Is NPS Pharmaceuticals The Next Alexion?

Executive summary:

• NPS Pharmaceuticals' (NPSP) successful launch of Gattex and plans for international expansion put the company on a path to significant growth.


• Natpara is expected to be approved by the end of 2014 with potential peak sales exceeding Gattex's.


• NPSP795 is the lead product in the pipeline which will complement the product portfolio and further improve revenue and profits.


• NPS could be the next Alexion (ALXN) - a very successful orphan drug company.

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2013 was a transformative year for NPS Pharmaceuticals. The company launched Gattex and became a global company by regaining the international rights of two lead products from Takeda, Revestive (the ex-U.S. brand for Gattex) and Natpara. Gattex had a very successful launch and revenue reached $32 million in 2013, ahead of the company's initial expectations for $25 million to $30 million. Although the share price is up almost 400% since the launch of Gattex in early 2013, I believe NPS is still in its early stages of growth, and my price target is $62, representing 60% upside from the current price. I will also analyze the Jefferies downgrade, which I believe is wrong, since they are comparing NPS and its valuation with Alexion and Biomarin (BMRN), which have lower growth profiles.

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Source: Stockcharts.com

Q4 highlights

There were no major surprises in the Q4 report, since the company preannounced the results earlier. However, NPS easily beat both earnings and revenue estimates. Gattex sales were nearly $32 million, and at the upper range of the prior guidance for $28 million to $32 million. Q4 revenue increased 100% to $54 million, while EPS was $0.07, the first profitable quarter for the company in 2013.

Full year revenue increased 19.1% to $155.6 million. Management guided FY 2014 Gattex/Revestive sales between $110 million and $120 million, representing more than 250% year-over-year growth at mid-point. Operating expenses are expected to be between $180 million and $200 million, with the increase being primarily related to investments which are expected to drive global growth: production of pre-launch Natpara inventory and the establishment of secondary supply chains and other pre-launch initiatives, regulatory activities and execution of clinical activities supporting the global development of Gattex/Revestive in pediatric SBS and NPSP795 in ADH.

Gattex - early success, international expansion plans and great future potential

As mentioned before, Gattex had a very successful launch and brought in nearly $32 million in revenue. Gattex is the "first prescription medicine for the long-term treatment of adults with Short Bowel Syndrome (SBS) who are dependent on parenteral support." The company had 303 patients on Gattex at the end of 2013, which was in line with the upwardly revised guidance of 275 to 325 patients (previous guidance was between 200 and 300 patients). This represents 5% to 10% of the total addressable market in the U.S. (3,000 to 5,000 patients), and the global addressable market for Gattex/Revestive is 9,000 to 17,000 patients, which represents a substantial growth opportunity, since the penetration rate is less than between 1.5% and 3%, and the 2013 revenues do not fully reflect the number of patients being on therapy. Peak sales for Gattex/Revestive were previously estimated around $350 million. With the established annual price tag of $295,000, this translates into just 1,200 patients on therapy, which is quite below the potential addressable market. I believe that just the U.S. market presents an opportunity for Gattex/Revestive to surpass the previously estimated worldwide peak sales. This is based on the total addressable market and the high price tag, and I find it hard to believe that the company can have peak sales with a penetration rate between 7% and 13%. The current penetration rate of the U.S. market alone is between 5% and 10% already. NPS management expects Gattex/Revestive peak sales to be higher in international markets than in the United States. Gattex/Revestive could ultimately prove to be a billion dollar drug, although we should expect lower pricing on average for the rest of the world. NPS also initiated a global registration study to evaluate the potential benefits of Gattex/Revestive in pediatric short bowel syndrome. The company expects to report top line results later this year or at the beginning of 2015. Management estimates that pediatric patients represent about 10% to 20% of the adult addressable market, which translates into 900 to 3,400 patients, which brings the total addressable market to 10,000 to 20,000 patients.

I also believe that the FY 2014 Gattex/Revestive revenue guidance is quite conservative. The current patient number alone could almost justify the full-year guidance, as it would reach almost $60 million to $70 million, if we assume the long-term compliance rate of 70% to 80% and 20% to 30% for discontinuations (this is what NPS management expects). However, this has not been the case so far, as the company reported the compliance rate around 90% and the discontinuation rate of less than 10%. If the compliance rate remains this high, it could boost the revenue by 10% to 20%, because the company has guided for lower compliance rates (75% at mid-range as compared to the current rate of 90%) and higher discontinuations (25% at mid-range as compared to less than 10% in 2013).

Natpara is going to be bigger than Gattex with a much larger potential market and peak sales

Natpara "is a bioengineered replica of human parathyroid hormone 1-84, and is being developed as a hormone replacement therapy for the underlying cause of hypoparathyroidism". Hypoparathyroidism is a rare and highly symptomatic endocrine disorder characterized by insufficient level of parathyroid hormone. NPS reported positive findings from a Phase 3 registration study of Natpara, which met the primary efficacy endpoint with a statistically higher responder rate versus placebo. In 2007, the FDA granted orphan drug status for Natpara for the treatment of hypoparathyroidism. NPS filed its Biologic License Application (BLA) in the U.S. The FDA accepted the application and the PDUFA date is October 24, 2014, and the potential approval date may be before the end of 2014.

NPS estimates that there are 180,000 patients suffering from hypoparathyrodism worldwide, and that 40% or 70,000 are uncontrolled and highly symptomatic. The company will initially target U.S. patients, and believes there are over 20,000 patients that are uncontrolled and highly symptomatic. Although the company declined to give information about pricing of Natpara, it is believed that the annual cost of therapy will be around $50,000. Wedbush estimates that the annual price will be $48,000. This means that Natpara might have peak sales above $1 billion, representing a huge opportunity for NPS. A worldwide penetration rate of 10% would translate into roughly $900 million in annual sales. Natpara is expected to be the main growth driver for the company in 2015 and beyond.

NPSP795 - lead product candidate in the pipeline

NPS has two earlier stage pipeline products that include two calcilytic compounds, NPSP790 and NPSP795, with potential application in rare disorders involving increased calcium receptor activity, such as autosomal dominant hypocalcemia with hypercalciuria (ADHH). There is no approved treatment for this ultra-rare lifelong genetic disorder. NPS expects to launch a Phase 2a proof-of-concept study of NPSP795 in the middle of 2014. The company is also targeting first-in-class or best-in-class products to treat rare diseases and is looking to enhance its product offering with companion diagnostics.

The size of the ADH market is still unknown, and NPS considers NPSP795 as an ultra-orphan product. The company will disclose more information once it launches the Phase 2a proof-of-concept study. NPSP795 does not have potential to exceed Gattex/Revestive or Natpara, but it would be a nice addition to the company's product portfolio, extending the company's reach in the orphan drug market.

Valuation, price target and why Jefferies is wrong

It is hard to put a price tag on NPS, since the company just started the commercial launch of Gattex, and Natpara is yet to hit the market. I will use Alexion as an example of how to put valuation of an orphan drug company into perspective. Alexion had a successful launch of its only marketed orphan drug - Soliris in 2007, and has expanded the indication for the drug along the way. Alexion's revenue increased from $1.6 million in 2006 to $72 million in 2007 and $259 million in 2008. Alexion's revenue has grown at least 36.8% a year since 2009. Since the company was not profitable in its earlier stages of growth, I will use the price to sales ratio and try to arrive at a similar conclusion for NPS' valuation. You can see Alexion's P/S ratio chart below, which shows that the ratio bottomed in early 2009, which coincides with the depths of the recession and the bear market. I will use the P/S ratio of 10 as the bottom price range for NPS (on a forward basis), a 15 as the top of my valuation range. As you can see from the Alexion chart, if the market assigns a higher premium on NPS, as was the case with Alexion, we could see the company trading in a P/S ratio range between 15 and 20 or even higher.

Source: ycharts.com

Although I find the current analyst estimates to be quite conservative, I will use them to arrive at my price target. Based on forward 2015 P/S ratio of 15, my price target for NPS is $62, representing 60% upside from the current price. Downside should be limited to $33, assuming a 20% discount to the forward P/S ratio of 10. This is a very favorable reward-risk proposition, as you have at least 60% upside, and 15% downside from the current price. I also believe that the reward side is much larger, and that NPS could at least double in the next two to three years. NPS could very well be the next Alexion.

I also want to point out why Jefferies was wrong to downgrade the stock. Jefferies downgraded NPS from buy to hold with a price target of $38. The firm thinks that the potential of Gattex/Revestive and Natpara is largely priced in and goes on to compare the valuation of NPS to Alexion and Biomarin. This is wrong, as NPS has more growth potential than Alexion and Biomarin. Jefferies compares the 2014 EV/revenue ratio of the three companies and arrives at a conclusion that the growth is largely priced in. What Jefferies is missing is that NPS is expected to grow revenue in 2014 and 2015 at least 60%, while Alexion and Biomarin are in the 20% to 30% range. It is also wrong to compare forward valuation of a company with a product on the market since 2007 with a company that has just marketed its first product (notwithstanding royalties), and to compare the valuation just one year out.

Source: Yahoo! Finance

Based on the 2015 P/S ratio, NPS' stock price should rise between 35% and 76% to get to the level of Alexion and Biomarin. And as I stated before, NPS should be trading at a premium over its peers, since NPS is expected to deliver at least twice as much revenue growth.

Conclusion

The share price of NPS has come a long way in 2013. However, there is ample room for the price to rise further. Sales of Gattex/Revestive are expected to grow at least 250% this year, and potential peak sales may be much higher than previously anticipated. Natpara is believed to have even more potential than Gattex/Revestive, and the company has another lead product in the pipeline (NPSP795) that could drive additional growth. The $62 price target represents 60% upside from the current price, and the downside should be limited to $33. I also believe that NPS has much more potential than Alexion, and should be valued at a premium over both Alexion and Biomarin, given the company's growth profile and future potential.

Source: Is NPS Pharmaceuticals The Next Alexion?

Disclosure: I am long NPSP. 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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