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PATH Run-Up Valuation

publication date: May 10, 2011
 | 
author/source: Jeff Dos Santos
PATH Valuation

“NuPathe Inc announced that its New Drug Application (NDA) for Zelrix has been accepted for filing by the U.S. Food and Drug Administration (FDA). NuPathe submitted the Zelrix NDA on October 29, 2010. The Company expects to receive a Prescription Drug User Fee Act (PDUFA) date, the target date for the FDA to complete its review of the NDA, of August 29, 2011.”

NuPathe Inc. (PATH) and their main product candidate, Zelrix, will be the only product candidate to be evaluated in this valuation. Zelrix, while attempting to grasp the ever so competitive migraine market, will stand out for what it is: a single-use adhesive patch which is applied on the arm (or possibly the thigh) to treat migraines. Zelrix is mostly composed of Sumatriptan, yet Zelrix (using PATH’s “SmartRelief” technology) allows controlled delivery of Sumatriptan from this patch without any injectable insertion. If, and only if, Zelrix is approved, it will be the only transdermal Sumatriptan patch available in the market.
(Note: In this valuation, there is much more mention of market competition relative to other valuations due to the immense amount of competition in the migraine market. Therefore, we shall use the following subtitles: [Financials], [Competition], [EPS Estimate], and [Valuation]. )

[Financials]

(Note: Please be advised that this valuation was submitted on May 6th, 2011, 4 days before PATH reports first quarter (Q1) results. Therefore, there is no mention of analyzing PATH’s Q1 2011 financials. However, we assessed our own EPS (Earnings Per Share) estimate, since it will contribute to the final “run-up” price.)

(Side Note: The financials which we will analyze are for the fourth quarter ending 2010.)
PATH received a one-time grant of $650,000, but apart from that, they did not receive any other revenue (and so, is in a burn situation at the moment). Research and development costs came to $5.215M, and selling and administrative costs came to $1.634M. Accounting for interest income ($23,000) and the interest expense (-$179,000), the net income attributable to PATH was -$6.174M (or an EPS loss of $0.42, given 14.549M shares).

Cash and cash equivalents came to $38.918M, and prepaid expenses and other came to $1.008M which sets total current assets to be $39.926M. Given all other assets sets total assets to be $43.753M. Total current liabilities ($5.784M) are spread between accounts payable ($1.198M), current portion of the long term debt ($1.513M), the accrued compensation and benefits ($1.048M), accrued professional fees ($307,000), accrued R&D expenses ($1.502M) and accrued interest and other ($216,000), and given the long term debt of $3.704M leaves total liabilities to be $9.488M. Therefore, total equity is $34.265M (a book value of $2.36 per share).

[Competition]

"GlobalData has found that GlaxoSmithKline plc. (GSK), Eli Lilly and Company, Merck & Co., Inc., Pozen, Inc., Eisai Co., Ltd., Johnson & Johnson, NuPathe Inc. and Abbott Laboratories are the leading competitors in the global migraine market. Together, these companies accounted for more than 40% of the global migraine market in 2009"
< http://www.reports-research.com/168/d/2010/08/02/globaldata-migraine-pipeline-assessment-and-market-forecasts-to-2016/ >

(Note: The above statement refers directly to product candidates as well as marketed drugs. 

Example 1: When observing Eli Lilly's 10-K, "We believe our investments in research, both internally and in collaboration with others, have been rewarded by the number of new molecules and new indications for existing molecules that we have in all stages of development. At present we have more than 65 drug candidates across all stages of human testing and a larger number of projects in preclinical development. Among our new investigational molecules in the product phase of development or awaiting regulatory approval are potential therapies for diabetes, cancers, Alzheimer’s disease, rheumatoid arthritis, lupus, depression, and pancreatic exocrine insufficiency, as well as an imaging agent for detecting beta-amyloid plaques (which are associated with Alzheimer’s disease) in the brain. We are studying many other drug candidates in the earlier stages of development, including molecules targeting cancers, diabetes, obesity, Alzheimer’s disease, schizophrenia, depression, bipolar disorder, migraine, alcohol dependence, musculoskeletal disorders, atherosclerosis, anemia, benign prostatic hyperplasia, erectile dysfunction, and renal diseases. We are also developing new uses, formulations, or delivery methods for many of these molecules as well as several currently marketed products, including Alimta, Byetta, Cialis, Effient, Erbitux, Forteo, and Humalog."
< http://investor.lilly.com/secfiling.cfm?filingID=1193125-11-41620, Page 9> )

Example 2: Eisai Co., Ltd.'s E2007 (Migraine prophylaxis) is in (US) Phase II
< http://www.eisai.com/pdf/eir/epipeline.pdf , Page 1>

Example 3: While marketed, although lost patent protection in 2009 which caused sales to go down by 58% to $1.15B, Johnson & Johnson recalled Topamax due to bad odour (Topamax being J&J's migraine prevention drug)
< http://migraine.com/blog/migraine-drug-topamax-recalled-strange-odor-but-little-cause-for-concern/ >
<
http://www.healthzone.ca/health/article/975254

Example 4: "Increased generic competition has resulted in U.S. Depakote sales declining from $1.3 billion in 2008 to $161 million in 2010. Austerity measures implemented by several European countries reduced healthcare spending and affected pharmaceutical pricing in the second half of 2010 and that impact is expected to continue for all of 2011."
< http://www.abbott.com/static/content/microsite/annual_report/2010/16_review1.html >

Cause to Example 4: "The United States Department of Justice, through the Unites States Attorney for the Western District of Virginia, is investigating Abbott's sales and marketing activities for Depakote. The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties."
< http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=136-000104746911001056-5TTG1LL961P17OGHRDJUHVKJ3D&docFormat=HTM&formType=10-K, Page 18>
<
http://www.pharmcast.com/WarningLetters/Yr2009/Jan2009/Abbott0109.htm > ).

What has been presented so far is not good enough, according to PATH, "Migraine is a debilitating neurological disease that affects approximately 31 million people in the U.S. In 2010, according to IMS Health Inc., or IMS, a leading provider of pharmaceutical industry market data, U.S. sales of prescription products for migraine exceeded $1.7 billion, over 97% of which were for a class of medication called triptans. Sumatriptan, the active ingredient in Zelrix, is the most prescribed triptan and is currently available in oral, nasal and injectable formulations."
< http://www.easyir.com/easyir/nupathe/Annual_Report.pdf, Page 1>

"We anticipate Zelrix will compete with currently marketed triptans, including Imitrex (sumatriptan), Maxalt (rizatriptan), Zomig (zolmitriptan), Relpax (eletriptan), Axert (almotriptan), Frova (frovatriptan), Amerge (naratriptan), Treximet (sumatriptan/naproxen) and Sumavel DosePro (sumatriptan)"
< http://www.easyir.com/easyir/nupathe/Annual_Report.pdf , Page 12>

(Note: GSK (GlaxoSmithKline) led the migraine market with Imitrex (sumatriptan))
<
http://www.gsk.com/products/prescription-medicines/imitrex.htm >

(Note: Maxalt (rizatriptan) was developed by Merck & Co.)
<
http://www.merck.com/product/usa/pi_circulars/m/maxalt/maxalt_pi.pdf >

(Note: Zomig (zolmitriptran) is marketed by AstraZeneca))
<
http://www.astrazeneca.ca/documents/ProductPortfolio/ZOMIG_CIL_en.pdf >

(Note: Relpax (eletriptan) is marketed by Pfizer)
<
http://www.pfizer.ca/en/our_products/products/product/139 >

(Side Note:
"In June 2010, we received notices from Apotex Inc. and Apotex Corp. and from Teva USA that they had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Relpax. They assert the non-infringement of our patent covering the crystalline form of eletriptan, which expires in 2017. They have not challenged the basic patent, which expires in 2016. In July 2010, we filed actions against Apotex Inc. and Apotex Corp. and against Teva USA in the U.S. District Court for the Southern District of New York asserting the infringement of the crystalline patent." )

(Note: Axert (Almotriptan) was discovered and developed by Almirall)

(Side Note: Almirall is listed on the "Bolsa de Madrid" (Madrid Stock Exchange) and is a Spanish international pharmaceutical company)
(Note: Frova (frovatriptan) is licensed to Endo Pharmaceuticals)
<
http://www.endo.com/pdf/products/FROVA_Full_Prescribing_Information.pdf >
(Note: Amerge (naratriptan), also known as Naramig, is marketed by GSK)   
<
http://us.gsk.com/products/assets/us_amerge.pdf  >
(Note: Treximet (sumatriptan/naproxen) is manufactured by GSK and POZEN Inc., GSK is responsible for the commercialization of Treximet and POZEN will receive a royalty of 18% on net sales.)
<
http://us.gsk.com/products/assets/us_treximet.pdf >
<
http://www.pozen.com/product/treximet.asp >
(Note: Sumavel DosePro (sumatriptan) is marketed by Zogenix)
<
http://www.zogenix.com/index.php/products/sumatriptandosepro/ >
(Note: GSK's Imitrex patent expired both in the USA and Europe)
(Note: Treximet drew £56M in 2010)
<
http://www.x-rates.com/d/GBP/USD/hist2010.html >
<
http://www.gsk.com/media/pressreleases/2008/2008_us_pressrelease_10034.htm > )
(Note: Merck & Co.'s Maxalt drew $550M
<
http://www.merck.com/investors/financials/annual-reports/ar_2010.html , Page 6 & Page 56>)
(Note: Endo's Frova net sales for the year 2010 was $59.3M
< http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=ENDP:US, Page 10, not a direct link. Please click on “10-K” hyperlinked beside “Annual Financials”> )
(Note: Zogenix's Sumavel DosePro net sales for the year 2010 was $18.7M)

[EPS Estimate]
-No revenues are to be expected
-We believe R&D costs will be $4.5M
-We believe G&A costs will be $2M
-We believe the interest expense will be $300,000
-We believe the sum of shares will stay as is: 14.549M

Therefore, our EPS estimate is -$0.47.

What happened (summary):
-Actual R&D costs were much lower ($3.7M)
-G&A costs were a bit higher ($2.5M)
-Interest Expense was slightly lower ($249,000)
-Sum of shares slightly increased (14.56M)
-Actual EPS is -$0.44


[Valuation]
Recall that “U.S. sales of prescription products for migraine exceeded $1.7 billion, over 97% of which were for a class of medication called triptans”, according to PATH’s 10-K, "GlobalData has found that GlaxoSmithKline plc. (GSK), Eli Lilly and Company, Merck & Co., Inc., Pozen, Inc., Eisai Co., Ltd., Johnson & Johnson, NuPathe Inc. and Abbott Laboratories are the leading competitors in the global migraine market. Together, these companies accounted for more than 40% of the global migraine market in 2009"  according to GlobalData, andGlobalData estimated the global migraine market to be worth $3.8 billion in 2009. It is forecast to decrease at a Compound Annual Growth Rate (CAGR) of -3% over the next seven years to reach $3.1 billion by 2016.” according to GlobalData.
< http://www.reports-research.com/168/d/2010/08/02/globaldata-migraine-pipeline-assessment-and-market-forecasts-to-2016/ >
(Note: Traditionally, we were able to calculate the drug market with ease given the numbers at hand. Since the competition is immense, we shall break down every step on how we reached our Drug Market value PATH can inquire in one year’s time IF Zelrix is approved.)

The Drug market is equal to the market drug times the market share.

The market drug: We shall take what the drug market is worth to PATH ($1.7B), and filter out the triptans only which accounts for 97% of the market drug ($1.649B) minus what Treximet took (1.544263: The 2010 GBP to USD according to x-rates)($56M), minus what Maxalt took ($550M), minus what Frova took ($59.3M), minus what Sumavel DosePro took ($18.7M), minus what Depakote took ($161M) which equals $773.52M. 

The market share: “More than 60% of the pipeline drugs are either me-too drugs or generic drugs. However, the prevailing market landscape remains dominated by a small number of market players which moderately fulfill the unmet needs that exist in the market.”
< http://www.reports-research.com/168/d/2010/08/02/globaldata-migraine-pipeline-assessment-and-market-forecasts-to-2016/ > 

Also, Zelrix will only be generating US sales, which is something we need to filter out. To gain an approximate measure (in our opinion), we took the US sales ($1.7B) divided by the global migraine market value in 2011 ($3.8B x (1 – 0.03)2 = $3.5754B) which equals 47.55%.

Taking the approximated US migraine market share (47.55%) times the competitive filter (40%) equals 19%.

(Note: This 19% represents Zelrix’s market share after subtracting Treximet, Maxalt, Frova, Sumavel DosePro, and Depakote from the drug market.).

Therefore, the drug market is equal to the market drug ($773.52M) times Zelrix’s market share (19%) which equals $146.97M.

The sum of shares in one year’s time assuming a 25% annual dilution is equal to the current sum of shares (14.56M) times the annual dilution rate (1.25) which equals 18.2M.

Let the gross margin equal 40%, and the price over earnings ratio multiplier equal 20.

The gross revenue margin is equal to the gross margin (40%) times the drug market ($146.97M) which equals $58.79M.

The profit attainable to PATH in one year’s time (assuming Zelrix is approved) is equal to the gross revenue margin ($58.79M) minus annual research and development costs ($25M) minus selling general and administrative costs ($15M) which equals $18.79M.

The value of PATH in one year’s time is equal to the price over earnings ratio (20) times the profit attainable to PATH ($18.79M) which equals $375.8M.

The price per share in one year’s time is equal to the value of PATH in one year’s time ($375.8M) divided by the sum of shares in one year’s time (18.2M) which is equal to $20.65 if Zelrix is approved
Let’s assume the probability of approving Zelrix is 50%, then there exists:

(1) A seasonality adjustment (+5.72%)
(2) A PDUFA risk (-3.58%)
(3) A burn situation (-5%)

which therefore sets the scale investors face in terms of reaching the price per share to be 47.14%.
Combing the scale at which investors face (47.14%) times the price per share if Zelrix is approved ($20.65), gives us an unadjusted run up price of $9.73.

The adjusted run up price is equal to the unadjusted run up price ($9.73) plus/minus our EPS estimate (-$0.47) which gives us an adjusted run up price of $9.26.

Disclosure:
Some BioRunUp employees are LONG PATH

If you have questions about this run-up valuation you can email the author Jeff Dos Santos at jeff@biorunup.com