In 2011, the global diabetes market was valued at around $51B. That figure is expected to grow by a CAGR of ~10% to nearly $100B by 2018. 370 million individuals worldwide have diabetes, and 550 million are expected to have diabetes by 2030. With a market that large, there are plenty of opportunities. One of the biggest opportunities is developing a diabetes treatment that is long-acting. Currently, the leading therapeutics in the U.S. are all once-daily injectables. Patients often fail to take their drugs consistently, so a once-weekly alternative would be nothing short of a "game changer".
Why Big BioPharma Bought Out A Company That Was Bleeding ~$550M For $7B
Analysts were once rosy about Amylin's once-weekly drug, Bydureon, which was approved by the FDA in late January as a treatment for only type 2 diabetes. But Bydureon's multiple rejections relating to cardiovascular, thyroid cancer, and pancreatic concerns have weakened the growth story. Furthermore, even Amylin's own trials suggested that the product is inferior to Novo Nordisk's (NYSE:NVO) once-daily Victoza. As much as convenience is important to diabetes patients, physicians are unlikely to transition patients from one drug to a less effective, albeit longer-acting, alternative. Despite these myriad of concerns, the product is still expected to yield annual sales north of $1B.
Bydureon was also still alluring to big BioPharma. Bristol Myers (NYSE:BMY) and AstraZeneca (NYSE:AZN) bought out Amylin -- a company that has never been profitable in pharmaceuticals -- for $7B just to get their fingers on the GLP-1 receptor agonist. This deal came at a 50% premium to the original bid and a 150% premium to the 2012 starting price. Other large pharmaceutical companies were also involved in the bidding war, including Sanofi (NYSE:SNY), which ranks #2 in the diabetes market with a 19.2% share in 2011. Clearly, big BioPharma likes the potential of long-acting treatments even if there are demonstrated clinical drawbacks.
AntriaBio's (OTCQB:ANTB) Long-Acting Candidate Looks Substantially Undervalued
If big BioPharma is willing to pay $7B for a company that is bleeding hundreds of millions in cash for a long-acting diabetes drug that comes with health concerns, imagine what large-cap producers would be willing to pay for a long-acting diabetes drug with limited health concerns. It is for this reason that AntriaBio looks substantially undervalued from a speculative standpoint alone. At a valuation of just over $40M, AntriaBio potentially has a superior product to Amylin with broader patient population coverage and a proven delivery technology.
This small-cap biopharmaceutical producer's lead product is AB101, which is a once-weekly injectable drug of basal insulin for type 1 and type 2 diabetes patients. It is important to note that basal insulin is normally supplied to the blood regardless of eating, and it causes tissue absorption of sugar to reduce glucose levels in blood. In its preclinical studies, AB101 demonstrated reproducibility from one injection to the nex, uniform insulin release, and no injection site reaction. A Phase I trial is expected to begin in 2H13 and will involve as many as 20 patients. It will be followed by a 50 patient Phase II study.
AntriaBio's promising potential is met by equally promising numbers. Lantus -- owned by Sanofi -- is currently the top basal insulin drug, and it generates sales north of $6B. Its main competitor is Levemir, which is owned by Novo Nordisk and brings in $2B worth of sales. These companies essentially control the entire basal insulin market.
How much could AntriaBio be worth? For illustrative purposes, assume the market grows at a CAGR of 10% and AntriaBio captures only a 1% share by 2018. Under a 10% discount rate, 2018 sales alone would be worth $8M in present value. The stock trades at around 5x the discounted 2018 share estimate. Sanofi, which was worth a little over $100B 5 years ago, turned out to trade at 4.6x 2012 sales discounted backwards by the same rate. So assuming markets are forward-looking, AntriaBio is trading more or less as if it will only penetrate 1% of the market 5 years from now. This, of course, substantially understates the company's potential. As the company moves closer towards its Phase I study, the stock price is thus likely to be catalyzed from increasing speculation.
At the same time that AntriaBio provides strong upside, it also provides low downside. The reduced risk is a result of the company's proprietary technology, which involves PEGylated insulin. "PEGylation" consists of attaching a PEG polymer chain to a molecule, such as insulin. PEGylated products have already been approved by the FDA before, and AntriaBio is not using any new excipients. Thus, there aren't many "negative surprises" one should expect; because the science is already there, the path to commercialization is relatively simple.
Novo Nordisk Falls Behind
Before AB101, Novo Nordisk's Ryzodeg was ultimately the most promising basal insulin product set for FDA review. But it still requires three weekly injections for treatment of type 1 and type 2 diabetes. The product has been approved in Japan, Mexico, and the EU and is expected to be launched around late 2013 to 1H14. However, in early February, the FDA rejected the candidate and called for greater cardiovascular data, which the company says it won't be able to provide this year. Among the FDA's various complaints were that the drug could increase the risk of non-fatal heart attacks, non-fatal strokes, and CV death. In total, this decision will likely kick the can back to a ~2017 US launch and cost billions worth of lost dollars.
The FDA rejection was associated with a 14% drop in the stock price and a $14.5B loss in shareholder value around the announcement. Yet again, the market has clearly indicated that long-acting diabetes drugs hold considerable promise. This delay also gives AntriaBio the time it needs to establish itself as the market leader in the long-active basal insulin market.
Bristol and Novo Nordisk have risen dramatically over the past 5 years -- 88% and 143%, respectively. The former now trades at a respective 36x and 19.3x past and forward earnings versus corresponding figures of 25x and 18.3x for Novo Nordisk. Bristol is giving its earnings call later today, and the stock has fallen 2% on Wednesday and 0.4% in after hours largely as a result of negative speculation regarding performance. Expectations have been set quite high in the past (3 of the last 5 quarters have been "misses"), so I believe there is still downside risk on the stock from any earnings announcement.
Even in the absence of a negative earnings announcement, Bristol looks overvalued. It has an earnings yield of 2.8% but an expected growth rate of 8.6%. Accordingly, I recommend avoiding the stock and gravitating towards more undervalued takeover targets. Bristol, which is badly in need of a pipeline catalyst, has demonstrated that the long-acting diabetes market is the place to be. AntriaBio, with its promising technology and undervalued product, provides compelling risk/reward. The mere thought of it making a move on this multi-billion dollar market could be enough, as Amylin proved, to attract large suitors. While this will help keep the stock price up, the Phase I study will help drive increasingly favorable speculation given the tremendous discount to intrinsic value.
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