Eagle Pharmaceuticals, Inc. - Poor IPO Debut Creates My #1 Small Cap Upside Opportunity Of 2014

| About: Eagle Pharmaceuticals (EGRX)

Eagle Pharmaceuticals, Inc. (NASDAQ:EGRX) is a specialty pharmaceutical company focused on developing and commercializing injectable products utilizing the FDA's 505(b)(2) regulatory pathway. It develops products that address the shortcomings, as identified by physicians, pharmacists and other stakeholders, of existing commercially successful injectable products. Its currently disclosed product portfolio includes two approved products and six advanced product candidates that together account for approximately $4 billion in peak U.S. branded reference drug sales. For each of its products, it intends to enter the market no later than the first generic drug, allowing it to substantially convert the market to its product while maintaining attractive pricing. Additionally, the U.S. generic injectable industry is huge at approximately $7.0 billion in sales in 2012, and grew at a compound annual growth rate of 17% over the last five years, making this a big market for EGRX to specialize in.

So basically, what the company is doing is developing enhanced, injectable versions of existing drugs. This strategy is attractive for several reasons, amongst them are:

  1. FDA risk is reduced, since its drugs are based on already approved drugs.
  2. There is a known market for almost all of the drugs being developed, and therefore a known market dollar size the Company is targeting.
  3. The 505(b)(2) pathway is the process that the FDA uses for expedited approval of specialty drugs, which are differentiated from the original branded drugs they are based on. Therefore, these are not exactly "generic" or exact replicas of existing drugs and can, in theory, enjoy better pricing.
  4. The 505(b)(2) process gives a specific date for approval, so there is more predictability in knowing when a drug could be approved.
  5. EGRX can patent its products (EGRX has 10 patents / 12 filed patents).

A question you may have is - what is the 505(b)(2) pathway? A 505(b)(2) is a new drug application which contains full safety and effectiveness reports, but allows at least some of the information required for approval to come from studies not conducted by or for the applicant. This method gains approval for new drugs in a fraction of the time and cost required by traditional paths. For a greater description of the 505(b)(2) pathway, click here.

EGRX's strategy of using this pathway has been validated with the approval of their first product, EP-1101, a proprietary version of argatroban, which was approved by the FDA in June 2011. EP-1101 entered the market prior to the first generic version of argatroban and has captured a 28%, and growing, share of the overall argatroban market while maintaining attractive pricing.

Before I go further into the specifics of the company's pipeline I want to discuss the current financial aspects of the company. The company recently completed a 3.35 million share IPO at $15 a share. Inside of the IPO offering insiders bought $6.5 million worth of stock (433k shares of the 3.35 million offered), and sold none, further showing the conviction they have in the Company. Therefore, if you subtract the shares purchased by insiders in the IPO then the Company has less than 3 million shares in the float, which means minimal buying in the stock could send it materially higher (or lower). The buzz was high on this IPO and I heard from several sources the IPO was oversubscribed, but when it came out it popped to around $16.5 and then stalled and I believe there were many folks playing for the IPO pop and they just sold when it did not immediately shoot to the moon (and then the stock cascaded down). This creates opportunity as the stock now trades down 20% from the IPO price at $12 a share. At $12 a share, the Company with 13.9 million shares outstanding after the IPO, has a market cap of only $167 million and if you net out the cash the Company has on hand of $55 million (or approximately $4/share) then the enterprise value is an even smaller $112 million. This low market cap is worth keeping in mind if you read further and understand some of the drugs they have in the pipeline.

The Company is still losing money but it does generate revenues from the one drug it has commercialized and revenues have been growing dramatically. The Company had revenues of $13.7 million for the year ended September 30, 2013, and revenues for the three months ended December 31, 2013 were $5.5 million up from approximately $1.5 million or approximately 270% from the same quarter a year ago.

As an added plus the Company is led by a senior management team, which has over 100 years of combined experience in building and running leading pharmaceutical companies. The CEO Scott Tarriff of EGRX left his CEO role at the generic drug company Par Pharmaceuticals in order to co-found EGRX. You can read more on the management team in the prospectus/S-1 filing or Company website.


FDA Risk - FDA approval risk is evident here as it is in all drug development companies. However, I would argue that due to the drugs the Company is developing being improved forms of currently available medications that the risk is lower than your typical startup biotech company.

Litigation Risk - The drug/pharma/generic world is riddled with litigation - and using the pathway the Company is pursuing is no different, but they have already shown an ability to do so effectively. I would point folks to the legal risk section of the prospectus, but in summary here is one relevant section relating to the 505(b)(2) pathway:

"In particular, our commercial success depends in large part on our avoiding infringement of the patents and proprietary rights of third parties for existing approved drug products. Because we utilize the 505(b)(2) regulatory pathway for the approval of our products and product candidates, we rely in whole or in part on studies conducted by third parties related to those approved drug products. As a result, upon filing with the FDA for approval of our product candidates, we will be required to certify to the FDA that either: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of our proposed drug product. When we submit a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to the patent owner once our 505(b)(2) NDA is accepted for filing by the FDA. The third party may then initiate a lawsuit against us to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving our NDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in our favor. If the third party does not file a patent infringement lawsuit within the required 45-day period, our NDA will not be subject to the 30-month stay."


Now, let's go into the Company's pipeline with a focus on the nearer-term catalysts, which could be substantial, and some are only a few months away. Below please find the pipeline along with the US branded reference drug, US sales of the branded drug and drug status. The company has two approved products - one of which has been commercialized - and six advanced product candidates in the pipeline. All of these can be reviewed in more detail at the company's website.


U.S. Branded

2012 U.S.
Branded Sales


EP-3101 (bendamustine RTD)


$608 million

NDA submitted

EP-3102 (bendamustine short infusion time)


$608 million

In pivotal clinical trials

Ryanodex (dantrolene)


$20 million

NDA submitted in January 2014; orphan drug designation received

EP-4104 (dantrolene)

No drug currently approved


Orphan drug designation received for heat stroke

EP-6101 (bivalirudin)


$502 million

Type C meeting with the FDA completed in the fourth quarter of 2013

EP-5101 (pemetrexed)


$1,122 million

Formulation work complete

EP-1101 (argatroban)


$99 million

Approved (US); marketed by The Medicines Company and Sandoz

EP-2101 (topotecan)


$25 million

Approved (EU); not marketed;
no current plans to commercialize in the U.S.

As mentioned the Company already has one drug commercialized and in a couple of years it has captured almost 30% of the market for that drug. Due to limited financial resources at the time, the Company decided to collaborate with partners in order to commercialize EP-1101 (its first commercialized drug) and it is now currently marketed by The Medicines Company and Sandoz Inc. pursuant to separate agreements. As a result of the commercialization strategy, EGRX has been able to minimize certain expenses, but also are required to share revenues from EP-1101 (argatroban) with its commercial partners. In the future, the Company intends to commercialize its products independently in the United States, while outside of the United States, EGRX intends to utilize partners for the commercialization of its products. As part of this strategy, EGRX intends to establish a small, specialty sales force that will target group purchasing organizations, hospital groups and key stakeholders in acute care settings, primarily hospitals and infusion centers. While the Company must make an investment in the sales force, this strategy should lend itself to higher margins over time.

The next drug up for approval (approval currently expected in July 2014) is EP-3101 or bendamustine, which is a drug targeted to compete against a drug currently marketed by Teva Pharmaceuticals (NASDAQ:TEVA), or Teva, under the brand name Treanda and indicated for the treatment of certain hematologic cancers. Bendamustine had 2012 U.S. branded sales of over $600 million, and based on recent market research EGRX anticipates sales to continue to grow substantially in 2013 and 2014, and they estimate that sales could reach $800 million in 2015. Per the IPO prospectus,

"We believe our proprietary bendamustine products, EP-3101 and EP-3102, are improved products compared to Teva's Treanda because they are ready to dilute, or RTD, liquids with longer stability and also offer the potential for shorter infusion time. These attributes result in added benefits to nurses, patients and pharmacists, and improved economics to physicians and other stakeholders. Our NDA for EP-3101 was filed with the FDA on September 6, 2013 and we believe EP-3101 will enter the market prior to generic competition and will capture a significant portion of the bendamustine market, as has been the case for our argatroban product."

The current target date for FDA approval of bendamustine is July 6, 2014 (so a near-term catalyst) and then likely commercialization sometime in 2015 (if EGRX can get a favorable ruling against the standard lawsuit filed by Teva) or at the latest in March 2016 when Teva's 30-month legal window ends. While this lawsuit related complication sounds a little unsettling (and is a risk), again, this is just part of operating in the drug/pharma/generic space.

Before I touch on the rest of the pipeline, let's focus on the materiality of the approval of this drug on this company. Per the S-1 IPO filing, the Company estimates the market for the branded drug here will be around $800 million in 2015 in the US alone which coincides when the Company's drug may be rolled out. The market share the Company's other commercialized drug EP-1101 (argatroban) now is 28%. Obviously, these are different drugs but the Company writes confidently about its ability to capture market share and if the Company equaled its market share of 28% with bendamustine that would equate to $224 million in annualized sales for just that one drug and only based on the US market! Therefore, if the Company could get to $224m in annual sales for Bendamustine the Company could earn $2 to $5 a share in EPS annually based on my various gross margin/sales cost assumptions and that's on just this one additional drug approval. Below please find a high level sensitivity analysis I ran in regards to a variety of gross margin assumptions for EGRX, which includes just the currently approved EP-1101 and this prospective EP-3101/3102. I annualized the 4Q2013 results for EP-1101 and then used 30%, 40% and 50% margin assumptions for this prospective drug. The reason I used those gross margin assumptions is if you look at the public market players in the generic space (such as Mylan Inc. (NASDAQ:MYL), Teva, Perrigo Company (NASDAQ:PRGO), Lannett Company, Inc. (NYSEMKT:LCI)) the gross margins range from low 30s to high 50s. I then made estimates for R&D expenses (increased it by 30% over the 2013 levels) and SG&A expenses (increased it by 100% over 2013 levels, due to sales force build for the new drug). I would also note I used a 35% tax rate but that as of September 30, 2013, the Company had federal and state net operating loss carry forwards of $72,794,131 and $37,615,304 respectively. Therefore, the tax liability in the early years will be minimal to zero and therefore increase the EPS materially higher (EPS of $3.4-$6.7 without taxes based on the same assumptions as below).


30% Margin Case - EP-3101/3102

40% Margin Case - EP-3101/3102

50% Margin Case - EP-3101/3102









Total Revenue




Cost of Revenue:









Total Cost of Revenue




Gross Profit




Research and Development




Sales, General, Admin




Total Operating Expenses




Income Before Taxes




Taxes at 35%***




Net Income




Shares Outstanding - Post IPO




Earnings Per Share




*Currently Commercialized, 4Q2013 Annualized Revenues / Gross Margin

**Expected July 6, 2014 Approval

***As of September 30, 2013, the Company had federal and state net operating loss carry forwards of $72,794,131 and $37,615,304 respectively.

Remember, the stock trades at $12 a share and the whole market cap for this Company is only $167 million at the current time. Obviously, a lot of assumptions above, but this is just an example of what I find so compelling about this company. They already have proven their ability to get one drug commercialized and they are going after some pretty big markets. Therefore, if even one or two of these drugs they have in the pipeline hit the Company should be valued at multiples of its current price.

I will not go into every drug, but I recommend those interested in this Company review the Company's website or S-1 filing. However, I wanted to touch on one other drug in the pipeline that is unique from others. This is a drug for heat stroke, for which there is currently no-FDA approved product. The drug is called EP-4104 (dantrolene) and already has orphan drug designation. In the S-1 prospectus the Company states,

"We believe these formulation characteristics afford us the unique ability to treat exertional heat stroke (EHS), for which there are no currently approved drugs, and therefore represents a major unmet market opportunity… Independent market research commissioned by us suggests that the worldwide peak revenue for EHS could exceed $150 million...the current treatment for EHS is not directed at the underlying cause of the diseases, but essentially a symptomatic therapy, which in some cases results in mortality or organ damage. Currently, to treat EHS, the standard treatment includes immediate surface cooling with ice...Even if these cooling techniques are properly implemented patients are still subject to risk of brain damage, irreversible organ damage or death."

I highlight this drug because it shows the Company may also be able to develop drugs not just based on current drugs with current alternative drug solutions, but also drugs that could target unmet medical needs. My final notes on the remaining pipeline are pointing out the number of drugs in later stages of development and the size of those markets (many of which are huge based on the US market alone).


In conclusion, I think the poor performance since the IPO allows for a great risk/reward opportunity in EGRX. I am making it my #1 micro cap upside pick of 2014. I have a longer-term mindset on this Company, but I also think traders can make money buying at the current price. Keep in mind the Company's quiet period ends on March 10, 2014 and I imagine strong initiations from the underwriters could put this back on investors' radars. It is not without risk, however, with a revenue generating commercialized drug in its pocket and at a market cap of only $167 million with $55 million of net cash I think you are being well compensated to take a long position (appropriately sized) in this Company as the upside is enormous. Additionally, the Company has near-term catalysts and has proven their strategy can work. Finally, the micro float of under 3 million shares could add fuel to the fire if the momentum begins… let's just say EGRX could fly like an eagle!

Disclosure: I am long EGRX. 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.