Trading 0.24$ Price target 2.75$New Paradigm target: 2.75$. Once the markets settle this will movequick for 2x, 3x, 4x in weeks. Check it out if you want
www.prometic.com
Paradigm Capital Inc, IIROC/TSX member 1
Claude Camiré, Analyst 416.360.1322
Alisa Beach, Associate 416.360.3579
September 5, 2008
Financial Summary (C$)
(end-Dec) Rev EPS EV/Rev P/E
FY07 $8.4 ($0.09) 13.1x Nmf
FY08e $24.8 ($0.06) 4.4x nmf
FY09e $55.2 $0.01 2.0x 33x
FY10e $99.2 0.08 1.1x 4.1x
All figures in C$ unless otherwise noted
* ProMetic has announced a licensing agreement with Abraxis
Bioscience (ABII-N) that could be worth up to $295m in
development and sales milestones, for the development of 4
protein therapeutics.
* License and service fees could reach a total of $34m in the
next 3 years, with $10m expected before the end of 2008. This
eliminates the need to come back to the market for financing.
* We have arrived at a deal NPV of $0.75, and thus are raising
our target price from $2.00 to $2.75. Maintain Buy.
Major Technology License Financially Rewarding
This deal is worth up to $295m in development and sales milestones. However,
when including resin sales and sales royalties, PLI revenues could exceed $600m
in the next 8 years. Financial details include an upfront payment of $7m, made as
an equity investment at $0.47/sh (34% premium), $8m in license fees and $287m
in sales milestones payments. License and service fees could reach a total of
$34m in the next 3 years, with $10m expected to occur before the end of 2008.
Financial Details Beyond the Announcement
In addition to the $295m potential revenues mentioned in the press release,
ProMetic should receive royalties on Abraxis sales plus manufacturing revenues
that would approximate 15-20% of Abraxis sales. Royalties are expected to start
by 2011 and are expected to be mid-single royalties. We expect significant
revenues from manufacturing starting in 2009 from the production of clinical
supplies, ramping up at industrial scale by 2010-2011. Taking into account all
sources of revenues and using a 30% discount, we derive a $0.75/share net
present value. The discount reflects the lower risk associated to develop protein
drugs and the shorter time to reach commercial status.
Stock Rating:
Buy
12- target (C$) ??$2.75
Potential ROR 733%
Company Profile
Sector Health Care
Ticker PLI-T
Average S/O (m) 300
Free float (m) 285
Mkt cap (C$m) 99.0
Mkt float (C$m) 94.1
Key Metrics
Enterprise Value (C$m) 110
Research Team
Claude Camiré
Analyst 416.360.1322
Ccamire@paradigmcap.com
Alisa Beach
Associate 416.360.3579
Abeach@paradigmcap.com
SaleroMetic Life Sciences IncLI-T $0.33)gest Deal in ProMetic History – Raisinggece
Paradigm Capital Inc, IIROC/TSX member 2
Claude Camiré, Analyst 416.360.1322
Alisa Beach, Associate 416.360.3579
September 5, 2008
Abraxis BioScience- Experienced Partner with Proteins based Drugs
Abraxis BioScience, Inc. (ABII-Q) is a mid-size biotech company focused on the
development of novel formulations of proteins and is a strategic fit for this reason..
It is an integrated company with dedicated manufacturing capabilities including
discovery, clinical drug development, sales and marketing. Abraxis’ main product
is the first solvent-free taxane that was approved by the FDA, in January 2005 for
its initial indication in the treatment of metastatic breast cancer. Abraxane has
been a huge success in oncology and competes directly with Taxotere and Taxol,
a US$3b market. Abraxis generated $340m in revenues in the last 12 months and
has a market cap of US$3b.
Filling the Template Around the World
This is the fifth licensing agreement for “Cascade” in the last 18 months. Other
license partners include Biotest (acquired Nabi Pharmaceuticals), Kedrion, Blue
Blood and CNBG. We expect additional partners to develop other ODs. Current
agreements include:
Company Products Est Market Size Territory
Blue Blood (Taiwan) Hyperimmune CMV + 2
undisclosed
$75-100m Taiwan and
Southern Asia
Kedrion (Italy) Hep B + one drug
undisclosed
$200-300m Europe or Italy
China National
Biotec Group (China)
7 proteins: FVIII,
thrombin, fibrinogen,
a1PI, IVIG,
hyperimmunes and
albumin.
$300-500m China
Biotest (Germany) 3 proteins $100-150m US
Current science has not fully identified the number of proteins existent in plasma;
however most estimates place the number in the hundreds. Additionally, pricing of
these drugs is usually at a premium to traditional chemical drugs. The other main
advantage resides in a longer market cycle because generics are usually unable to
reproduce the drugs, therefore significantly increasing the return on investment.
This is the reason why the pharmaceutical industry has shifted its product
development to proteins. The huge shift in investment is reflected by the value of
new manufacturing facilities for biologics, which has exceeded more than $20b in
the last 2 years.
Advantages of Developing Orphan Drugs (ODs)
While most proteins are marketed for large population markets such as cancer or
autoimmune diseases, other proteins target specific genetic diseases. Because
they are tailored for smaller populations, the FDA has created an Orphan Drug
Diseases Designation (ODs’). ODs target rare diseases or conditions that affect
fewer than 200,000 people in the U.S. The Orphan Drug Act provides a seven-year
period (10 years in Europe) of exclusive marketing to the first company who
obtains marketing approval for a designated OD. ODs are developed in a shorter
time than traditional drugs, as the FDA grants a faster review process and less
stringent clinical trials. Commercially, ODs can fetch much higher prices than other
drugs as they serve much smaller populations, and thus higher prices are required
to recoup costs. While many patients depend on these new drugs, patients must
face steep costs that usually exceed $50,000/patient/year.
Paradigm Capital Inc, IIROC/TSX member 3
Claude Camiré, Analyst 416.360.1322
Alisa Beach, Associate 416.360.3579
September 5, 2008
Revenue Outlook – Strong Revenue Growth from Protein Technologies
We are revising our revenue estimates for FY08 upwards based on revenue
recognition of the expected $10m in FY08. We have increased the revenues from
Protein Technologies to $25m in FY08 versus our previous forecast of $21m. Even
though we expect $10-20m in revenues in FY09 from this new deal, we have only
conservatively increased our forecast from $45m to $55m. Because most deals
are back-ended, we expect revenues to sharply increase staring in FY10. Blood
bag filters remain an important short-term catalyst. We will revise our forecast
when we have better visibility. Blood bags remain the wild card potential for this
business application as they could reach peak potential revenues between $100-
200m within three years, generating a 60% EBITDA.
Summary of Changes
2008e 2009e 2010e
Revenues
Prior $21 $45 $83
New $25 $55 $99
Variance $4 $10 $16
EPS
Prior -$0.06 $0.00 $0.06
New -$0.06 $0.01 $0.08
Variance $0.00 $0.01 $0.02
Source: Paradigm Capital
Stronger Financially
With this new agreement, PLI gets a $7m equity injection, and license and
development fees that will total $10m in FY08. Given the increase in revenues and
the decrease in burn rate, PLI funds its daily operations and eliminates the risk for
outside financing. We believe the combination of the five plasma deals signed in
the last 2 years, the sale of blood bags in Europe and the sale of resins to
customers gives us increased confidence for significantly increased revenues. We
also remain highly optimistic about other deals in the short term, either from other
plasma deals or PBI-1402, which would be materially more financially attractive.
Multiple Near-Term Events to Drive the Stock Higher
We expect near-term catalysts to include the following:
• More licensing deals for the “Cascade” technology
• Clinical trials results for PBI-1402 Phase Ib/II expected by Q4/FY08 for
Chronic Kidney Dialysis patients
• PBI-1402 licensing partnership for at least one indication
Facing an Even Brighter Future
With this agreement, PLI significantly increases revenues for Protein Technologies
and solidifies its credibility in the protein industry as a significant technology
provider. As such, the visibility of the company makes it attractive for other protein
companies seeking to expand manufacturing services. We emphasize that the
beauty of PLI’s technology is in its ability to keep giving. ProMetic designs a resin
specifically for each protein to be developed, and this is why many companies that
hope to develop a plasma protein therapeutic require PLI’s technology in order to
Paradigm Capital Inc, IIROC/TSX member 4
Claude Camiré, Analyst 416.360.1322
Alisa Beach, Associate 416.360.3579
September 5, 2008
so (because otherwise they can be very difficult to separate from the rest of the
plasma). Therefore, this deal is not necessarily a one-shot deal, and many similar
deals could be signed with numerous companies.
Interestingly, revenues from protein technologies are the recurring type with a
higher mix of royalties; therefore generating a high EBITDA. Taking into account
all sources of revenue and using a 30% discount, we derive at a $0.75/share net
present value. We are maintaining our Buy recommendation and increasing our
target price from $2.00 to $2.75 based on discounted cash flow.
ProMetic held a conference call to discuss this deal today at 8:30am. The replay
is available on its website.
Table 1: ProMetic Life Sciences – Income Statement C$000’s
2005 2006 2007 2008e 2009e 2010e
Plasma Proteins 4,000 2,500 10,250 20,461 36,793
Blood Bags Filters 3,250 4,000 10,000 20,000
Resins 4,050 2,647 2,675 6,800 8,840 10,608
Protein technologies 8,050 2,647 8,425 21,050 39,301 67,401
PBI-1402 Anemia 3,750 15,888 31,775
Therapeutics 3,750 15,888 31,775
Total Revenues 8,050 2,647 8,425 24,800 55,188 99,176
Operating Margin 6,550 2,647 5,047 10,388 28,848 54,728
General Admin 6,742 8,001 5,894 6,483 7,132 7,845
Research & development 13,338 15,288 19,293 16,000 14,400 15,840
Depreciation & Amortization 2,892 2,244 2,297 2,412 2,532 2,659
Operating Expenses 22,972 25,533 27,483 24,895 24,064 26,344
EBITDA (13,530) (20,642) (20,139) (12,096) 7,316 31,044
EBIT (16,422) (22,886) (22,436) (14,508) 4,784 28,384
Other Revenue
Other Items (5,182) (7,573) (3,000) (2,000) (2,000)
EBT (21,604) (30,459) (22,436) (17,508) 2,784 26,384
Income Taxes
Net Earnings (21,604) (30,459) (22,436) (17,508) 2,784 26,384
EPS Basic ($0.19) ($0.21) ($0.09) ($0.06) $0.01 $0.08
Avg Shares Out. 115,717 148,261 242,603 315,000 325,000 325,000
Source: Paradigm Capital
Paradigm Capital Inc, IIROC/TSX member 5
Claude Camiré, Analyst 416.360.1322
Alisa Beach, Associate 416.360.3579
September 5, 2008