Recently, I met someone who told me about the struggles of a young family member who had been diagnosed with growth deficiency. This young boy needs to receive daily injections of human growth hormone (hGH) until he reaches normal height. Beyond the sadness this child must feel because of the physical differences between himself and his peers, he also has to cope with the restrictions that come with daily injections of hGH. Additionally, if this boy's family ever wants to take a trip, or he wants to go to a friend's house, he must carefully plan ahead, and even then he might run into problems. He has lost much of the sense of freedom and opportunity that his friends enjoy without a second thought.
This story sparked my interest on two fronts: why does this young boy need injections (as opposed to ingesting hGH orally) and why does he need to receive these injections daily? The answer to these two questions runs as follows:
- In order for a medicine to treat a patient, it needs to get into the bloodstream. Normally, a patient can swallow the medicine and it will seep into his or her bloodstream through the stomach lining. However, in the case of hGH, because of its large size and sensitivity to stomach acids, it cannot seep through the stomach lining, and must get injected in order enter the bloodstream.
- Children with growth hormone deficiency need to stick to a very rigorous treatment schedule to correct their imbalance. In order to ensure that these children return to normal size, they must receive daily injections.
These answers raise two issues. First, have any companies attempted to either make an oral version of hGH or a version that does not require daily injections? Secondly (and this comes from my interest in finance and pharmaceutical companies), which companies have hGH products, and where do they have market share?
In this article, I will address these, and related topics, and give us a clear picture on the current hGH market, and its future.
Five companies currently control the market for hGH products:
Name of Product
Revenue (2011, in mm's)
% of revenue from USA
% revenue from Intnl
Novo Nordisk (NVO)
Eli Lilly (LLY)
Merck KGaA (MKGAY.PK)
*These three drugs -- Genotropin, Humatrope, and Saizen -- do not have an explicit geographic breakdown of their revenue. I have made an approximation based on available information.
Based on these revenue numbers, the current market for hGH products totals $3.5bn, and will continue to grow. However, as they all rely on daily injections, their approach dramatically diminishes patients' quality of life. However, there is a company that seeks to address this problem.
Prolor Biotech: Longer Lasting hGH
Prolor Biotech (PBTH), an Israeli company, has developed "a short, naturally-occurring amino acid sequence (peptide) [called CTP] that has the effect of slowing the removal from the body of the therapeutic protein to which it is attached." (Annual Report p.3)
One of the therapeutic proteins that can use PBTH's peptide -- CTP -- is hGH. The effect of PBTH's peptide on hGH allows patients to reduce their injections from daily to weekly. Regulators around the world have taken notice -- two weeks ago European regulators granted PBTH's product orphan drug status, which gives the drug 10 years of market exclusivity beginning at product launch. This follows the lead of US regulators who granted PBTH orphan drug status two years ago (see previous link). US orphan drug status gives PBTH 7 years of market exclusivity, reductions in regulatory fees, certain tax credits and additional regulatory support.
PBTH's peptide for hGH has already been proven safe in hGH deficient adults, allowing it to move onto phase III studies, and has enabled the company to proceed with phase II studies in children.
We cannot overstate the significance of this development. As mentioned above, the market for hGH last year reached $3.5bn for the companies making daily injections. Surely, PBTH's daily product, which has been granted market exclusivity, will take away large amount of market share from these established players.
Significantly. the technology used by PBTH has already been successfully employed by Merck (MRK) for use in one of its therapeutic proteins. So, despite the inherent risks, we can view this as a positive sign for future regulatory acceptance of PBTH's hGH drug.
To properly evaluate PBTH, we should employ a discounted cash flow (DCF) model to develop an accurate valuation for PBTH. Our DCF will take numerous factors into consideration, and should yield some interesting results.
While we can glean a lot of information from seeing the market potential, both in terms of current value and macro trends, a precise valuation needs a DCF. Our DCF model will assume the following:
- PBTH's Adult CTP-hGH will not recognize any revenue until 2016
- PBTH's Child CTP-hGH will not recognize any revenue until 2017
- Child and Adult hGH split the market for hGH evenly
- PBTH will eventually take 60% of the hGH market, and it will do so in 3 years after launch of Adult hGH and 2 years after launch of Child hGH
- The following discount rates
- Adult hGH -- 36%
- Child hGH -- 52%
I will now unpack this information following the above order. Let us put some meat on the bones:
- PBTH's phase II Adult CTP-hGH took about two years, assuming another two years for phase III, and one more year for NDA approval, we get three years until revenue recognition.
- PBTH's Child CTP-hGH started its phase II trial in February 2012, and its trial will run until December 2013. Assuming another two years for phase III work, and one year for an NDA that gets us until 2017
- On page 64 of its annual report, Merck KGaA reports some estimates that the incidents of GH deficiency in adults numbers 3 in 10,000, and in children between 1 in 4,000 and 1 in 10,000. The former numbers for children put in on par with adult GH deficiency, but the latter draws distinctions between the two. In order to maintain conservative estimates, I will use the one that brings them to parity, even though PBTH has made more progress on its adult hGH product, and therefore would make for a higher valuation if I assumed a larger market for adult hGH.
- Since both the EU and the FDA gave orphan drug status to PBTH's GH, which shows the significance of this discovery, we can assume a market share larger than 60%. Moreover, because Child hGH can ride on the back of Adult hGH, it is likely to gain adoption faster than Adult hGH. However, in order to maintain our conservative valuation, I will maintain a 60% estimate..
- I give different discount rates to the adult and children's versions of hGH because of their different stages of the regulatory approval process. According to estimates, 36% of drugs that reach stage III do not receive approval, and 52% of phase II drugs do not receive regulatory approval. I have therefore used these numbers as a discount rate in our DCF model.
Using these assumptions, considering a $3.5bn market, and a 10 year time horizon, we find that PBTH has a DCF of $413mm, or a 25% discount to its current price. Importantly, PBTH has other products besides hGH in its stable. For example, it has begun developing products that cut down the number of injections to treat hemophilia and type II diabetes. Finally, it has the patent rights for the peptide that increases the lifespan of therapeutic proteins, which has much broader applications.
In short, taking the conservative DCF valuation alone reveals a discount to PBTH's current share price, even without taking into account PBTH's pipeline, and its strong peptide asset.
Daily To Weekly: Close But No Cigar
Earlier last month, Novo Nordisk got word from the FDA that its longer lasting insulin, which reduced the amount of injections required, would not receive FDA approval. On this news, NVO shares plunged 15%, but Sanofi-Aventis (SNY), which makes Lantus, one of the leading daily basal insulin, jumped 3.2%. The market rewarded SNY after this FDA rejection because any other result would have severely threatened its market leading position. From here we can glean the importance the market places on drugs that can reduce injections from daily to weekly, and the benefits that could bring to PBTH going forward.
From the hGH manufacturers we have been discussing - NVO, PFE, LLY, RHHBY, and Merck KGaA -- PFE and LLY have lost the most in terms of the "patent cliff". That makes them logical candidates to buyout PBTH. However, we need to remember that although the hGH segment of PBTH is the most exciting, it has many more promising and profitable ventures as well.