Brian Marckx, CFA
PTX: New Deals Fortify Long-Term Outlook, Support Higher Valuation
Cough Candidate JV
On December 20, 2010 Pernix announced it had entered a joint-venture with a U.K-based company for the development and commercialization of BC1036. BC1036, also known as theobromine, is the highly-anticipated antitussive drug candidate that Pernix management had yet to disclose the name of but previously noted could have enormous potential. Terms of the JV with SEEK, a U.K.-based drug incubator, include upfront payments by both parties of $1.5 million each. Both parties will appoint two directors, will each hold 50% voting interest and will own 46% of the share capital (Manfred Scheske will own 7% (non-voting) share and 1% will be left unissued). Additional capital will be contributed on a pro-rata basis and as necessary, as determined by the JV’s board.
Theobromine is an alkaloid of the cacao plant and is found in chocolate. It is in the methylxanthine class of compounds which also includes caffeine. It has been used clinically as a vasodilator, diuretic and heart stimulant but has yet to be patented in the U.S. for cough suppression. Codeine has been widely regarded as the most effective antitussive and is the API for cough suppression in several popular brand name and generic prescription medicines including Robitussin AC and Dimetane DC. However, codeine’s serious adverse side effects, including being highly addictive and causing drowsiness, limits its use. Codeine, for all practical purposes can only be used at night and should only be used sparingly (or not at all) in pediatric patients.
Seoul Korea-based Ahn-Gook Pharmaceutical launched the drug in Korea in 2009. The patent-trail was not disclosed in Pernix’s press release but from what we can tell the JV licensed global rights (ex-Korea) from Ahn-Gook. Pernix’s press release implies that the drug (marketed as AnyCough by Ahn-Gook) has been well received in Korea following its launch in 2009. However, there is no readily-available public information to quantify how successful the drug has been.
Based on the safety history of the drug, at least a portion of which presumably came from clinical trials undertaken in support of the approval in Korea, the JV expects to be able to move the candidate directly to phase III testing. The companies are in the process of gaining regulatory clearance in Europe for protocol of a single phase III trial. Discussions are also underway with FDA to confirm a regulatory program for approval in the U.S. The companies hope to start clinical testing in mid-2011 and, if all goes well, Pernix thinks the drug could be on the market in both Europe and the U.S. sometime in 2013. The deal also gives Pernix the right to fund development of a suspension formula for the U.S. market and, upon, FDA approval, would hold exclusive rights to the product. Pernix notes in the 8-k filed describing the terms of the deal that they would not likely fund development of a suspension formula unless the initial formula receives regulatory approval in both Europe and the U.S.
Manfred Scheske will lead the development effort of BC1036. Scheske came to SEEK in October 2010 and from what we can tell he’s a pretty big hitter. At his previous post as Glaxo-Smith Kline’s President of Consumer Healthcare in Europe he led the pan-European launch of OTC Alli, which has been a tremendous success for GSK’s consumer business. Prior to that he spent six years as GSK’s head of U.S. consumer healthcare products.
New Co-Promotion
On January 12, 2011 Pernix announced it had entered a co-promotion agreement with ParaPRO LLC, a privately-held specialty pharma company with a focus on the development of pediatric drugs. At the time of the announcement ParaPRO had submitted a drug candidate containing the API spinosad to the FDA seeking approval for the treatment of head lice. The FDA granted approval of Natroba days later. Natroba is indicated for the topical treatment of heads lice in patients four years and older. The agreement with ParaPRO gives Pernix the exclusive rights to co-promote the drug in the U.S. The duo expect to launch Natroba “in the first half of 2011.”
The NDA was supported by data from two phase III trials which were published in Pediatrics: Official Journal of the American Academy of Pediatrics. The trials compared the efficacy of spinosad with that of permethrin (Nix). Permethrin is considered the current standard of care for treatment of head lice and is the API in a variety of lice control products (OTC and Rx). In fact, Nix is endorsed by the American Academy of Pediatrics for treatment of head lice. The trials followed over 1,000 individuals for 21 days. The primary endpoint was the proportion of lice-free participants after 14 days. Results showed that approximately 85% (trial 1) and 87% (trial 2) of spinosad-treated participants were lice free after 14 days. This compared to approximately 45% (trial 1) and 43% (trial 2) for the permethrin-treated participants. The study authors thus concluded that spinosad was significantly more effective that permethrin for the treatment of head lice.
Spinosad may have other advantages other than efficacy over premethrin most notably that lice has shown to become resistant to premethrin and overuse of it can be dangerous due to toxicity – especially to children. These can go hand-in-hand, as individuals will often apply more premethrin than the recommend dose when treatment fails to fully eradicate premethrin-resistant lice strains. Pyrethrin, another common API used for the treatment of lice, has also shown to be susceptible to lice-resistance.
The other, perhaps somewhat more subjective, advantage is in application. Nix, along with most other lice-control products, requires that the individual combs the product through the scalp – combing is not necessary with Natroba, which potentially makes application easier and less time consuming.
Based on the apparent advantages of spinosad over the current standard of care, along with a U.S. market for head lice treatment estimated at approximately $240 million, we think this deal with ParaPRO could be potentially very lucrative for Pernix. Pernix expects to receive between 35% – 42% of net sales proceeds. Using rough assumptions and back-of-the-envelope math; if Natroba can take 30% of the market (~$70MM), approximately one-half (this might be conservative) of which we assume would be sold by Pernix. After rebates Pernix’s cut could be $11 million. After selling (and some G&A) expenses and taxes, as much as $6 million (~$0.25 EPS) could flow to the bottom line. Grabbing 30% market share would not happen within the year of launch but, given the apparent significant efficacy advantages of the drug, combined with Pernix’s sales acumen, we think this is a realistic assumption within a few years after launch.
We had previously modeled a contribution from an anticipated new co-pro deal beginning in early 2011 so this announcement does not necessarily materially impact our model – based on the verbiage in the press release (potential launch in “first half of 2011”), our timing may be off slightly (maybe one quarter early) but we were in the ballpark.
Valuation
The bulk Pernix’s revenue has historically (and currently) been derived from products with relatively limited upside and short remaining sales lives. While Pernix’s strategy of acquiring “has-been” drugs at firesale prices has proven to be extremely profitable, it involves high product turnover and almost constant deal-making. The relatively short-term focus of this strategy introduces a higher level of long-term uncertainty. As a result, our prior valuation relied on a near-term P/E multiple.
Our model had previously included contributions from both a new large co-promotion deal and unknown pipeline candidates (although not specifically for BC1036) so the recent news regarding Natroba and the SEEK JV impacts our model only slightly. And while management had previously indicated that they were in discussions regarding both, we felt, prior to the deals being announced, that the risk of failing to consummate the deals added substantial uncertainty to our longer-term financial forecasts for Pernix.
With the deals now in place, we feel risk to our longer range forecast is now greatly reduced and consequently are moving to a valuation method which incorporates this anticipated growth.
We use industry average five-year PEG (using P/E calculated on 2011 EPS) of 0.52 to value Pernix. We look for Pernix to post 2014 EPS of $2.23, which implies five year growth of 39% (from $0.43 in 2009). Applying the resultant ~20x P/E multiple to our 2011 EPS estimate of $0.76 values Pernix at approximately $15.50/share.
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