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The Progenics Background

Progenics Pharmaceuticals (PGNX) is a biotechnology company that develops innovative therapies for oncology. Their primary focus is developing treatments to improve the lives of prostate cancer patients. Progenic's first commercialized drug, Relistor, is a subcutaneous injection for the treatment of opioid induced constipation (OIC). Relistor is currently being commercialized worldwide, other than Japan, by Salix Pharmaceuticals (SLXP). Ono Pharmaceuticals has Japan commercialization rights for Relistor. The primary revenue generator for Progenics Pharmaceuticals is Relistor commercialization milestones and royalty payments from Salix.

How Opioids, Constipation, And Relistor Are Intertwined

Opioid analgesics are usually prescribed for patients that suffer from chronic pain. A common side effect for many patients is constipation. Relistor seeks to target the underlying cause of the constipation in patients by starting from the source. Opioids relieve pain by interacting with mu-opioid receptors in the brain. However, when opioids interact with mu-opioids outside of the central nervous system in the gastrointestinal tract, constipation occurs. The primary benefit of Relistor's mu-opioids is that it does not cross the blood-brain barrier and does not come into contact with mu-opioids in the gastrointestinal tract. This allows Relistor to effectively and efficiently decrease the constipation without interfering in pain relief.

Relistor subcutaneous injection was approved in the US in 2008 to treat opioid causing constipation in patients when responses to laxatives were insufficient. Relistor is already approved for use in 58 countries including the European Union, Canada, and Australia. Relistor is also already approved in the EU and Canada to treat opioid causing constipation in patients when responses to laxatives were insufficient.

Relistor Complete Response Letter from July 2012

On July 27, 2012, Salix and Progenics received a Complete Response Letter (CRL) from the U.S. FDA following the review of a Supplemental New Drug Application (SNDA) for Relistor injection for subcutaneous use for the treatment of OIC in patients with chronic non-cancer pain. The CRL requests additional clinical data. Shares plummeted from their $10.80 July 27, 2012 closing price the very next day and continued to fall to the $1.52 range in November 2012.

However, since then, Salix and Progenics have continued to work together with the FDA to generate a path forward for further regulatory review of Relistor's sNDA for chronic pain. The FDA informed Salix and Progenics that it would seek advice from an Advisory Committee and action will happen within 30 days from receiving advice from the Advisory Committee. As of this writing, the Advisory Committee date is still unknown but should be within the first two weeks of September 2013.

Current Financial Status

As of June 30, 2013, Progenics had $80M in cash and cash equivalents. In the second quarter of 2013, Progenics completed a public offering of 8.5M common shares at a price of $4.40 per share. Progenics received $40M in proceeds. Progenics has a burn rate of roughly $10M per quarter which is quite high for a small cap biotech although the current $80M in cash and cash equivalents should be sufficient to fund research and development costs for two years.

What Do The Institutions Think?

One of the first things I look at when making stock picks is to get a general idea of what the professionals of the street think. As of the 6/30/2013 13F filings, Progenics has 83% institutional ownership which is considered to be very high. The most noticeable 6/30/2013 13F was the one filed by top healthcare hedge fund Baker Brother Advisors, LP which has $5B in assets under management with 99.7% of fund holdings in the healthcare sector. Baker Brothers have increased their Progenics position by 367% to 4.2M shares. What do Julian and Felix Baker know that the rest of the public? I am definitely not qualified to answer that rhetorical question but it is something to consider when making investment decisions. Very little is known about Julian and Felix Baker as they tend to stay away from the media spotlight. However, it is known that Julian studied at Harvard Business School and Felix has a PhD in Immunology from Stanford University.

According to the 6/30/2013 13F filings, 15 funds established new positions in Progenics, 59 funds increased their positions while 16 funds decreased positions and 9 funds sold out of their Progenics position. The street does seem to have positive sentiment regarding Progenics Pharmaceuticals and Relistor.

Investment Implications

It should be noted that Progenics will receive a $40M developmental milestone upon US marketing approval for subcutaneous Relistor in non-cancer patients. Progenics will receive a $50M milestone upon US marketing approval for an oral formulation of Relistor, up to $200M of commercialization milestone payments upon achievement of US sales targets and royalties ranging from 15-19% of net sales of Relistor by Salix. However, if US approval is granted with a Black Box Warning, payment of the developmental milestone would be deferred and subject to achievement of the first commercialization milestone which are payable on annual U.S. sales first exceeding $100M.

According to FASB ASU 2010-17, "developmental milestones can be recognized by the vendor in its entirety as revenue in the period in which the milestone is achieved". Based on my interpretation of that revenue recognition guidance, it would make sense that Progenic's would recognize the entire $40M in developmental milestone as revenue once Relistor is approved in the U.S. if there is no Black Box Warning which would give it a huge increase considering Progenics had only $4.027M in revenues for the first and second quarters of 2013 combined.

Salix has also given revenue guidance for 2013 Relistor sales of $49M and has reiterated that in its latest 2013 Q2 earnings call. Salix obtained the licensing rights for worldwide Relistor from Progenics in February 2011. Based on that growth rate of roughly $25M per year in Relistor sales, I expect Salix to be able to exceed the $50M mark in U.S. Relistor sales by 2015 as the U.S. market for Relistor is more concentrated compared to Europe and an easier market to sell to. Progenics would receive the additional 15-19% of royalty based on the U.S. Relistor sales as well which adds to the bottom line.

If Relistor is not given approval from the FDA, it is hard to say what Progenics and Salix would do. Obviously shares would take a hit like they did after the first CRL. Salix does market Relistor worldwide in many countries but there is certainly capped upside from not being able to enter the U.S. market. Progenics currently only receives revenue from Relistor as the rest of their pipeline products are still in clinical trials. At a burn rate of $10M per quarter, I do see Progenics diluting again if Relistor is not approved for U.S. use as Progenics simply will not have enough working capital to last more than a few quarters. Shares of Salix took a minor after the CRL in July 2012 but have more than recovered since.

However, I will mention that very smart fund managers such as the Baker Brothers have taken a substantial position in Progenics and have been increasing their position. They are far smarter than I am so I would not second guess their position.

Source: Progenics Pharmaceuticals - Alive Again With Institutional Backing?