By Jason Napodano, CFA
Back in early May 2013, shares of Pozen, Inc. (POZN) were trading meaningfully below $5. In fact, the price of $4.57 per share back on May 8, 2013, so vastly undervalued the company that we "pounded the table" with respect to our "Buy" recommendation. Today, the shares are just under $6, earning a handsome near 30% return on our table-pounding recommendation. Yet, despite solid gains over the past three months, we still believes the shares remain attractive for investors. The single biggest catalyst on the horizon is a potential partnership for PA-325/40, currently under U.S. FDA review with a PDUFA goal date set for Jan. 24, 2014.
On Aug. 6, 2013, Pozen reported financial results for the second quarter of 2013. Pozen reported revenues in the quarter of $1.651 million, driven entirely by royalties on $23.3 million in worldwide sales of Vimovo at AstraZeneca (AZN). Vimovo sales were nicely ahead of our forecast for $16.0 million in sales. Sales grew by 40% from the second quarter of 2012 and 18% sequentially from the first quarter of 2013.
Pozen collects a 6%-10% blended royalty on worldwide sales of Vimovo. Royalties in the second quarter equated to roughly 7% of the worldwide reported sales by Pozen (note that AstraZeneca reported worldwide Vimovo sales of $24 million). We are pleased with the revenue beat by Pozen, albeit off of a small base. We had slashed our sales forecast for the drug after the first-quarter conference call, when Pozen announced that AstraZeneca was pulling promotional efforts in the U.S. and most of the EU due to slow uptake of the drug.
As it turns out, U.S. sales in the second quarter were flat in the first quarter ($6 million in both Q1 and Q2), EU sales actually grew by $1 million (to $8 million from $7 million), and the established and emerging markets saw the biggest growth ($7 million to $10 million). Going forward, we expect U.S. and EU sales to be flat the remainder of the year, while the established and emerging rest-of-world markets continue their slow and steady uptake. For all of 2013, we model Vimovo sales (as reported by AstraZeneca) at $96 million. And we model $97 million in 2014.
Costs Remain Low
Pozen reported a net loss in the second quarter of 2013 of $4.0 million, or $0.13 per share. This was less than expected due to a combination of higher royalties on Vimovo (noted above) and significantly lower-than-expected R&D costs. R&D expense in the first quarter totaled $3.6 million. R&D expense in the second quarter totaled only $1.9 million. The U.S. application for PA-325/40 and PA-81/40 has been filed and Pozen is now focusing on wrapping up the data package for PA-100/40 in the EU.
We remind investors that Pozen recently completed a Phase I study demonstrating comparable bioavailability (BA), and Pa-100/40 is bioequivalent (BE) to a listed EU reference product in 100 mg enteric-coated aspirin. Pozen still needs to conduct a Phase I pharmacodynamic (PD) study demonstrating appropriate gastric pH control with PA-100/40 to satisfy the European Medicines Evaluation Board (MEB) request on the PA Marketing Authorization Application (MAA). The timing of this second study with PA-100/40 will most likely be dependent on the scope of the commercialization partnership Pozen aims to sign in the coming months. Nevertheless, now that Pozen has effectively wrapped up the majority of these PD, BA, and BE studies on PA, research and development costs should remain low in the coming quarters.
Cash Position Solid
Pozen exited the second quarter of 2013 with $76.9 million in cash and investments. Management believes that cash burn in 2013 will be roughly $22 million, which includes no upfront payment from a commercialization partnership on PA. Guidance for 2013 includes securing a commercialization partner before the end of the year. With the PDUFA set for Jan. 24, 2014, we believe the window to close a deal is narrowing for Pozen. The company either needs to close a deal in the next two months or we believe companies will most likely want to wait until the FDA makes a decision in late January 2014. That said, we think PA could command an upfront payment of $15-$20 million given our belief that peak U.S. sales are roughly $350 million.
Our article linked to above has a detailed discussion and analysis of the PA product and market opportunity. During the company's second-quarter conference call, management noted being in discussions with the U.S. FDA on the application. We see little reason for concern ahead of the Jan. 24, 2014, PDUFA. Pozen's PA -- its "safer aspirin" product -- completed two positive Phase III trials, with outstanding data showing reductions in endoscopic gastric ulcers and dramatically lower rates of discontinuations for patients taking PA-325/40 vs. 325 mg enteric-coated aspirin.
Any pending FDA approval is a wildcard event, but we believe odds strongly favor approval of PA-325/40 and PA-81/40 in January 2014. We find it interesting that the Pozen press release on Aug. 6, 2013, even contained the proposed label for PA:
Proposed PA Indications and Usage (Pending FDA Review and Approval)
PA8140/PA32540 Tablets contain 81 mg or 325 mg delayed release aspirin and 40 mg immediate-release omeprazole and are indicated for patients who require aspirin (1) to reduce the combined risk of death and nonfatal stroke in patients who have had ischemic stroke or transient ischemia of the brain due to fibrin platelet emboli, (2) to reduce the combined risk of death and nonfatal MI in patients with a previous MI or unstable angina pectoris, (3) to reduce the combined risk of MI and sudden death in patients with chronic stable angina pectoris, (4) in patients who have undergone revascularization procedures (CABG, PTCA) when there is a pre-existing condition for which aspirin is already indicated, and to decrease the risk of developing gastric ulcers in patients at risk for developing aspirin-associated gastric ulcers.
We are maintaining our "Buy" rating on the stock. We are comfortable with the filing strategy on PA-325/40 and PA-81/40 in the U.S. We believe that the application included all the necessary data to gain approval in January 2014. Additionally, we are pleased with the company's progress with PA outside the U.S. Guidance from the MEB in the Netherlands suggest that no Phase III trial is necessary for approval in Europe.
We have conducted a discounted cash flow (DCF) analysis on Pozen and arrived at a fair value of $9 per share. The current market capitalization of only $175 million represents a steep discount to the cash on hand, the net present value of the future Vimovo royalties, and the potential to partner PA-325/40 later in the year.
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