- Copaxone is either a 2014 or 2015 launch.
- The biosimilar franchise has value and there is a milestone on M923 this year.
- Momenta cash burn will not exceed its resources prior to milestones.
Momenta Pharmaceuticals (NASDAQ:MNTA) is a generic biologics company. The company currently earns a license fee from sales of generic Lovenox, and they are contesting the patent on Teva's (NYSE:TEVA) Copaxone. Separate from these products, Momenta is one of the few small public companies developing biosimilar drugs, generic forms of small cell molecular drugs.
Developments in the last six months have not been positive for Momenta. First, the company's biosimilar partner, Baxter (NYSE:BAX), abandoned one of three drugs in the joint biosimilar development program. Second, Momenta continues to contest Teva on launch of a Copaxone generic. A recent court ruling may permit a generic Copaxone launch as early as May 24; however, there are legal battles underway on whether the gene expression of the generic matches the branded drug and whether elements of the Copaxone patent are valid.
Although there still may be a window for Momenta to launch Copaxone in 2014, the likely 2015 launch is more relevant for the company in the long run. Teva benchmarked Copaxone sales at $3.7-$3.9B for 2013. Sales were down 5% year-over-year due to new branded competition. At 2010 study found that generics replace branded drugs in 50% of prescriptions during the first year of generic availability. A different survey indicated that only 30% of doctors are inclined to prescribe biosimilars. More industry data indicate that the presence of generics on the market results in a 25% price decline on average, and some price reductions have gone as far as 80%. Momenta is one of two generic filers for Copaxone (Mylan (NASDAQ:MYL) is the other filer). Applying study percentage and giving Teva the benefit of the doubt due to their reformulation of Copaxone, my calculation of the market opportunity for Momenta's generic Copaxone starting in 2015) is ($3.8B * 30% switch rate * 70% price * 1/2) $400 million.
Momenta has two biosimilar drugs in development and both are targeted at autoimmune and inflammatory applications. The lead drug, M923, is expected to achieve "technical development criteria and the submission of an Investigational New Drug (IND) application in the second half of this year," according to Momenta's fourth quarter earnings report. It could be an Enbrel or a Humira clone. Enbrel is a significant inflammatory therapy and the FDA began accepting generic submissions in 2010. Baxter signed a development agreement with Coherus for $246M specifically for an Embrel generic, so Momenta is either not after this market or deserving of a much smaller upfront payment ($33M). Humira is the more likely possibility with FDA approvals possible for the first time after December of this year. However, Momenta is not alone in that market, with Boehringer having announced an upcoming product for the European market. The branded drug Humira is a big drug with Abbvie (NYSE:ABBV) reporting $2.65 billion in global revenue just last quarter.
Biosimilar development has suffered delays as regulatory bodies struggle to determine whether similar molecules made through differing production methods constitute equivalent drugs. IMS put the entire generic biologics industry at just $1.6 billion in revenues in 2012, and they saw a path to nearly $9 billion in revenues by 2017. Recent developments make those estimates look aggressive. Teva disbanded a generic biologic joint venture earlier this year, and venture funded biosimilar firm, Epirius, has decided to focus on developing drugs for non-US markets only. Momenta claims in its 10-K that the biosimilar market is a mere $1.9 to $2.6 billion at present.
Given some negative developments in the biosimilar market along with Momenta itself seeing a collaboration end recently, it's hard to put too high of a probability on commercial success with M923. If we start with Humira being approximately a $6 billion revenue drug in the US, and use the generic percentages and average price reductions as before, then apply a 25% probability, I calculate ($6.0B * 50% switch rate * 70% price *1/2*25% probability) a generic autoimmune biologic being a $260 million opportunity for Momenta.
While there are two larger drug opportunities in the pipeline, Momenta does have a marketed drug as well. Most recent data from Sandoz indicates annual sales of $213 million for generic Lovenox. Industry data suggest that sales of Enoxaparin Sodium (generic Lovenox) have declined steadily over the last four years, and projections for 2014 near $175 million. Momenta earns a royalty on the Sandoz sales, and the royalty looks to be near $20M in the most recent year. Mirroring the market, I expect this royalty to decline steadily going forward. If those revenues decline at a 10% rate over the next 5 years, the un-discounted sum total revenue stream would be worth $80 million.
Biotech stocks are particularly difficult to value, but I have found that opportunities present themselves in the stocks when the equities trade at a discount to the market value of the addressable market for the drugs. My calculation of the addressable market for Momenta is $740 million ($400M Copaxone, $260M for M923, $80M Lovenox). As such, the stock is worth $14.50 per share, a 30% premium to today's price.
My final check for a biotech is cash burn, or how long they can survive before financing, and whether that window includes a milestone. Optum, a medical consulting group, asserts that expenses exceed $250 million to develop a biosimilar drug. Momenta spent $104 million on research and development in 2013, and they currently have $245 million in cash and marketable securities on the balance sheet. With the cash and the income from Enoxaparin Sodium, it appears that Momenta can get to either a generic Copaxone launch or a M923 milestone prior to having additional cash needs.
Despite setbacks in both the Copaxone litigation and the biosimilar development pipeline, Momenta Pharmaceuticals trades at a discount to its imminent drug opportunities, and the company has enough cash to see these biologics to their next major milestones. I recommend purchase.