Two weeks ago, Titan Pharmaceuticals (NASDAQ:TTNP) saw volatility for the ages. It began the week with losses of 40% only to end the week with gains of 40%. This volatility occurred as the FDA provided negative comments about the company's drug Probuphine, but then gained after the FDA Advisory Committee recommended the approval of the drug. The drug, Probuphine, has been developed for the treatment of opioid abuse, using buprenorphine, which will compete with the billion dollar drug Suboxone. At first glance, the upside for this company appears unprecedented, but as you dig deeper you realize that there are many questions that must be answered, even with an approval.
My Concerns With Probuphine
In a previous article I shared my concerns that Titan's product may not be commercially successful. I admitted that I have not followed the company that well but made assumptions based on my knowledge of opioid abuse and the behaviors of those who would be patients. As I explained, I used to work for the Department of Corrections with inmates serving long-term prison sentences for drug-related offenses. In the program, Suboxone was given and patients responded well. However, my concern with Probuphine is not its effectiveness or its potential market, but rather its delivery (the drug is implanted into the patient as a long-acting up to six months solution). I expressed concerns that the drug does not attack the psychological part of addiction, as addicts often require the constant dosing of Suboxone in a similar way that smokers who quit desire a lollipop or need to chew gum to satisfy their oral fixation. These were my initial concerns, but I have since found more concerns that should be addressed.
More Concerns Regarding Probuphine
Fortunately, I have maintained close contact with many of those that I used to work with while at the Department of Corrections. And during last March Madness weekend, I spent the Saturday watching the games with a physician who prescribes Suboxone. This person wishes to remain anonymous, but throughout the day I spent time educating him on this new delivery of buprenorphine (Probuphine) and right away he identified several issues that Titan Pharmaceuticals and its partner Braeburn Pharmaceuticals will have to overcome. Here is my take from that conversation including several potential problems the company will encounter.
Who is Going to Prescribe?
After its approval, Probuphine will fall under the same category as the drugs Suboxone (buprenorphine/naloxone in film form), Actavis' (ACT) generic (buprenorphine/naloxone in tablet form), and Subutex (buprenorphine alone). In order to prescribe any of these three medications, a physician must undergo a certain class (in Ohio) or partake in additional training. With Probuphine, a small solid rod is implanted in the upper arm and then removed at the end of the treatment period, therefore, who will prescribe the medication? Will it be a surgeon, and if so will these surgeons have to obtain the same training used for other buprenorphine drugs?
If current prescribers will be allowed to use Probuphine, then in what way is it more convenient to the physician's current prescribing of Suboxone? It is quite easy to prescribe Suboxone, as this physician explained "it is a very simple drug with very black and white interactions." However, with a rod, you could run into various issues with delivery, complications with the rod itself, and additional reactions that may develop. Also, what will be the reimbursement strategy for the physician? Will the physician have to purchase the drug prior to it being prescribed, and how will this work with the pharmaceutical industry and the FDA's strict policy on prescribing the drug? These are all questions in which there are no current answers, and will be among the first asked to those marketing the drug to prescribers. The real question is how will the company respond to these questions?
What is the Benefit for Physicians in Terms of Revenue?
For almost all physicians who prescribe buprenorphine, they charge a monthly rate, and almost none accept insurance. It is a cash only system, with most physicians charging between $150 and $300 per month for the service. This is a constant creator of revenue for the physician, but with Probuphine being implanted only one time for a six month dosing, how does this benefit the physician? The physician I spoke with explained that pricing for treatment is based on location, demand, and takes into account that those addicted to drugs are typically of lower economic class, meaning they can't afford expensive treatments. Therefore, charging patients $1,000-$2,000 per treatment cycle is not sensible to the patient, but the physician is not going to sacrifice their own revenue to offer an equal product. The physician will most likely prefer the once a month prescribing method, and its $150-$300 system. Not only does it produce greater revenue, but also allows for more interaction and better compliance. With that being said, what is the financial incentive for prescribing Probuphine for the physician?
Restrictions on Treatment
Another way that Probuphine could cut into the earnings of physicians, with its one time every six month cycle, is that those who prescribe buprenorphine are only allowed to treat up to 100 patients at a time. Therefore, with the need for office visits diminishing, how would the FDA adjust this law for physicians? And would the FDA adjust this law for Probuphine, and how would it affect other buprenorphine products?
In my opinion, this is the most significant question in getting a limited number of prescribers to switch from Suboxone to Probuphine. With Suboxone, physicians have a steady stream of revenue, think about it, $150 times $100 equals $15,000 per month, therefore how would this be accounted for with the use of Probuphine? Would the doctor be able to charge $900 for a six month treatment, and if so, how many patients can really afford the treatment?
Finally, as my friend was explaining, the government continues to place more overhead work on prescribers every year, and the FDA continues to place new restrictions to ensure the most thorough of control over this drug. Therefore, if Probuphine is used on such a random basis, how can the physicians ensure that they meet all of the FDA's reporting requirements by prescribing such a large supply of the medication (up to six months)? Because after all, they can not ensure that patients will return for maintenance therapy without the incentive of receiving a new prescription. The six months of unsupervised treatment could create regulatory issues that are currently present for other buprenorphine products, and also the physician.
The final noted problem is with pricing for the drug. Currently, buprenorphine products have monthly costs of $750 average (based on $10 per tablet/film at 2.5 per day). Therefore, the price is expensive, so does this mean that for one treatment the price is going to be $4,500, or anywhere close? If so, this would become a massive problem, and a guaranteed sign of failure, because with physicians assuring that they receive their earnings, the total cost of treatment could become $6,000 for a single session. And since this patient population is not known for their large bank accounts, this would be unattainable for those seeking treatment. In order for the company to succeed, pricing will be closely watched and it will have to offer a price that is so competitive that it counteracts all of the other potential issues that I have described.
This is a company that faces many hurdles with the success of this product. It must overcome regulatory hurdles that are already set for buprenorphine, it must address issues with patient acceptance, convenience, physician reimbursement, physician revenue-stream concerns, cost, and let's not forget the increasing competition that already exists. And although the market for buprenorphine is massive, and largely untouched, the company must answer these unanswered questions before any outlook can be created. With that being said, I am neither long nor short, rather someone knowledgeable in the space with great connections to those directly involved in the prescription of buprenorphine. Personally, I would love to see the product succeed, and if so then this is a stock that could see incredible upside.
This is a company with a market cap of just $125 million and when you consider that Suboxone reported sales of more than $1.30 billion last year, with significant growth from "film", you realize that it's a massive market opportunity. However, the revenue of Suboxone does not tell the whole story, as it's estimated that nearly one million people are in buprenorphine treatments. It is also estimated that more than 2.5 million are considered "dependent" on opioids, and many Department of Corrections reports suggest as high as five million in the U.S. Therefore, "if" Probuphine can overcome the listed issues, then sales of $500 million are not unattainable, nor is an even greater amount of revenue possible for the drug used as a treatment for chronic pain (which I believe is a better indication). As a result, with its microcap valuation, such sales could easily catapult the stock significantly higher, possibly four-five times peak sales such as other biotechnology stocks with approved products. Therefore, great upside exists if the company can answer these questions and succeed in its uphill battle.
In the end, I view this not as a "short case" but rather an invitation to the company to explain their plan of attack and to answer these lingering questions. Can the company really convert surgeons and convince them to take the class to be able to sell Probuphine, and find a balanced price that is realistic for patients? If so, then it's possible that this could be a gold mine for longs.
Disclosure: I am long ACT. 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.