Today's NPS Deal- Putting Drugs In The Right Hands

| About: NPS Pharmaceuticals, (NPSP)

Today NPS Pharmaceuticals (NASDAQ:NPSP) repurchased the ex-North America rights to its two main orphan drugs, Gattex/Revestive for the treatment of short bowel syndrome and Preotact/Natpara for hypoparathyroidism from Takeda (OTCPK:TKPHF). In exchange for repurchasing the rights, NPS is giving Takeda $50,000,000 in shares with the potential for $30,000,000 in additional shares or cash to be paid if and when combined worldwide sales are greater than $750,000,000 for the two products. Important to note, in addition to the worldwide rights, NPS is purchasing all existing inventory and all marking, sales, and research data for Revestive and Preotact. This data will be much more valuable in the hands of NPS than it was to Takeda as the company focuses its attention exclusively on rolling out these two products. Also announced today, NPS is bringing on Sandy Smith, a former president of Genzyme's international unit as a commercialization consultant focused on NPS's international expansion.


Revestive/Gattex has been approved in Europe and the U.S. for short bowel syndrome and NPS is currently focused on the product rollout. Revestive was approved in mid-2012, but as of today Takeda had not made any sales. NPS, despite only receiving U.S. approval in December, already has patients on the drug, signed distribution partnerships, has 120 doctors trained, and is working on agreements with insurers. In the sixth week of the Gattex's launch 72 prescriptions have been written and the company continues to expect 200-300 patients on the drug by the end of the year. The difference in rollout speed highlights the value of putting Gattex back in the hands of NPS.

Assuming the European market is similar in size to the U.S. market (15,000-25,000 patients) Gattex has tremendous revenue potential. Prior to Gattex pricing, which came in about three times what analysts were expecting, peak sales were estimated at $250-$350 million. I believe that is conservative, especially considering the price of $300,000 per year and the apparent market acceptance of that price, and estimate peak U.S. sales at $450,000. With a similar market size in Europe, even if the drug is priced lower due to harsher reimbursement climates, I believe the European market could add an additional $300 million. Previously NPS would have received double digit royalties (about $45 million). Now it can collect the whole thing.

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Additionally, consolidating sales, marketing, and patient relations will prevent a duplication of efforts and allow NPS to drive value of the product. NPS CEO Francois Nader announced that one of the first things the company is doing is expanding its patient registry to European markets. This registry will allow NPS to collect valuable patient information that can drive sales efforts. For this year, NPS does not believe the additional costs will be material, reiterating operating expense guidance of $130-$140 million for 2013. While the costs of running a global operation will be ultimately be somewhat higher, the additional revenue potential is well worth it.


Preotact/Natpara product has been approved in Europe for treatment of osteoporosis in post-menopausal women with a high risk of fractures and NPS is currently working to file the U.S. biologics application for Natpara in the treatment of hypoparathyroidism. Preotact has been marketed in Europe since 2008 and NPS received royalty payments of $8-$10 million from 2008-2011. These royalty payments are monetized through a non-recourse debt agreement with DRI and total payments to DRI would need to meet $250 million before payments revert back to NPS. In 2012, manufacturing issues prevented the sales of Preotact starting in August and royalty payments to NPS dropped to just $4.8 million.

These manufacturing issues are the same issues that have caused delays to the filings of the U.S. biologics application for hypoparathyroidism. The company is currently running various experiments to isolate the problem, expects to have data by the end of the second quarter, and still expects to file the U.S. biologics application by the end of 2013. According to Dr. Nader, the company will reassess the osteoporosis indication and look at the possibilities of filing for the hypoparathyroid indication outside the U.S. This acquisition gives NPS greater control over manufacturing and sales. One of the major initiatives announced by Dr. Nader is the integration of R&D work between the U.S. and European operations in working towards resolving the manufacturing issue. By putting control fully in NPS's hands, the company can ensure the appropriate attention is being paid.

Great Deal at a Great Price

A question asked by Alan Carr of Needham and Company on today's conference call perfectly highlights the value of this deal for NPS. Mr. Carr asked why Takeda had not yet started the process of approaching countries in Europe to begin negotiating on the rollout of Gattex, to which Mr. Nader replied "Ask Takeda." For Takeda, Gattex and Preotact were little fish in a big pool of products. Their potential revenue contributions were not meaningful enough to exert the high level of effort required to launch drugs in these orphan categories. By taking a buyout in the form of stock, Takeda is able to remove its responsibilities and put the drug in the hands of a company focused on maximizing their value. Ultimately this will be a great deal for NPS, for Takeda, and for shareholders.

Disclosure: I am long NPSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.