Key investment highlights
Under a new management team, Flamel Technologies (NASDAQ:FLML) is employing a low-risk strategy to generate substantial revenue and cash flow in the near-term. After more than two decades of losses, I estimate the company will rapidly become cash flow positive as early as February 2014 and could generate EPS of as much as $1.00 for the year.
Flamel is taking advantage of new incentives under the FDA's Drug Efficacy Study Implementation (DESI) program, which removes competitor products from a market if a company successfully submits New Drug Applications (NDAs) for drugs that had previously been exempted. In the 1960s, when the FDA first required companies to submit NDAs to show safety and efficacy before selling drugs on the market, it grandfathered approximately 3,000 drugs that were deemed safe. About 10 years ago, in an effort to encourage companies to compile existing drug efficacy and safety data on these grandfathered drugs, the FDA announced it would remove competitor products if a new NDA is approved on these grandfathered drugs. These products are already well-established and are often re-priced by the NDA filer at as much as 3-5x the previous price until generic versions are approved for sale, which typically takes about 3 years.
Flamel's Bloxiverz was the company's first NDA submission under the DESI program, and it was approved on May 31, 2013. It is now the first and only FDA-approved formulation of neostigmine methylsulfate, and it was launched in the third quarter. It is indicated for reversal of the effects of non-polarizing neuromuscular blocking agents after surgery. A 45% market share leader voluntarily withdrew from the market last month, and, under FDA guidelines, the agency is expected to remove all remaining non-approved neostigmine products from the market imminently. As the sole provider for a drug that is used in approximately 5 million surgeries annually, FLML has re-priced the product 3x to $15.96/10 ml multiple dose vial. Following FDA action, Bloxiverz should very quickly generate annualized revenue of $80 million with peak sales of $150-175 million expected within 24 months. Margins are expected at more than 70% and total after-tax cash flow to shareholders over the next 3years should exceed $170 million, which is nearly the current market cap of the company.
A second DESI product has been filed with the FDA and has a PDUFA date of April 28, 2014. Two more products are expected to be filed with the FDA in 2014. While management will not provide much detail on these filings for competitive reasons, they are assumed to be similar-sized opportunities to Bloxiverz and could generate an additional $500 million in cash flow. These products carry relatively low regulatory risk and in total could be worth $15-20 per FLML share, based on 25 million shares outstanding.
Flamel also has state-of-the-art drug delivery technology for biologic and small molecule drugs and is currently working on 10-12 proprietary programs of which clinical data is expected on 7 programs 2014. Several of these programs should target blockbuster indications, and have shorter target bio-better or OTC regulatory pathways.
Flamel is backed by Deerfield Management, which owns nearly 20% of the equity and has warrants for 3.3 million shares with strike prices ranging up to $11. Broadfin, another dedicated health care fund, owns 15%. A senior partner at Deerfield, who was responsible for the Flamel investment and conducted extensive due diligence on FLML for Deerfield, left his position with the firm in 2012 and joined FLML as the head of business development.
Deerfield and Eclat owners sold a very valuable earnings stream (valued at more than $500 million) to Flamel for a relatively small sum ($12 million note and 3.3 million warrants for FLML common stock and a 20% Eclat royalty stream), suggesting that they see substantial value in Flamel's own drug delivery technology.
I believe the shares should be valued at $20 today, assigning a value of $500 million for the discounted cash flow of the Eclat products and assigning no value to the Flamel drug delivery technology.
Flamel Technologies is one of the most undervalued stocks in the pharmaceutical sector and could offer returns of 100-200% over the next 12 months based on near-term product opportunities. After generating losses for its entire 22 years as a public company, significant change has taken place at the company over the past 2 years, and this has been missed by most institutional investors except for a handful of savvy, dedicated health care hedge funds, such as Deerfield Management (a 20% owner + 3.3 million warrants at strike prices of $7.46 and $11.00), and Broadfin Capital (15%). Other notable investors from the past have included David Einhorn, Oscar Schafer and BVF, Inc.
Deerfield purchased a 20% stake in early 2012 and subsequently sold privately-owned Eclat Pharmaceuticals to Flamel. Eclat Pharmaceuticals was the brainchild of Mike Anderson, a senior executive with deep experience in the pharmaceutical industry. His business plan was to file NDAs on 4-5 existing drugs that have been on the market for decades but never obtained regulatory approval as they were grandfathered by the FDA when this regulatory requirement was first put in place by the agency in 1962. In addition to acquiring these projects, Flamel added Anderson as its CEO and, a few months later, added a senior partner from Deerfield as head of business development. Under Anderson's leadership, the company changed strategy from a drug delivery company to a fully integrated specialty drug company and added an experienced industry executive to head R&D.
Two years later, FLML is at an exciting inflection point and is on the cusp of dramatic earnings and cash flow growth after two decades of losses. The first signs of this transformation should be evident in coming months when the company's first approved product, Bloxiverz, begins to ramp up as the FDA removes all other competitor products from the market. Flamel will have a 100% share of an $80+ million market at launch and $150 million peak sales two years out. As this product is sold to hospitals, it will require minimal selling expenses and operating margins should approach 70%. We believe Bloxiverz can generate approximately $180 million in cash for FLML over a three-year product life cycle. Furthermore, 3 more similar-size Eclat products are on deck to continue the cash flow for several years to come. As discussed in more detail below, the belief is these 4 products could generate $500-700 million in cash flow over the next 5 years. I think management is committed to substantial earnings generation, and much of this cash flow will fall to the bottom line, which could result in EPS of $0.50-$0.75 in 2014 and well over $1.00 in 2015. Flamel has a market cap of just $175 million and a relatively small share base of 25 million shares. The stock currently trades at a price-earnings ratio of 7x the forward earnings estimate and less than 1x the cash flow to be received by Bloxiverz alone. I believe the stock should be valued closer to $20 today based on Bloxiverz and the other Eclat products alone and assigning no value to the Flamel drug delivery platform.
The Eclat products includes Bloxiverz and three undisclosed products, one of which is under FDA review with a PDUFA date of April 28, 2014. The other two are expected to be filed with the FDA in 2014. These drugs target products that are listed under the DESI program, which was implemented by the FDA in the 1960s after it established the requirement that New Drug Applications (NDAs) be filed with the agency proving safety and efficacy before a drug could be approved and sold on the U.S. market. At the time, the agency established the DESI program to evaluate over 3,000 products that were on the market to determine their safety and those deemed safe were grandfathered and allowed to remain on the market even though a clinical study and NDA were never filed with the FDA. To encourage drug manufacturers to file NDAs, about ten years ago the FDA changed the rules governing these DESI drugs so that any drug company can compile the existing drug efficacy and safety data in an NDA and, if approved by the FDA, the agency would remove the competing DESI products from the market. As a result of being the only FDA approved product with no competition, these products are often re-priced by the NDA filer at as much as 3-5x the previous price. The product life cycle is naturally relatively short as generic drug companies file ANDAs and are typically on the market in about three years time.
I project that the market for the first of these Eclat products, Bloxiverz, should achieve an $80 million annual sales run-rate once the FDA removes the remaining DESI products from the market, which we expect to happen imminently. There should be a 4-6 week lag to achieve this sales ramp as the channel inventory is worked off. The drug is being initially priced by FLML at $15.96/10 ml multiple dose vial and is used in approximately 5 million hospital surgeries annually. Similar to other branded products without competition, pricing should go up about 30-40% annually and peak sales could approach $150-175 million at the end of year 2. We estimate operating margins of 70%. Assuming a 35% tax rate, approximately $180 million in cash flow should be generated from Bloxiverz over the three years following FDA removal of the other non-approved products. While management has not disclosed much information regarding the other three DESI products in the pipeline, we assume they are similar size in terms of revenue and cash flow characteristics to Bloxiverz, resulting in another $500 million in cash flow to FLML. Bloxiverz has been de-risked with the FDA approval but there is some risk inherent in the other three products, most notably another party gaining FDA approval before FLML. Even if investors discount this possibility, the value range of $180 million for Bloxiverz and $700 million for the all 4other products is significant and highlights the absurdly low valuation of FLML's sub-$200 million market cap. In fact, the current market cap is less than the cash flow generation expected from already approved Bloxiverz alone and assigns no value to the three other Eclat DESI products that carry relatively low regulatory risk and FLML's technology platform.
Flamel's Drug Delivery Technology Platform
Flamel's drug delivery platform includes Medusa, a hydrogel depot formulation that delivers injectable biologic over a 1-14 day period; Micropump, a high-performance, flexible technology for the oral delivery of small molecules; and Trigger Lock, an abuse resistance technology for opioid analgesics. The new management team currently has 11 programs under development and expects to provide clinical data on seven of these programs next year including at least two programs that we believe target blockbuster opportunities. There is also a PDUFA date for the second Eclat product on April 28, 2014 and NDA filings are expected on the two other Eclat programs in 2014. While management has been tight-lipped about the pipeline, we believe that Anderson and Deerfield did extensive due diligence on the technology platform before selling a very valuable asset to Flamel.
The stock closed yesterday at $7.34 and had a market cap of $190 million. 12-month price target is $20, based on $500 million of cash flow from the Eclat products and assigning $0 value to the Flamel drug delivery platform or the nearly $200 million in NOLs.
Disclosure: I am long FLML. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.