Seeking Alpha
Long only, value, special situations, growth at reasonable price
Profile| Send Message|
( followers)  

The Players

Pain Therapeutics (NASDAQ:PTIE) is an Austin, Texas based biotech company developing novel painkillers. Their lead drug candidate, Remoxy is an abuse-resistant, controlled-release, oral capsule oxycodone. Pain currently has a strategic alliance with drug manufacturing giant Pfizer (NYSE:PFE) (as a result of Pfizer's acquisition of King Pharmaceuticals in March of 2011) to market and distribute all of the drugs in their pipeline. The third company involved with Remoxy is California-based DURECT Corporation (NASDAQ:DRRX), whose drug delivery formulation is used in the compound to make it abuse-resistant and who is contracted to manufacture the drug. While each of these companies stand to benefit from FDA approval for Remoxy, they offer very different risk/reward profiles to investors.

Pain Therapeutics

As its only drug candidate currently beyond phase I and having such a robust market potential, Remoxy's fate will strongly dictate the fate of PTIE. That being said, PTIE has become much more attractive since the stock lost more than 45% of its value from October 2012 highs in the $5.50 range. Plus, the company is holding on to a nice cash hoard of $1.24 per share with no debt, which puts in a likely solid bottom for the share price should things go sour.

Pain Therapeutics' agreement with King Pharmaceuticals was for King to pay for the research and development costs of Remoxy while Pain took the drug through phase I and phase II trials, both companies collaborated on phase III, and King exclusively commercialized the drug. In addition to research and development costs, King would pay Pain 15% royalties on the first $1 Billion in sales of Remoxy and 20% thereafter. Pfizer has since taken over King's role in this agreement.

Pfizer

Since Pfizer is by far the largest company mentioned here, having a market cap of 200B and many drugs on the market and in their pipeline, whatever happens to Remoxy will be relatively less significant for the company. That said, the drug's huge potential market (which will be discussed in more depth later) and patent protection through 2025 undoubtedly make it a very high priority. The Remoxy story may only be a small part of an investment thesis in Pfizer, but it is an important, and potentially very positive, one.

As per the previously mentioned agreement, Pfizer has assumed the role once held by King Pharmaceuticals and will pay royalties to Pain Therapeutics as described above.

DURECT Corp.

Like Pain, Durect has no drugs that have reached the market yet and has a lot riding on Remoxy. However, they do have a more diverse and further developed pipeline that could potentially buffer a shortcoming in Remoxy. Also like Pain, DURECT has a very healthy looking balance sheet with no debt and $0.55 per share in cash after their latest round of financing in December.

Assessing Durect's royalties is more difficult. According to their website,

...If Remoxy is commercialized, we will receive royalties for Remoxy of between 6.0% and 11.5% of net sales depending on the sales volume.

Thus, like Pain, they will receive a greater percentage in royalties as sales volume increases, however, where the cutoffs for rate increases occurs is uncertain.

To give some visual comparison of the relative importance of Remoxy for these companies, I've made a chart showing their market cap, number of pipeline products (this is the total, including Remoxy, with no regard to point in development), percentage received of low and high volume Remoxy sales, and the stock's price change since October 31, 2012, the day before Pfizer announced that Remoxy would require additional tests.

Company

Market CapPipelineLV SalesHV Sales% Change
PTIE133M315%20%-37%
PFE200B8779%68.5%+9.5%
DRRX119M76%11.5%-16%

multiple sources: yahoo finance, company websites

Remoxy: A Brief History

Remoxy addresses a genuine medical need as a tamper-resistant re-formulation of oxycodone given the prevalence of prescription opioid abuse. It is formulated with Durect's ORADUR technology to prevent the painkiller from being crushed and used for inhalation or injection. Dissolving or heating the medication does not cause rapid release of the drug either.

In December of 2002, Pain Therapeutics and Durect entered into a development and license agreement whereby Pain would pay for the development of the ORADUR-based drug for exclusive rights to commercialize it. In March of 2009, King Pharmaceuticals entered the mix as Pain's sub-licensee and acquired exclusive commercialization rights in exchange for development costs and royalties. When Pfizer acquired King in February of 2011, it took on the role of commercial partner, finalizing the complicated breakdown of Remoxy sales illustrated in the chart included earlier. Remoxy has had a pattern of changing hands up the ladder to ever larger companies. Now that Pfizer, with all of its vast resources, has a hand in it, Remoxy is better positioned to eventually succeed than ever before.

Remoxy has so far failed to gain FDA approval twice, in December 2008 and again in June 2011. From Pain's press release regarding the latter CRL:

The FDA's Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Certain drug lots showed inconsistent release performance during in vitro testing. It is not known at this time whether this is an artifact of the testing method or a manufacturing deficiency.

To address this issue, Pfizer ran two studies in 2012 on the bioavailability and pharmacokinetics of the oxycodone compound, the results of which should be known soon. Investors were hopeful that the completed trials would pave the way for a quick re-filing of Remoxy's NDA, but Pfizer's conference call for Q3 12 made room for doubt (p. 5 of the transcript). Pfizer is planning to meet with the FDA in late March to discuss going forward with Remoxy, but sounded less committed to the idea:

So we're targeting a late March meeting with the FDA to discuss those outputs and agree on a net go or no-go decision. I think one last comment just to make is that I think it's important to remember that our commitment to this area is very strong, and as such we continue to invest in our compound ALO-02, which is an extended release oxycodone, which uses an altraxon platform technology and it's currently in Phase III.

In other words, "if we can't go with Remoxy, no big deal, we've got a spare."

The results of these studies and the meeting with the FDA will give investors a clearer idea of Remoxy's future and likely prove to be catalysts for Pain, Pfizer and Durect.

Remoxy: Market Potential

If Remoxy is approved there is little doubt that it will prove to be a multi-billion dollar drug. Opioids are the most commonly prescribed class of drugs in the U.S. Purdue Pharma's drug, Oxycontin has annual world wide sales of almost $4 billion. With Remoxy's superior tamper-resistance and backed by one of the largest pharmaceutical companies in the world, there is good reason to believe that it will quickly gain a significant chunk of this large market.

Let's take a look at some very conservative numbers. If we put Remoxy annual sales at $1.5 billion, this is what the breakdown would probably look like:

$1.5 billion annual sales

PFEPTIEDRRXTotal
632.5 M250 M117.5 M1500 M

By comparison, Pfizer's one-time expenses for research and development and commercial licensing of $400M are minor and would be recouped within a year.

This next table shows annual sales from the previous table as a percentage of the company's total market cap. Note that royalties from Remoxy would be very sizeable compared to Pain and Durect's current market caps suggesting that a large increase in share price would be warranted should approval (or its increased probability in the eyes of the market) come to pass.

Annual Sales to Market Cap

PFEPTIEDRRX
.3%188%99%

Annual sales comparable to Oxycontin may be more realistic if Remoxy is approved, but clearly even relatively low sales volumes would be solidly profitable for Pfizer and bump Pain Therapeutics and Durect up another tier.

Conclusion

I don't pretend to know with any certainty what the fate of Remoxy, or any of the companies I have written about will be. While Remoxy is a compelling story, there is little solid evidence to point to that suggests it will appear on the market soon.

The potential upside for PTIE and DRRX is huge. Of the two, I feel that DRRX has the better risk/reward profile since it has a more robust pipeline to fall back on. The potential upside for Pfizer is much more limited, but the downside risk is correspondingly minimized.

I believe that all of these are solidly investable companies so long as you are aware of their exposure to Remoxy and what you're getting into.

Source: All You Need To Know About Remoxy