Gentium: An Undervalued Orphan Biotech

| About: Gentium S.p.A. (GENTY)

Gentium (GENT) is a biotechnology company that has developed a drug for the prevention and treatment of veno-occlusive disease (VOD), a complication of patients undergoing stem cell transplantation. Hepatic VOD is a clotting disorder in the liver, resulting from therapies administered prior to transplantation, such as radiation, chemotherapy and hormone therapy. Severe forms of VOD can be fatal, driving mortality rates that exceed 80%.

As of August 2, GENT had a market cap of $226M and was covered by only two brokerage firms. GENT is an underfollowed story.

VOD: Key Stats

In excess of 50K stem cell transplants occur annually (according to the World Health Organization); VOD incidence is ~14% of all stem cell transplants. This implies 9K cases of VOD per year. Severe VOD has a mortality rate of 84%.

Defibrotide Reduces VOD Incidence and Mortality

The Food and Drug Administration (FDA) and European Medicines Agency (EMA) have granted orphan status to defibrotide (orphan drugs target conditions that affect fewer than 200K people) for both prevention and treatment of VOD. This is important as it allows GENT to benefit from market exclusivity for 7 years in the US and 10 years in the EU once approval has been granted.

The company has completed three phase III trials - one for prevention and two for treatment of VOD. In 2009, the company announced Phase III results for treatment of severe VOD. At 100 days, 24% of the patients in the defibrotide arm achieved a complete response vs. 9% in the historical control arm (p=0.015).

In a prevention study published in The Lancet in 2012, 22 out of 180 participants had VOD by 30 days after stem cell transplantation (12%) compared to 35 out of 176 in the control population (20%, p=0.048) - a 40% reduction in VOD.

Recent Developments

On July 26, GENT received a positive opinion from the EU's Committee for Medicinal Products for Human Use (OTCQB:CHMP) for defibrotide (defitelio) for the treatment of VOD. The European Commission (EC) will review the positive recommendation and should likely grant formal approval before the end of the year (the EC generally follows the recommendation of the CHMP). This has been a lengthy, unpredictable regulatory process, as the company initially filed for European Marketing Authorization in March 2011, was denied in March 2013, with the opinion ultimately reversed in late July following an appeal by GENT.

Approval Will be a Positive - But the Drug is Already Selling

Given the mortality rates associated with VOD, as well as the lack of available treatment options for patients, the company has had permission to distribute defibrotide on a pre-approval basis through a cost recovery program in the US and a named patient program (NPP) in the rest of the world. As a result, many key opinion leaders (KOL's) are already familiar with the drug prior to its official launch.

In 2012 (according to the company's latest annual report available on EDGAR), GENT generated €29M in total revenue ($38.7M in US dollars at the current $1.33 USD/EUR exchange rate), of which €23M ($30.4M) was derived from NPP sales of defibrotide to roughly 1,200 patients. Sales of defibrotide grew 35% in 2012. As a result, GENT is already a profitable, cash-flow positive biotech company - despite not yet having an approved product. GENT also has a fairly clean balance sheet; at the end of March, GENT had €11.7M in cash on its balance sheet and €2M in debt.

Moreover, the current price of defibrotide (~€19K per patient, or ~$25K USD; calculated by dividing NPP revenue by the # of patients receiving defibrotide in 2012 per the company's latest annual report) appears modest given the orphan nature of VOD and the high mortality rates associated with VOD. Many approved orphan drugs command prices that exceed $100K.

While drug launches can prove difficult to handicap, one positive of the long path towards approval has been the amount of time that GENT has already been in the market through its NPP-based sales. Said another way, the defibrotide launch has been somewhat de-risked relative to other drug launches. The company already has the benefit of having identified many key prescribers.

Future Catalysts:

8/13: Reports 2Q Results

8/14: Presenting at Wedbush Life Sciences conference in NYC

10/10-11: Chronic GVHD: From Biology to Clinical Practice (scientific conference)

4Q: Final approval by the European Commission (within 3 months of the recommendation of the CHMP)

4Q: GENT expects to file NDA with the FDA prior to the end of the year.

2014: FDA rules on defibrotide NDA

Timing uncertain: studies on additional potential indications for defibrotide (phase III: acute graft versus host disease; phase 1/2: add-on therapy for multiple myeloma).

Valuation is reasonable

I generally analyze biotech valuations through an enterprise value (EV)/sales framework. Relevant orphan comps include Viropharma (VPHM), Aegerion (NASDAQ:AEGR), NPS Pharmaceuticals (NASDAQ:NPSP), Jazz (NASDAQ:JAZZ) and Alexion (NASDAQ:ALXN). These companies trade at enterprise value / 2013 sales multiples of anywhere from 4.7x to 61.2x. GENT recently traded at 4.0x and 2.4x 2013 and 2014 consensus sales estimates, respectively.

Given the fairly early stage of defibrotide penetration in the market, the orphan protection / market exclusivity enjoyed by defibrotide in the US/EU, the potential for FDA approval in 2014, and the possibility of improved pricing following approval, I would expect GENT's trading multiple to begin to approach the multiples exhibited by larger orphan peers.

Assuming the stock could trade at 4x 2014 consensus sales - still at the low end of its peer group - this implies a share price of $23.50, 64% above the August 2 closing price of $14.24.

Selected Orphan Drug Companies

Ticker / Company Product # Analysts Covering Stock Approx revenue / patient 2014 Consensus Revenue $M EV/ Sales
ALXN / Alexion Soliris 22 $400K $1,910 11.7x
VPHM / Viropharma Cinryze 13 $350K 561 3.8x
JAZZ / Jazz Xyrem 14 $60K 1020 4.6x
AEGR / Aegerion Juxtapid 9 $250K 177 14.4x
NPSP / NPS Gattex 11 $300K 235 7.5x
GENT / Gentium Defibrotide 2 $25K 89 2.4x
Click to enlarge

Sales estimates and # of covering analysts sourced from Yahoo! Finance and current as of August 2; revenue per patient based upon company documents.

Disclosure: I am long GENT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.