IntelGenx: A Compelling Investment Opportunity

| About: IntelGenx Technologies (IGXT)


IntelGenx is trading at a price that does not remotely reflect its potential - it should be higher based on Rizatriptan film alone.

The market is substantially undervaluing the pipeline products at IntelGenx.

Low cash burn rate helps to lower the risk of dilution.

Partnership agreement for unknown drugs could yield an unexpected source of growth for investors.

The increasing sales of Forfivo XL along with increased revenue should help to lengthen the company's cash runway, further decreasing the risk of dilution.

In January, I wrote about the potential for IntelGenx (OTCQX:IGXT) heading into the future, which can be found here. The purpose of this article is to analyze the company after its disappointing CRL from the FDA, and to examine the other factors that still help to make IGXT a compelling buy. In this article, specifically we will look at the recent growth initiatives regarding Forfivo XL. This will involve delving deeper into the marketing advantage for Forfivo XL, as well as figuring out where sales are heading. This article will also include analysis about the FDA's CRL regarding IntelGenx's Rizatriptan film and the market potential for Rizatriptan, and why it has the potential to be a very significant product for IntelGenx. Furthermore, IntelGenx has released some new clinical trial results regarding its Tadalafil film, that I will fill investors in on the significance of (and try to develop a peak sales estimate for Tadalafil), as well as some other pipeline developments that were not covered in my previous article (a new product INT0028, expanded agreement with Par Pharmaceuticals, animal products business etc). We will then examine IntelGenx's newest financial position in order to insure that investors are not at any risk for dilutionIn this new article, I will also attempt to develop what I believe would be a fair price for IntelGenx's stock moving forward.

Forfivo XL

The first product that is necessary to discuss is IntelGenx's approved drug Forfivo XL. Already having a product on the market allows for IntelGenx to receive revenue at essentially no cost (thanks to a partnership agreement), the approval of Forfivo XL is important for the company, however, as it validated that IntelGenx can see a product all of the way through development into FDA approval. With this in mind, investors know that IntelGenx has the technology and management in place that is needed to see the product through the various stages of development and into FDA approval.

Now, turning towards Forfivo, Forfivo XL is a higher dose of Wellbutrin XL. The key marketing benefit, and the key benefit for patients for the use of Forfivo is the fact that patients no longer have to take multiple pills in order to get the dosage of Forfivo XL. This helps to slightly increase patient compliance, as you eliminate the problem of patients forgetting to take one of their pills to equal the full dosage. This advancement, also meaningfully enhances patient convenience, as any patient would rather take one pill rather than two or three in order to get the same amount of dosage. This helps to also simplify the dosing schedule for patients, as often with the currently utilized methods, patients will have to stagger when they take Wellbutrin in order to get the full effect. This is not necessary with Forfivo XL, as it would be one 450mg pill. With these benefits in mind, for patients that are taking a higher dosage of Wellbutrin, Forfivo offers a compelling option for patients. As such, this also provides a slight competitive edge in the market over currently approved drugs and should help for Forfivo to be able to increase its marketshare as marketing efforts continue.

Through the partnership agreement (linked above), IntelGenx is able to generate revenue at no cost. Forfivo is currently being marketed in the United States by Edgemont pharmaceuticals, and as such Edgemont is absorbing all of the costs associated with the marketing of the drug. IntelGenx currently receives royalty revenue on the sales of the drug, and does not have any marketing obligations towards Forfivo. It is important to note, that in the agreement, there are additional milestones of up to $23.5 million, should the drug hit pre-defined sales goals. While these goals are not looking as if they will likely be hit, it could be a nice surprise upside to investors should Forfivo XL begin hitting its sales goals.

Forfivo XL has not been a large revenue producer for the company, but investors have been able to see revenue growth from Forfivo. For the most recent quarter, Forfivo generated $222 thousand in royalty revenue. This is a substantial increase over the quarterly revenue generated in the first quarter of 2013, which was $157 thousand. With these numbers in place, it looks as though IntelGenx will smash last year's revenue number of $492 thousand. Although IntelGenx admitted in its previous annual report, that it found sales of Forfivo XL to be "disappointing" it mentioned that Edgemont was taking steps to help improve the sales of Forfivo. From the information that we have (albeit only one quarter), it seems as though those efforts have begun paying dividends as investors are seeing substantial growth in the sales of Forfivo XL when compared to the first quarter of 2013. If Edgemont is able to hold sales steady quarter over quarter, IntelGenx should also be able to smash the second quarter of 2013's results of just $100 thousand in royalty revenue. Should this trend continue, and should sales continue to grow it is very possible that IntelGenx will see over a million dollars in revenue from Forfivo XL for the year.

It is important to note, however, that there is some risk for Forfivo XL. Multiple companies have filed Paragraph IV certifications, certifying that the patents for Forfivo are invalid and that the FDA should allow for a generic. This is a common tactic of generic pharmaceutical companies, and when IntelGenx filed its lawsuit it automatically triggers a thirty-month stay from the FDA approving the generic. It is likely that IntelGenx will be able to uphold its Orange book listed patents in court, and that no generic competition will be able to enter the market before the patents expire. IntelGenx has filed the requisite lawsuit versus the companies seeking to market a generic, and will likely be able to prevail in a lawsuit. Typically what happens in these types of cases is that there is some sort of settlement agreement reached, which helps to prescribe who is able to launch and when. An interesting tactic that IntelGenx could use to try to keep generic pharmaceutical companies at bay is to give to the first generic company, upon the expiration of IntelGenx's patents, an authorized generic. This would help to provide additional revenue for IntelGenx past the date of the expiration of its patents. Another possibility would be a courtroom victory, which may come with damages, which would of course help IntelGenx's bottom line. I do not believe the risk to be high at all that a generic pharmaceutical company launches, however, to be a well informed investor we need to know that the risk exists that a generic pharmaceutical company will enter the market before previously predicted.

While Forfivo XL growth provides immediate revenue for the company, it is not going to be a long-term driver of growth. The company has other products in its pipeline that are likely to help grow for the long term and that investors should help to focus on for the long term.

Anti-Migraine Versafilm Product

The product that is perhaps the most important immediate driver of growth at IntelGenx is the anti-migraine Versafilm Product. This product will be able to drive substantial revenue to IntelGenx over the long term. It is important to note, that this product is being co-developed with RedHill Biosciences (NASDAQ:RDHL).

Before we get into the development history and revenue of the product, it is important to figure out what the Anti-Migraine Versafilm product is. The product is an oral thin film product that contains the drug Rizatriptan, which is currently marketed by Merck as Maxalt-MLT. The primary benefit of IntelGenx's product would lie in the idea that it is easier to use. It is easier for patients to stick a film on their tongue than to take a pill (the only current method of delivery by Merck). The usability benefits of the product for patients who have a hard time swallowing pills will be a marketing edge. Also, just the enhanced convenience of use should help IntelGenx and RedHill to grab substantial marketshare. These benefits should allow for RedHill and IntelGenx to be successful in the segments of patients who are taking Rizatriptan and are either elderly or are children (two groups who struggle to take pills). One common problem with current Migraine drugs is nausea related to the Migraine. This makes it rather uncomfortable for patients to swallow pills, while conversely it would still be easier to take a thin film product. This means that the usability benefits for IntelGenx should provide it with a marketing edge over a large amount of the current migraine products in existence. IntelGenx could also benefit from a growing market for Rizatriptan, as Rizatriptan is designed to have a shorter Tmax time than other Triptan based drugs, which means that it takes a shorter amount of time to take effect. With this in mind, as the market for Rizatriptan continues to expand, so should the market for IntelGenx's product, as it would share in this benefit due to its bioequivalence.

Before turning to my favorite part of our discussion, the revenue potential for the product, we must first look at some of the development progress that IntelGenx has made for the drug. IntelGenx and RedHill received a Complete Response Letter, after trying to get their product approved. The CRL mentioned deficiencies in the third party Chemistry, Manufacturing and Controls. The CRL did not request any additional clinical trials (which is significant). In March 2014, IntelGenx responded to the CRL and believes that it has now responded to all of the concerns raised by the FDA. With this in mind, it presents a potential catalyst for IntelGenx shareholders of the FDA approving IntelGenx's drug. It is important to note that the bioequivalence, efficacy, and safety of IntelGenx's drug was not questioned by the FDA. This leads me to believe that it is a relatively minor issue that had to be addressed, and that IntelGenx will be able to receive approval this time around for the product.

Now that we know a little bit about the development of the product, we can turn to the real potential for the drug: the revenue. The market for Maxalt is large, last year Maxalt had over $638 million in sales. I expect these sales to increase, as it increasingly gains a part of the $1.6 billion worldwide triptan market. As Maxalt continues to grow in revenue, so too will the potential for IntelGenx's product.

As we try to figure out some sort of sales projection for IntelGenx, it is important to note that IntelGenx and RedHill are actively seeking a marketing partner to help market the drug. Regardless of whether or not they find a partner, pursuant to the original agreement IntelGenx can still receive subject to certain conditions, up to 75% of the worldwide income from the product.

It is also important to note that IntelGenx recently completed a bioequivalency trial for the film in Europe. With this trial's success (the Rizatriptan film was shown to be bioequivalent to Maxalt), IntelGenx is well set up to file for European approval. IntelGenx expects to file for European approval in the third quarter of 2014, which will only help to expand the market potential for the drug.

Sales estimates for IntelGenx's drug vary rather widely. An estimate that I personally believe to be very possible (and rather conservative) is this estimate of over 100 million dollars in peak sales potential. With this level of peak sales, IntelGenx should be trading much higher than it currently is. At the time of this article, IntelGenx was sitting at a market cap of $43.90 million. By applying even a 1.0 price to sales ratio, IntelGenx is extremely undervalued based upon the potential for this drug alone. The market cap based on this potential alone should be 75 million dollars, also remember what I told you that IntelGenx is to receive 75% of the revenue per the agreement with RedHill. Furthermore, this estimate does not include revenue from Forfivo XL and does not value IntelGenx's pipeline at all, which is of course a very conservative method of evaluating a company's share price.

Other Pipeline Products

IntelGenx is by no means a two trick pony. It has many other products in development that have the potential to add significant amounts of revenue for shareholders who are focused on the long term potential for the company. Most of these products revolve around the company's Versafilm technology (which was used to develop the Rizatriptan film). Therefore, the importance of IntelGenx obtaining approval for the Rizatriptan film is heightened, as an approval would serve as a validation of IntelGenx's technology platform.

An interesting product that IntelGenx has in development is a Tadalafil film. Tadalafil (also known as Cialis) is a drug that is used for the treatment of Erectile Dysfunction and is currently marketed by Eli Lilly. The market for a Tadalafil film is potentially huge, as Cialis had over $2 billion in worldwide sales last year. IntelGenx's solution would be having a marketing advantage over Cialis as the Versafilm technology would provide ease of use for patients who struggle to take pills. The company has been rapidly advancing the drug through the development cycle, having recently completed a bioequivalence study in healthy volunteers. The positive completion of this study helps to lay out the ground work for a pivotal bioequivalence trial. This drug will be very significant to IntelGenx's long term growth strategy. Even if IntelGenx is able to grab a mere five percent of the Tadalafil market, that would represent sales of over $100 million. Once again, the potential to grab $100 million suggests that IntelGenx is substantially undervalued from its current market cap.

IntelGenx has also recently begun the development of another product that is not being valued by the market. They have named the product INT0028, and it is an improved product containing dronabinal (sold under the trade name Marinol), indicated for the treatment of Neuropathic Pain Management. The product was developed using IntelGenx's AdVersa muco-adhesive tablet technology. This product is a rather promising addition to IntelGenx's pipeline, as it has demonstrated substantial improvements for patients. In a pilot clinical trial where it was compared with Marinol, INT0028 doubled the bioavailability of dronabinal, while decreasing the plasma levels of unwanted psychoactive metabolites. Should these results continue to hold up, INT0028 would be a substantial improvement in terms of efficacy and would have less side effects, meaning that it should be able to gain a large amount of Marinol's market. Marinol had sales of over $190 million, considering the benefits of INT0028 over Marinol I would estimate that IntelGenx would be able to grab up to 50% of Marinol's market (which in my opinion is quite conservative given the benefits of IntelGenx's treatment). This would put the revenue potential for IntelGenx at over $95 million. Even if we assume that there is a 20% chance of IntelGenx obtaining approval for the product (with early results it looks larger but let's just conservatively say that it is), that would mean that the market should value the drug at $19 million in IntelGenx's pipeline currently. The market seems to completely undervalue the drug, and this could help to provide a surprise for investors as INT0028 continues to progress through clinical trials.

Finally, we have one other area of development that IntelGenx is looking at. IntelGenx is working on animal health products, using its proprietary Vetafilm technology. The benefits of this technology is that it would improve the ease of administration of drugs to animals, as the film is designed in a way that it cannot be spat out due to its adhesive formulation. IntelGenx does not have a clear product in development yet, but is looking to partner the technology out to another company for development. Any partnership news on this front should provide a hidden catalyst for shareholders that could increase the stock price.

IntelGenx also has a few products that investors do not currently know about, but have the potential to provide significant returns. These products would be from a partnership agreement with Par Pharmaceuticals. This partnership was recently expanded to include two more products. Investors could be in for some surprising returns from these drugs, as Par carries all of the development costs for the drugs and IntelGenx would be entitled to royalties on sales as well as milestone payments. The market is currently evaluating this agreement as zero, so any revenue generated would help to provide a case for IntelGenx being undervalued. Let's also not forget the fact that Par wanted to expand the agreement suggests that Par liked what they were seeing out of the initial testing from the first product, otherwise there would be no reason to expand the agreement to cover two more additional products. This agreement could provide unforeseen returns for investors at literally no cost to IntelGenx. Any revenue obtained from these agreements would go straight to IntelGenx's bottom line.

These pipeline products will help to provide a future avenue for share price growth. As these products continue to progress through clinical development, we should see share price increases as the market begins to catch onto the potential for IntelGenx's pipeline.

Financial Position

Whenever we are considering a stock for long term investment, we must take a look at the financial position of the company. Investors do not want to invest in a company looking to the long term, only to find themselves heavily diluted once the company finally reaches its full potential. Fortunately for IntelGenx shareholders, the company has done a very good job of managing its cash, and dilution does not appear to be imminent. The company appears to have a rather substantial cash runway, that when combined with increasing Forfivo XL sales, should help to provide the company with the resources that it needs to effectively operate well into the future.

At the end of its most recent quarter, IntelGenx had a cash pile of over $5.2 million. While this may not seem like a lot of money, IntelGenx had an incredibly low net cash used in operating activities of $0.6 million. The net loss was impacted by higher R&D costs associated with the bioequivalence study for the Tadalafil film. With this study over, investors should see an even lower cash burn rate in the future. The overall net loss reported for the quarter came in at $422 thousand, which was a decrease from the $486 thousand recorded in the first quarter of 2013. The decrease in net loss, even though they have an increase in costs due to the bioequivalency test helps to show that IntelGenx is able to effectively manage its resources.

On the revenue side, IntelGenx recorded $222 thousand in sales of Forfivo XL. This was an increase from the first quarter of 2013's sales of $154 thousand. With this in mind, should the company continue to see increased sales, it should help to expand IntelGenx's cash runway. Also, any revenues from the agreements with Par Pharmaceuticals should have a similar effect. It is also important to note, regarding the revenue that upon FDA approval of IntelGenx's migraine product, IntelGenx is due a $500 thousand milestone payment from RedHill. This should also substantially add to IntelGenx's cash pile.

Overall, IntelGenx appears to be well positioned from a financial standpoint for long term success. While the company is currently losing money, its current pipeline products should more than make up for that. When coupled with the fact that the company will not need to dilute until well into the future (given its current cash burn rate), it appears as though IntelGenx is in a financial position to merit long term oriented investment.

Share Price Estimate

It is a very tricky business attempting to estimate the share price that a company should be trading at. These are my estimates only, and they could meaningfully deviate from the results given any number of setbacks including the potential refusal of the FDA to approve any of the aforementioned products, or a failure in marketing the products successfully. Now, given the disclaimer at the beginning of this article I have determined IntelGenx to be substantially undervalued. The pipeline products at IntelGenx appear to be substantially undervalued, in this article alone I have identified the potential for $200 million in peak sales (not including Forfivo XL) and another $19 million valuation for INT0028 (which I feel is conservative). This valuation did not take into account any sort of revenue from the Par agreements or from a potential partnership regarding the animal products division, either of which should substantially increase the valuation of IntelGenx. If I am right, given 62.5 million shares outstanding, the company should be valued at over $3.50 per share.

Bottom Line

IntelGenx represents a highly undervalued investment opportunity. While the company did experience a recent setback with its CRL, it appears to have adequately addressed the issues raised and should see FDA approval this time around. As investors see increased attention to the company, it should increase in share price. The company offers a compelling risk/reward analysis for investors, and is trading far below its fair value. IntelGenx has positioned its pipeline for long term growth and appears to be in a position where it could provide significant returns for long term oriented investors.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.