Ereska, it is helpful to consider that even though both drugs give excellent analgesic effects, they work on different pathways. As an NSAID, Dyloject is more suitable to treat pain caused by inflammation like in surgery, whereas; Ereska is more suitable to treat pain caused by nerve damage as in trauma.
The Potential Market for Dyloject
Javelin has arrived at a $500MM worldwide market for Dyloject. In Europe the market for Voltarol is currently around $750MM per year. By figuring merely a 10% of penetration and using the current EU approved price of $10 per dose with an average of 4 doses per patient gets one to approximately $75MM per year.
Sales in the UK, where the product has already been launched have been slow to take hold mostly due to the way drugs are marketed there. To get on a hospital formulary in the UK, a drug company has to proceed on a hospital-by-hospital basis. Even after winning an account it still takes time to gain mindshare. This is not necessarily the case in the US where drugs can get into mainstream usage faster.
It is possible to back into the US market by looking at the current market for Ketorolac an NSAID that is currently approved for post operative use which is approximately 43MM units per year at around $9 per unit. Sometime after the drug was approved it was determined to have dangerous side effects relating to the kidneys and livers, most often seen in the elderly or people with diabetes. It was subsequently given an additional black box warning by the FDA. Even with this warning it still sells around $300MM per year.
Dyloject’s unique safety profile has shown that it can be used in patients that are not candidates for Ketorolac. It actually has shown in clinical trials to have a faster onset of action offering identical pain relief as Ketorolac. The initial objective will be to go after the segment of patients that are not candidates for Ketorolac. This amounts to 25MM units at $15 per unit (Ketorolac now sells for approximately $9 per unit) yielding an initial US market of around $350MM.
Even though is anticipated that Dyloject will be approved with the normal black box warning common to all NSAIDs, the recent safety study has shown that the drug clears readily from patients with compromised livers and kidneys because the drug does not appear to aggregate in those organs as Ketorolac does.
Clearing the drug from the system also is the key to getting people out of the hospital which due to the rising costs of health care is a major consideration of the current administration and will be for the forseeable future as the country struggles to control the rising cost of health care.
Another benefit that Dyloject has shown is the ability not to inhibit platelet aggregation which is another way of saying that it does not inhibit healing. It is likely that the drug will eventually be given to patients before the surgery is concluded further expediting the process of getting patients home. I believe that as physicians get more comfortable with the features and benefits of Dyloject, it will likely take even greater share from Ketorolac.
Certainly, as the baby boom generation ages and the incidence of diabetes continues to proliferate, the overall market for Dyloject will grow--further compounded by this overriding trend towards day surgery. Because the drug has little or no overhang effect it plays well into this trend. The 2 markets: EU plus US gets me to $450MM and this does not even take into account the rest of the world so these numbers should be considered conservative.
The Potential Market for Ereska
Using numbers reported by the National Center for Health Statistics, there are approximately 30MM trauma cases reported by US hospitals in the US each year. Ereska could serve that market exceptionally well as patients admitted to an ER could be given the drug before a determination could be made as to whether or not morphine could be given. Also, as I previously mentioned, the drug used in low doses can mitigate morphine side effects so it has the potential to vastly decrease the time a patient would have to remain in the hospital after getting morphine. For the drug to be a commercial success the duration of effect must be greater than 1.5 hours which it has been shown to be capable of in previous double-blinded placebo controlled studies.
The investment community appears to vastly underestimate the potential market for Ereska which could legitimately be a $300MM drug in the US alone. I can get to $300MM by merely estimating 2 doses at $10 each and only a 50% penetration of the trauma market. Additionally, military and national defense usage could also be a very nice steady revenue stream with almost no cost of sales attributed to it. 65% of military injuries have some orthopedic component to it, whether it is a bone break or extreme nerve pain.
The $300MM does not even account for the potential usage in breakthrough cancer pain or off-label usage in certain forms of depression, like Obsessive Compulsive Disorder (OCD). I view all of this as a lottery ticket. Adding up both potential revenue streams for Dyloject and Ereska gets me to around $800MM in sales potential which could reasonably be achieved in 3 years following US approval of both drugs by mid 2010. This is all without the inclusion of possible Dyloject sales in Japan or South America (where Diclofenac is currently used) and without any ex-US or off-label Ereska sales.
In January 2009, Javelin successful negotiated an exclusive European marketing deal for Dyloject with Therabel NV, a private, Dutch pharmaceutical concern receiving $12MM in upfront payments and up to $59MM in sales and regulatory milestones. JAV has disclosed a double digit royalty on future sales while Therabel assumes all commercial, regulatory and manufacturing responsibilities. Therabel was founded in 1945, has 400 employees and had consolidated revenues in 2008 of $169MM. It has a large and dedicated sales force with a focus on the pain market.
Summary
All-in-all, Javelin Pharmaceuticals seems like a bargain at its current market cap of ~ $70MM. While cash is a concern ($15.7MM in cash at 3-31-2009 with net cash used for 3-months of $4.3MM), the company has been actively reducing overhead and is in negotiations with other potential partners. The next milestone payment coming from Therabel could possibly be achieved by the end of the year when and if Therabel files for approval of Dyloject in the rest of Europe. Therabel is not that large of a company so Dyloject is a meaningful product to them. They are also well versed in the European drug approval process.
The difficult part of the Javelin story and probably accounts for some of the discount is the state of flux the business model is in. It is difficult to model future earnings because we cannot be sure at this point if they will ultimately partner Dyloject in the US or go it alone. We don’t know what royalty they may be able to achieve in a US partnership.
Furthermore, we cannot be sure what the model is for Ereska. In fact, we are not totally sure if management will elect to sell the whole company. However, in either scenario, it is hard to see it being worth much less than the current valuation. Even in the unlikely event that Ereska were to fail investors would be left with Dyloject which in my opinion would substantiate a $70MM market cap. If it plays out that way, a good case of dissociative anesthesia may well offer some temporary relief which is all that I think would be needed as the stock would eventually rebound to current levels.
