Inefficient Market Theory suggests that a company's market capitalization is not always a true reflection of its value, and it can be vastly different than the current value of their future cash flows.
Progenics (NASDAQ:PGNX) appears to be a good example of an inefficient market. Last week, 30 days after a positive FDA Advisory Committee meeting, the Agency advised Progenics and its partner, Salix (NASDAQ:SLXP), that the opioid induced constipation (OIC) drug Relistor can be approved upon submission of a plan for a post marketing study.
Relistor has a history. In 2005, Progenics and Wyeth entered into an agreement to develop Relistor. By 2008, subcutaneous Relistor had earned FDA approval for a narrow patient population, those suffering OIC in palliative care. The oral formulation succeeded in a Phase II trial, but the drug failed an important indication, the delay in bowel function known as post-operative ileus (POI). By 2010, Wyeth was in the midst of being acquired by Pfizer (NYSE:PFE), and disappointing Relistor sales in the one million patient palliative care OIC market led Wyeth to abandon Relistor. They even paid Progenics $10M to exit the collaboration.
By 2011, Progenics had a new partner in Salix Pharmaceuticals, a specialty pharmaceutical company focused on gastroenterology. Salix's approach to Relistor was to expand the current label to include OIC patients outside of palliative care, then pursue the oral formulation.
After a three-year delay that included a complete response letter and a FDA Advisory Committee meeting that brought Salix, Progenics, AstraZeneca (NYSE:AZN), and Nektar Therapeutics (NASDAQ:NKTR) together at a meeting to assess the entire class of OIC drugs, the Agency stated that approval of subcutaneous Relistor for non-palliative patients will occur as soon as Salix submits a suitable post marketing plan. Phase III trials of the oral version are complete, and Salix has said that the results reflect the subcutaneous formulation, suggesting a strong likelihood of FDA approval.
Annual subcutaneous Relistor sales are $42M in the relatively small palliative care market. With the expanded label, Salix will be able to market to eleven million patients affected by OIC. In a July investor presentation, Salix CEO Carolyn Logan forecasted total sales of oral and subcutaneous Relistor to exceed $1.5 billion by 2023.
The affect of Relistor royalties on Progenics' valuation is simple to calculate, albeit with a few key assumptions. Progenics earns a royalty of 15%-19% on Relistor sales. They also earn a $40M milestone on the expanded indication, and $50M on approval of the oral sNDA. Salix expects to submit the sNDA for the oral in Q4, with a 2015 PDUFA date in 2015.
Relistor has patent protection through 2031. If sales reach only half of Salix's projections, and Progenics earns only a 15% royalty on all of those sales, these are the future cash flows (assuming a 15% discount rate):
|Year||Cash Flow||Present Value (i=15%)||Source|
|2014||$6M+$40M||$ 40M||15% on $42M sales + $40M milestone|
|2015||$12 + 50||$ 47||15% on $80M sales (existing & new indication) + $50M milestone|
|2016||$16||$ 11||Assume 32% sales growth to 2023 (Salix forecast year)|
|2020||$48||$ 18||Assume sales reach only 50% of Salix forecast (through patent expiration in 2031)|
Progenics has other promising products that are in Phase III trials, but it has a market capitalization of only $328M, which is less than the value of just their anticipated Relistor cash flow. There are three possibilities to explain this valuation:
- The market believes that Salix's sales projections are high by more than double; or
- The market believes that Progenics' other products, the PSMA prostate imaging and cancer therapy drugs have no value; or
- The market is inefficient and will soon realize the value in Progenics.
If you believe that Salix's projections are correct, and that the cash flows shown here are understated by half, then Progenics is worth at least $708M. And if you believe that either of the PSMA products for Prostate cancer show promise, $708M should be just a starting point.
Progenics had about $94M on its balance sheet as of March 31, 2014, and their quarterly cash burn rate runs about $9M. The upcoming $40M milestone payment from Salix for the expanded Relistor indication will strengthen the balance sheet and should provide enough cash to complete the PSMA Phase III trials without shareholder dilution.
Progenics has a small retail float, with 75% institutional ownership, and a significant short interest. When the market does catch up with Progenics, the inefficiency could resolve itself very quickly.
This article contains projections and other forward-looking statements regarding future events. These statements are predictions, and are subject to risks and uncertainties that could cause actual events or results to differ materially. These risks and uncertainties include, among others: failure to achieve FDA approval, market acceptance for approved products; competition; the possible impairment of, inability to obtain and costs of obtaining intellectual property rights; and possible safety or efficacy concerns, general business, financial and accounting matters, litigation and other risks.
Disclosure: The author is long PFE, SLXP, PGNX, AZN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.