A few weeks ago I wrote an article about Prolor Biotech (PBTH) where I gave a broad outline of the company's breakthrough product -- a peptide (called CTP) that extends the life of therapeutic proteins. Because of the protein's extended life, patient injections (the only method available to administer therapeutic proteins) get reduced. In that article, I highlighted PBTH's progress in attaching their peptide to human growth hormone (hGH), and the positive effects that could have for both the adult and child hGH markets.
To briefly rehash, PBTH has made significant progress in developing both its adult and child hGH products. On the adult front, PBTH has conducted a successful phase 2 trial, and expects to proceed with a phase 3 trial in the near future. Moving to the child hGH, PBTH began their phase 2 trial last year, and should have results from that trial available in the near future. Taken together -- we used a DCF model to show that PBTH's value stood at around $400mm, or around a 25% discount to the current market valuation.
In this article, I would like to flesh out the details of other assets in the PBTH pipeline, and use that information to further refine PBTH's valuation. Specifically, I will focus on two other items in PBTH's pipeline -- its clotting factor drug for hemophiliacs, and its diabetes drug. Both of these drugs have not moved passed the pre-clinical phase, so using the DCF valuation seems unreasonable. Therefore, I will try to take the hGH valuation, combine it with my analysis of these products, and try to come up with a relative valuation relative to other development stage pharmaceutical companies.
Blood Clotting Factors
Hemophilia is a disease in which people do not produce blood clotting factors which stop blood flow in the event of a cut or scab. The current course of treatment varies from case-to-case. However, in most cases, patients need to receive an infusion either at a hospital, or in some cases, can self-administer the shots. The efficacy of these infusions varies from patient to patient, but all patients must continually monitor themselves to ensure they have proper levels of clotting factors in their system. PBTH seeks to provide patients with some measure of relief by providing a longer acting blood clotting factor. While this will not completely solve the problem, even providing patients with this terrible disease with the most minor level of comfort has tremendous value.
PBTH enters a $2bn market for blood clotting factor drugs with Novo Nordisk's (NVO) NovoSeven having the largest share of the Factor VIIa market, and Pfizer's (PFE) BeneFIX having the largest share in the Factor IX market (different Factors for different types of hemophilia). PBTH has drugs under development for both of these factors, and they have received positive preclinical results, and plan to initiate a Phase II trial later this year. They plan to start with a phase II trial because of the significant dangers of testing their clotting factor drugs on completely healthy patients.
Now that we have an overview of PBTH's activity in the clotting factor space, let's move to see their activity in the diabetes space.
Diabetes comes in two flavors -- type 1 and type 2 (type 2 taking the vast majority of cases). Diabetes patient's pancreases do not produce enough insulin -- which removes glucose from the blood and into cells. Treatments for diabetes seek to either directly (through straight insulin injections) or indirectly (through stimulating the pancreas to produce more insulin) increase insulin production. Incidents of diabetes has grown dramatically in the past 15 years, doubling between 1995-2010, from 135mm to 284mm and scientists expect it to double again between 2010-2030 to close to 500mm.
In a previous article, I focused on the work AntriaBio (OTCQB:ANTB) has done in improving the longevity of insulin, but in this article I want to highlight the work PBTH has done in effecting indirect production of insulin.
As mentioned in my article on ANTB, one of the main ways to stimulate pancreatic production of insulin is by injecting a hormone called GLP-1. Many companies have done a lot of work in this field, with the most recent innovation coming by way of BMS's (BMY) and AstraZeneca (AZN) once weekly Bydureon (part of the Amylin acquisition). However, despite the gains made in the GLP-1 space, patients taking this protein have a higher risk of weight gain. PBTH is developing a longer lasting GLP-1 that reduces the risk of weight gain in patients taking GLP-1 protein. PBTH estimates their drug addresses a $2bn market, with that number growing larger as incidents of type 2 diabetes increase. PBTH has received positive preclinical data, and plans to start a phase I study this year.
Now that we have a summary of PBTH's work in the blood clotting factor and diabetes space, we will now take a look at how PBTH plans to monetize these two assets.
In marketing a drug PBTH has two big strikes against it. First, the company doesn't have the infrastructure -- both capital and operational -- to market a drug that needs to reach a wide audience. Second, as an Israeli company, it doesn't have the local market expertise necessary to establish itself as a player in world markets.
Using this background, we can address the two drugs we have covered in this article. When it comes to the blood clotting factor drugs, PBTH needs to get its drugs in the hands of hemophiliacs. Hemophiliacs need to get treated (at least for the most part) in one of only 50 hemophilia centers located across the USA. Considering the small amount of terrain PBTH needs to cover, they can market this drug independently.
However, when it comes to their diabetes drug, PBTH needs to cover a much more diffused population, and as such, overcome significant marketing obstacles. Additionally, PBTH has much higher development costs associated with the diabetes drug, further giving them reason to find a partner in this venture.
In short, PBTH has three significant drugs in various stages of development -- hGH (for children and adults), blood clotting factors, and a diabetes drug. All of these drugs currently have established markets and standards of care, with PBTH's peptide providing additional improvements. As we mentioned in the outset, we estimated the DCF of the hGH drug to stand someone in the ballpark of $400mm, and its total addressable market at around $3.5bn. The blood clotting factor, and diabetes drug each have $2bn markets, giving PBTH a total of a $7.5bn actual market across all of their product lines. Despite this significant market size, and the progress PBTH has made in the development of its hGH drug, it has not seen the valuation one might expect when comparing it to similar companies.
Weight Loss Drugs: Small Market Large Valuations
A lot of ink has been spilled over the weight loss products that have come out from Arena Pharmaceuticals (ARNA), and Vivus (VVUS). In short, both ARNA and VVUS received FDA approval in July of last year to market their weight loss drugs. Both of these drugs received a lot of press, and sky high valuations. Immediately following approval, VVUS traded at a market cap of ~$3bn and ARNA at ~$2.5bn. Since then, the both stocks have come down to earth in a major way. The main reason for this lies in the fact that these drugs do not address a particularly large market. Despite all the fanfare, the total market for prescription weight loss drugs barely gets over the $1bn mark. See chart for summary of the current major products on the market
Revenue (in mm's)
What's most surprising about this, is that we have seen this movie before. Genentech (now Roche) introduced Xenical back in 1999, to similar fanfare, and while the drug started off strong (something we cannot say for our friends at ARNA and VVUS) it quickly tapered off after people realized they needed to do more than just take this "miracle drug", but I digress.
The main point here runs as follows: granted ARNA and VVUS have gone much further down the road, and indeed reached their destination, when it comes to their drug development process. Additionally, they both have products beyond their weight loss drugs. However, despite the tiny size of their market, investors still assigned them a huge valuation. Using the same math, as investors used in ARNA and VVUS (essentially attaching a market cap of 3x the total addressable market) would yield a $21bn valuation for PBTH! Obviously, we cannot do that, because of the differences in stages of development, but I think the point comes across clearly: PBTH has a much larger market potential than its peers yet doesn't receive the same recognition.
Finally, we have not even addressed the underlying patent that PBTH holds on its peptide, which has broad applications to all therapeutic proteins. However, even without considering this, we see that PBTH justifies a much higher valuation than it currently has, and it is only a matter of time before the secret gets out.