Beacon's new report. I've posted last wednesday on August 14, a comment from Beacon.
They came up with a full report on August 16:
The therapeutic really show a great potential, plasminogen and AAT could represent a future 30 cents EPS alone.
| ProMetic reported Q2/FY13 results that were slightly below expectations both from a revenue and margin perspective. At this stage of its development, "lumpy" quarters are still to be anticipated. Key near-term focus, however, is commissioning of Laval plant. ProMetic’s own proprietary PPPS technology in Laval enables significant yield advantages, which in turn will enable its entry into the orphan drug market. The 2 orphan drugs in the pipeline (plasminogen and AAT) could alone ultimately realize value for shareholders far in excess of the current share price. Anticipate further orphan drugs to be added to the pipeline as ProMetic looks to exploit the yield advantages accruing from its PPPS technology. While we maintain our Buy recommendation and $1.00 target price, we believe the risk-return continues to skew even more positively given its orphan drug line-up and its therapeutic segment, which is entering clinical trials in September. |
Internalizing PPPS to Drive Significant Value
ProMetic announced its Q2/FY13 results, which were a little lighter than expected, both from a revenue and margin perspective. The highlights of the results are below:
($000s) Q2/FY13 Q2/FY13 1H13 1H12 Revenue 5,162 6,271 9,606 7,330 EBIT -2,351 1,231 -3,870 -2,558 EPS 0.00 0.00 -0.01 -0.01 Product Sales 2,593 2,338 4,535 3,271 Service Sales 2,568 446 5,071 572 License Sales 0 3,487 0 3,487 Operating Margins: Product 31.9% 53.4% 31.4% 32.4% Service 15.2% 83.2% 18.6% 77.3% Licenses n/a 100.0% n/a 100.0% Op Margin Before Corp O/H -5.5% 45.3% 2.1% 9.9%
Source: Company Reports and Beacon Securities Ltd
At this stage of its development, with most of its partner drugs is not having received FDA approval, "lumpy" quarters are still anticipated. We would expect greater visibility on product sales as we head into FY14.
However, it is becoming increasingly clear that ProMetic’s proprietary PPPS technology is going to drive significantly higher value once it is internalized for its own use at its soon to be commissioned Laval plant.
PPPS Key to Driving Higher Yields on Orphan Drugs
Focusing on its protein segment, ProMetic has focused to date on selling its resins to other pharmaceutical companies as part of their FDA-approved manufacturing process. Recall that the resins are used to either create new drugs or improve existing drugs by removing impurities, such as prions. From a value creation perspective, selling these "filtration tools" nets product sales representing ~2-3% of the value of the finished drug. While we believe this business will grow significantly over the next several years due to the number of drugs in its "pipeline" and the potential market penetration of them, we also believe there is an imminent major inflection point. August 16, 2013 Page | 3 Doug Cooper| 416.643.3863 | dcooper@beaconsecurities.ca
ProMetic Life Sciences
Through its soon-to-be commissioned (anticipated to be late November 2013) Laval plant, ProMetic will use its own PPPS technology to capture specific proteins from plasma. This not only opens up selling the "active protein ingredient" and moving up the value chain to ~20-30% of the value of the drug, but most importantly, opens up the orphan drug market to ProMetic. This ability to isolate "non-commodity", valuable plasma-based proteins is directly attributable to its proprietary PPPS technology. The following table highlights ProMetic’s yield advantage over existing "filtration" technologies:
ProMetic’s Yield Advantage
Source: ProMetic Life Sciences
In fact, through recent trials, ProMetic has confirmed that its yield advantage for Alpha-1 Antitrypsin is 220%, even more significant than the initially indicated 170%. August 16, 2013 Page | 4 Doug Cooper| 416.643.3863 | dcooper@beaconsecurities.ca
ProMetic Life Sciences
What Are Orphan Drugs?
An Orphan Drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition. The assignment of orphan status to a disease and to any drugs developed to treat it is a matter of public policy in many countries, and has resulted in medical breakthroughs that may not have otherwise been achieved due to the economics of drug research and development. For example, The Orphan Drug Act (ODA) of January 1983 was passed in the United States. Under the law, companies that develop a drug for a disorder affecting fewer than 200,000 people in the US may sell it without competition for seven years and may receive clinical trial tax incentives.
The National Institute of Health estimates that there are approximately 7,000-8,000 rare diseases affecting 25 million Americans. Since the passage of the ODA in 1983, the number of orphan drugs has increased from 10 to 382 in 2011. To treat this growing opportunity, more than 2,500 medicines have been designated "orphan drugs" and are in all stages of development. In fact, orphan drugs currently account for 22% of total drug sales with 35% of FDA-approved drugs in the last three years having this designation.
Interestingly, the market for specific orphan drugs can grow quite strongly as a result of:
a) New patients emerging when they learn of the new drug’s beneficial effect;
b) Patients live longer as a result of the drugs and as such, need to take it longer.
Laval Facility’s Orphan Drug Strategy
ProMetic’s orphan drug pipeline now stands at two, both with the ability to drive significant revenue and EPS contribution.
Plasminogen:
In March 2013, the American FDA granted an orphan drug designation for ProMetic’s plasma purified human plasminogen drug. The orphan drug designation is for the treatment of hypoplasminogenemia, or Type 1 plasminogen deficiency (T1PD). If left untreated, plasminogen deficiency results in thick, woody growths on the eyes and can lead to blindness. The disease can also affect the ears, sinuses and tracheobronchial tree. Most affected cases are infants and children. Management has indicated that it believes the T1PD market is ~$50-$60 million per year (~1500 patients). There is no current drug on the market. Given the fast track clinical trial approval process as part of the Orphan Drug program (12-15 patients), ProMetic believes it could have an available drug as early as 2015. Furthermore, to satisfy 100% of the demand of this market, management believes it would only take approximately 10% of the capacity of the August 16, 2013 Page | 5 Doug Cooper| 416.643.3863 | dcooper@beaconsecurities.ca
ProMetic Life Sciences
Laval plant. Through the development and sale of its own T1PD drug, ProMetic would receive 100% of the value of the drug. Based on a similar 86% product contribution that InterMune (ITMN – US) receives for its orphan lung-fibrosis drug, a $60 million revenue forecast for plasminogen could contribute a product contribution of $0.10 per share.
Alpha-1 (AAT):
ProMetic recently announced (August 14, 2013) that it will develop and commercialize Alpha-1 as its second plasma-derived orphan drug product. AAT is a protein whose main function is to protect the lungs from damage. As noted above, its PPPS technology allows significantly higher yields (+220%) that will immediately make ProMetic the industry’s low cost producer of AAT. While the Company believes the market opportunity is ~$1 billion, it announced that its initial capacity would be ~$150 million through Laval as well as through Taiwan-based Hematech (who would act as a contract manufacturer). ProMetic anticipates filing its IND in 2014 and to have a drug on the market by 2016/2017. Assuming a similar margin profile as noted above for plasminogen, AAT could have a product contribution of ~$0.20+ per share.
Other Orphan Drugs?
We believe that ProMetic will continue to focus on building the pipeline of its own orphan drugs. As witnessed in the chart above, Its PPPS technology enables a yield advantage such that pursuing orphan opportunities makes a lot of sense.
Protein Technologies –The Roadmap
Over the next 3-4 years, ProMetic will look dramatically different than it does today. We believe there will be a staged and steady progression starting with the ramp-up of its sale of resins followed by its commercialization of its orphaned drugs. At this stage, our roadmap is as follows:
2013: The final transition year as ProMetic moves from a predominantly R&D company into one selling a greater amount of product sales. We anticipate y-o-y growth in both product and service sales as it increases the number of partner drugs on which its PPPS technology is part of the manufacturing process.
2014: We expect product sales to ramp sharply as some significant partners receive FDA approval for their drugs. Once those drugs enter commercialization, product sales should increase significantly. We also expect ProMetic to file its IND for AAT in 2014.
2015: While product sales should continue to advance, we anticipate that ProMetic will have its plasminogen drug approved and on the market by late 2015. August 16, 2013 Page | 6 Doug Cooper| 416.643.3863 | dcooper@beaconsecurities.ca
ProMetic Life Sciences
2016/2017: As a commercialized drug with no real competition, we anticipate plasminogen sales to ramp. Furthermore, we anticipate that its AAT drug will have received regulatory approval.
By 2017 therefore, we anticipate that ProMetic could be generating pro-forma sales north of $200 million.
Don’t Forget About Therapeutics
On July 11, 2013, ProMetic announced that its lead drug candidate BPI-4050, will enter the clinical trials program in September. With significant pre-clinical results, we believe that partnership probability has now increased significantly.
While it was widely anticipated that 4050 was targeting the large Chronic Kidney Disease (CKD) market (27.5% of the US$343 billion US general Medicare market), it now seems that ProMetic will first seek an orphan drug designation for lung fibrosis. Clearly CKD remains the ultimate goal; however, ProMetic may be able to show "proof of concept" of 4050 much quicker through the lung fibrosis market. As Pierre Laurin, CEO of ProMetic indicated in its press release:
"While renal indications may represent the highest value on a long term basis, the development strategy pursued may also target other fibrotic indications as point of initial commercial entry. Pulmonary fibrosis for instance, is a good example of an interesting target for which PBI-4050 has demonstrated superior efficacy compared to the only other commercially available therapy"
Our due diligence indicates that the only other drug on the lung fibrosis market and which received orphan drug designation, is InterMune’s (ITMN – US) Esbriet (pirfenidone). To date, this drug is approved in the European Union. In its Q2/FY13 earnings release, InterMune reported Esbriet revenue of US$14.4 million versus US$5.5 million in the year ago period. Based on its LQA revenue run-rate of US$58 million and its market cap of US$1.4 billion, InterMune is trading at 24x.
If ProMetic is able to pursue an orphan drug designation for pulmonary (lung) fibrosis, it could have a competing drug on the market within the next couple of years. Not only would results emanating from its shortened clinical trial period provide increased revenue visibility, but they could also serve to fast-track other partnerships on much larger indications such as CKD. August 16, 2013 Page | 7 Doug Cooper| 416.643.3863 | dcooper@beaconsecurities.ca
ProMetic Life Sciences
Sum of the Parts Valuation
While ProMetic’s revenue attributable to its growing pipeline of orphan drugs is still a few years away, we believe there is supporting evidence to show that such a program will be successful. Notably, biologics created from human plasma have a VERY high success rate in terms of regulatory approvals. Secondly, ProMetic’s PPPS technology gives it a significant yield advantage and positions it as the low cost producer and/or the only company able to satisfy the demands of a specific market (i.e. plasminogen). Given that, we believe the market will start to give ProMetic the "benefit of the doubt" valuation as it hits further near-term milestones. Ultimately, if all of these initiatives are successful, we believe ProMetic could be worth several multiples of what the stock is trading at today.
Tweaking Estimates
In light of the weaker than expected Q2/FY13 results, we have made some adjustments to our FY13 and FY14 forecasts.
Revised Forecast
($000s) New Old FY13e FY14e FY13e FY14e Revenue 28,858 45,815 30,750 52,751 EBIT -2,252 18,219 4,062 25,170 EPS -0.01 0.03 0.01 0.05
Source: Beacon Securities Ltd
Excellent Risk-Return –Maintain Buy
As we have tried to show, we are not concerned with the slight revenue and margin miss in the Q2/FY13 results. The opportunities that ProMetic is pursuing, especially the orphan drugs, are very significant and have the potential to create significant value. As a case in point, if our revenue and EPS contribution for plasminogen and AAT are accurate, just those two drugs could have a value of over $4.00/share within the next few years. At this stage, we still value the company predominantly on its resin business, which is providing all of the revenue. We continue to value that business at $1.00 per share. However, its growing pipeline of orphan drugs, its strategic relationships with such groups as CNGB and NantPharma as well as its therapeutic segment all work to skew the risk-return even more positively
Over the coming months, we believe we could start to see some milestones achieved, which would signify that those "free" options are becoming more probable. As one or more of these starts to be priced into the shares of ProMetic, we believe the stock has the potential to trade materially higher. We maintain our Buy rating and target price of $1.00.