Apricus Biosciences, Inc. (NASDAQ:APRI) is a pharmaceutical company that develops and markets treatments for male and female sexual health. Vitaros is currently the only approved product, which treats erectile dysfunction, and has partnerships in Canada, Europe and Africa. The other product the company is developing is Femprox, a leading candidate for the treatment of female sexual arousal disorder, and has successfully completed one 400-patient Phase III study in China. The company currently trades just under $2.50, and has a market cap of $90 million.
I have previously written about APRI, and believe they have a clear path to shareholder profits, but there are still some areas to be cautious about.
The road ahead for Vitaros
Vitaros is a topical cream for the treatment of Erectile Dysfunction (ED). Over the past year, the company has been able to secure partnerships with six distributors for rights in Canada and across Europe that included milestone payments for the launch of Vitaros and double digit royalties (I've previously estimated this will be around 12%). Vitaros has already been approved for distribution in Canada, Ireland, Germany, Italy, France, Belgium, the Netherlands, Sweden, and the United Kingdom.
(Source: Company presentation, February 2014, slide 9)
While some of the payments were upfront, the majority were tied to the successful launch of Vitaros. All in all, the company has just over $200 million in payments that will come due. During the recent 16th Annual BIO CEO & Investor Conference, CEO Richard Pascoe stated the company is currently in the production stage with Vitaros, and expects to launch in mid-2014.
The other statement I found promising is the intent to regain the rights to Vitaros in the US. These rights were previously sold to Warner Chilcott, which was subsequently acquired by Actavis (NYSE:ACT). The company has a strong interest in getting Vitaros approved in the US, and is working to not only get it approved, but also to regain those rights. I would expect serious discussions about regaining those rights once the company has launched in Europe and claimed some of the milestone payments from the partners.
How will Femprox go?
While the market for the treatment of ED is fairly well known, the market for a similar product to treat Female Sexual Interest/Arousal Disorder (FSIAD) is unknown. There are numerous novelty products that claim to enhance the female sexual arousal, but there has yet to be an FDA approved product. According to a US Census survey of women over 18, 53 million (44.2%) have some type of sexual dysfunction and 31 million (26.1%) have an arousal problem. This is an incredible, and as of yet untapped market, that the company can address.
During the BIO Conference, Pascoe stated a few things that hint at where the company will go.
The company is seeking a "Europe First" strategy, similar to what it did with Vitaros. The company still has a ways to go with trials, but Europe has expressed the possibility of accepting one study, if the results are significant enough, versus the requirement for two studies in the US.
(Source: Company presentation, February 2014, slide 14)
The company also stated it would start the licensing process in March 2014. Consideration would be given with a priority of global or multi-regional licensing. I read this as instead of selling the rights to individual countries, like they did with Vitaros, the company wants one company with global rights, or at a minimum continent sized rights. So $200 million bought the rights to just over 10% of the global population. I would expect the company to give a "discount" for global rights, and would expect somewhere in the $1 billion range with the same double digit (around 12%) range.
That seems like a high estimate, and of course would all be conditioned on FDA and European approval, however, the global market for the treatment of male ED was $4.3 billion in 2012. If Femprox trials do proceed well, I would expect talk of a takeover by one of the larger pharmaceutical companies that already have the distribution networks set up.
So with all these plans, where does that place the company, assuming they can meet all these goals and continue down this road. The following is how the company looks right now:
First, cash on hand. If the company can successfully launch Vitaros in Canada and Europe, it is entitled to $200 million in cash payments, and will then be sitting on $223 million. While the correlation between cash on hand and stock price isn't linear, it helps to establish the market cap of the stock, and the stock price. This of course does not take into account cash flow from the royalties the company will realize.
Stocks are not typically based on how much they have on hand, but on how much revenue they can generate over a period of time. I believe that with $200 million cash in the bank the company will use the money for one of two things:
- Reacquiring the rights to Vitaros in the US: The company is highly interested in the approval for Vitaros in the US, and may seek to reacquire those rights from ACT. If the company can reacquire the rights, it opens up another huge revenue stream for the company, assuming the company can secure FDA approval.
- Securing European and FDA approvals for Femprox: Femprox offers another market to the company, one that is likely just as large as the market for ED products, that has yet to be tapped. By gaining approval for Femprox in Europe and the US, the company will be able to secure partnerships and royalties for sales.
The addition to the bottom line of the company reflects the potential for expanding operations and approvals for both Vitaros and Femprox throughout Europe and the US. For a developmental bio-pharmaceutical I value cash on hand for its ability to keep the company from issuing more shares and the ability to continue developing future products. If the stock were valued based on multiples of cash on hand, then the stock could go to a market cap of anywhere between $450 million (2X cash on hand) to $900 million (4X cash on hand).
During the recent conference, the company also stated they expect peak global sales to be in the $300 million range. The company will likely not get there until the 2016 time frame, but below is a look at those numbers.
With both a strong balance sheet of over $200 million, and sales of $300 million with royalties of 12%, I would conservatively say this company should be valued at the $600 million level. That is based on only Vitaros sales and licensing at peak sales in the 2016 timeframe, and does not take into account any developments from Femprox and licensing deals the company can secure. So with a market cap of $600 million, and no more dilution, this would place the stock in the $12-16 range. That seems like huge upside, but this is all based on peak sales that are likely a few years off.
Landmines and Criticism
So as bright as the future looks, there are still some landmines and criticism:
First, investors are becoming impatient with the launch of Vitaros. The company has already been approved for the launch, but has been slow to get it to market. According to the CEO, manufacturing has already begun, and the launch will happen mid-year.
Second, while the company has good data from a study of Femprox in China, it still has to pass the European Regulatory Authority and the FDA for approval. Again, not something that is a slam dunk, and is likely years away. Investors have been watching Femprox closely as a pioneer drug for the treatment of FSIAD, and a negative response will have an effect.
I am optimistic and bullish on APRI. I believe the launch of Vitaros will happen in the next few months, which will be a positive catalyst for the share price. The boost to the cash position will also allow the company to gain approval and rights for sales in the US, which will only increase the potential for sales and revenue. The company also stated they would begin the process of partnering for Femprox, which will provide future revenue should it gain favorable approvals.