BioCryst Pharmaceuticals (BCRX) announced that their Jpanaese partner, Shionogi & Co., has been granted approval for peramivir in Japan, triggering the third $7 million clinical development milestone payment from Shionogi to BioCryst. BioCryst will receive an additional $95 million as commercial milestones are achieved. In addition, BioCryst receives a 10% to 20% royalty on Shionogi's sales, and will capture a manufacturing margin on sales of the Active Pharmaceutical Ingredient (API) to Shionogi.
Unfortunately, the Reuters news story on the approval had a serious error in the last line, where they said: “The company has said it expects peramivir to generate annual sales of at least 5 billion yen ($55 million).”
They got this information from a Bloomberg story on September 9, but failed to note that sales estimate was for hospital sales only. The Bloomberg article said:
“Sept. 9 (Bloomberg) -- Shionogi & Co. forecast its experimental treatment peramivir will earn annual sales of about 5 billion yen ($54 million) in Japan on demand from hospitals for patients critically ill with influenza including swine flu.
"Shionogi plans to file data to Japan’s health ministry in November for approval to market the flu medication and expects to sell it as early as October next year, Takuko Y. Sawada, head of development at the Osaka, western Japan-based company, said in an interview.
"If approved, peramivir would compete with antiviral drugs such as Roche Holding AG’s Tamiflu and GlaxoSmithKline Plc’s Relenza. Sawada said peramivir, which has completed all three typically required trial stages, is administered directly into the blood stream, allowing it to be effective more rapidly.
“ 'It’s a good drug for severely ill flu patients, for whom it’s critical that antivirals are effective with a high degree of certainty,' Sawada said in Osaka yesterday. There is demand for intravenously administered drugs for such patients, she said.”
The Shionogi spokeswoman clearly was referring to the hospital market only. But Shionogi's approval is for outpatient as well as hospital use, and the company is on record saying they expect to treat 600,000 patients this year and three million during the next flu season. If they were only looking for $54 million in sales, three million treatments would have to sell for $18 a dose. There is no intravenous drug that sells for $18 a dose, and the price per dose in the U.S. is $450. The Reuters story was misleading, because it implied the $54 million was for total sales of peramivir, not just hospital sales.
The erroneous number weighed on the stock, as a 20% royalty on $55 million in sales would be only $11 million, or 25 cents a share for BCRX.
In reality, the three million doses will be priced between $150 and $450 a dose, yielding $450 million to $1.35 billion in sales for Shionogi. The 20% royalty to BioCryst would be $90 million to $270 million, or $2.05 to $6.15 per BCRX share. Management has said their royalty is “between 10% and 20%.” It could start at 20% and then decline with accumulated volume. Or it could start at 10% to recognize Shionogi's expenses to get the drug approved and introduced, and then rise with accululated volume. I don't know.
So assume it is only 10%, and Shionogi prices a dose at the low end of my forecast range. That is still $1.00 a share for BCRX as recurring revenue for many years. That is worth 20X to 30X, so I am not changing my $30 near-term target. It takes only one analyst to run the numbers, or the company to document their royalty guidance, to get the stock to $30.
Of course, if the price per dose is $450 and the royalty is 20%, the $6+ in pretax royalty income would support a much higher target price for BCRX.
Disclosure: Long BCRX