After reporting Q3 earnings, Savient Pharma (SVNT) plummeted back to a $1 from the meteoric rise to nearly $3 during the quarter. The company reported disappointing sales numbers for the promising gout drug and failed to break out one-time costs to provide investors a clearer picture of the 2013 earnings view.
As written in a previous article, Savient Pharma: The Pharma Rising From The Dead, the company was able to complete a restructuring that provided time to build the revenue base. While all of those moves left the company better equipped to survive long enough for the promising new drug to thrive, Savient has yet to prove to the market that the drug will ever meet the original estimates. Will the lowered cost structure even be sufficient enough to survive?
The company is a specialty biopharmaceutical company focused on developing and commercializing KRYSTEXXA (pegloticase) for the treatment of chronic gout in adult patients refractory to conventional therapy.
Q3 2012 Highlights
The company reported the following highlights for Q3 2012:
- Net sales for KRYSTEXXA were $4.5 million for the third quarter of 2012, a 13% increase over the second quarter of 2012.
- For the third quarter of 2012, the company had a net loss of $39.7 million, or $0.56 per share, on total revenues of $4.9 million, compared with a net loss of $27.4 million, or $0.39 per share, on total revenues of $2.6 million for the same period in 2011.
- Appointed John Hamill to the position of Senior Vice President and Chief Financial Officer.
- The release of the Veterans Affairs (VA) monograph, and the KRYSTEXXA criteria for use allows Savient to work more closely with VA Medical Centers and improves access for patients and providers.
- Positive opinion received on October 19 from the European Medicines Agency's Committee for Medicinal Products for Human Use (OTCQB:CHMP).
The company reported earnings without providing adjusted numbers to exclude severance costs and impairment charges. Excluding the $2.8M inventory impairment charge, the $6.4M warrant valuation charge, and the $1.1M stock based compensation charge, the net loss would've been $10M less than reported.
On top of that, removing the severance costs would've easily allowed the company to beat analyst estimates.
Updated Reorganization Plan/Cost Structure
Unfortunately, the company spent very little time discussing the new reorganization plan announced on July 9th. The sales force let go was focused on primary care physicians that may never refer a patient to the use of the drug. This new plan allows time for referrals and drug results to play a more prominent role.
The plan involved cutting 35% of the work force across the company effective on September 10th. The initiatives were originally announced at saving approximately $56M in annual operating expenses in 2013. That amounted to $14M in savings per quarter, but the company is now guiding towards a high of $50M in savings for 2013.
Table - Updated Example of New Cost Structure (000s)
|Metrics||Q3 '12||Q1 '13|
|Cost of goods sold||1,422||1,400|
|Operating income (loss)||(22,506)||(16,000)|
* Q3 numbers exclude the one time charges mentioned above. Q1 estimates assume hitting the 20% cost of goods sold target.
Based on these numbers, the majority of the gains will come from the cost savings. With expectations of over 80% gross margins, Savient needs to significantly add to revenue in order to achieve profits.
A huge factor in the success of Savient's stock in the next 12 months will be whether the company can sign a significant licensing or partnership deal for Europe. The lack of success in the US makes a strong deal in doubt. Can the company garner a premium deal when the primary US market has been a failure to date?
Any deal with significant cash payments and a partner that seriously pushes the adoption of KRYSTEXXA could have a major impact on the future of the drug worldwide, even in the US.
The Medicines Agency's Committee for Medicinal Products for Human Use provided a positive opinion on October 19th. This typically leads to an approval by the European Commission that the company expects by the end of the year.
The company claims to be seeing strong interest by potential partners in Europe and the rest of the world. It makes logical sense that partners would want access to a drug that solves an unmet need in gout, yet the lack of financial progress in the U.S. could lead to very low offers.
While the greatly improved cost structure should help the company remain in business long enough for Savient to finally educate the market about KRYSTEXXA, the lack of progress on sales in Q3 was very disappointing. The original sales estimate for Q1 2013 was $9.5M, yet the growth in Q3 only provides a trajectory for the numbers to hit $6-7M. Below is a graph highlighting the quarterly revenue for KRYSTEXXA:
* The estimates for the next two quarters assume 20% sequential revenue growth.
Even at $1.14, the stock has more than doubled from the bottom in July at $0.48. Investors probably aren't too late at this level, as the stock ended 2010 around $20 and the promise of the drug still exists.
Chart - 1 Year
Investors should look into adding to this stock now that it has pulled back substantially. The company has the potential for KRYSTEXXA approval in the EU by the end of the year and signing up a much-needed partner. It should also be able to easily surpass analyst estimates that aren't accurately accounting for the reduced operating costs going forward.
Assuming the company can keep the cost structure under control, the key to stock success will clearly be the ability to generate significant gross income going forward. The company either needs a huge European licensing deal or for the US market to finally open up to the drug.
Either move would unleash a major rally for the stock so investors might want to invest half a position now and half a position once one of those catalysts are confirmed by the company.
Additional disclosure: Please consult your financial advisor before making any investment decisions.