Editor's notes: Buysider Logical Thought crunches the numbers for Remoxy and PTIE and finds a promising result. Probability-weighted upside of 120%+ for the company as Pfizer reformulates the drug.
Pain Therapeutics Inc. (PTIE) is a drug development company that will collect roughly a 20% U.S. royalty and a 10% foreign royalty on what I estimate to be $1.4 billion/year in sales if Pfizer (PFE) obtains FDA approval for PTIE's tamperproof (i.e., unattractive to drug addicts) extended release form of oxycodone called Remoxy. Oxycontin -- Purdue Pharma's version of the drug -- does $2.4 billion in U.S. sales and around $400 million more overseas; I think Pfizer - with its superior marketing muscle - should be able to grab at least 50% of that. [DURECT Corporation (DRRX) will also collect a royalty -- a considerably smaller one than PTIE's -- from Pfizer on sales of Remoxy.]
Remoxy successfully completed its Phase 3 efficacy trials but was rejected by the FDA because it was difficult to manufacture consistently; however, Pfizer developed a revised formulation and recently conducted a new bioavailability study which appears to have been successful, as in October it announced it would launch a full-bore effort to get Remoxy approved and if all goes well will file for FDA approval in mid-2015; thus the drug could be on the market by early-to-mid 2016. Demonstrating additional progress, this month Pfizer initiated the "abuse potential" study.
If we assume that Remoxy is on the market by mid-2016 and ramps (by 2019) to $1.2 billion/year in U.S. sales plus $200 million/year in foreign sales through the 2030 IP expiration and then tax-adjust (assuming a 30% rate) those cash flows and discount them back at 7%/year to mid-2016, we get a mid-2016 value of approximately $24/share for PTIE (assuming 62 million fully-diluted shares and approximately $50 million in combined cash and NOLs on the balance sheet).
What's the downside? Well, if this new formulation fails completely PTIE will probably trade down to its cash value of around $1/share. Or if Remoxy is approved but new competition were to cut its sales potential to just $500 million/year in U.S. sales and zero sales overseas, I think the stock would be worth only around $10/share upon approval. Now let's probability-weight these various possible outcomes...
First, let's keep in mind that unlike most drugs up for FDA approval, Remoxy's Phase 3 efficacy results here aren't in dispute; rather, the reason the drug received a 2011 "complete response letter" from the FDA was entirely due to "manufacturing issues," in that King Pharmaceuticals (the original manufacturer which was subsequently acquired by Pfizer) was apparently having trouble manufacturing chemically consistent doses of the drug "at scale." Well, no one knows better than Pfizer how to do this kind of "basic chemistry" and the fact that Pfizer recently dedicated a separate press release announcing its decision to go forward with Remoxy after testing its latest formulation tells me that it's confident it has licked the problem. Additionally, the FDA may now be particularly disposed towards approving a tamperproof painkiller such as Remoxy, as it has specifically refused to approve non-tamperproof generic forms of oxycodone.
Thus, I think there's at least a 70% chance that Remoxy is approved vs. a 30% chance that it isn't. So at PTIE's November 22nd closing price of $3.70, I see a probability-weighted downside of around 22% (73% x a 30% probability) vs. a probability-weighted upside of around 119% to 384% (170% to 549% x a 70% probability). Stated differently, I see (over the next two-and-a-half years) the current reward-risk ratio for a long position in PTIE as being somewhere in the range of approximately 5:1 to 17:1, with a possibility of mitigating some of that risk by decreasing the position size if PTIE substantially increases in price prior to the FDA's decision.
Disclosure: I am long PTIE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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