Pozen’s (POZN) stock has been on a precipitous decline since the beginning of the year, down from $7.10 on January 1 to only $4.87 today. The current market capitalization based on today’s price and roughly 30 million shares outstanding is $146 million. We think this vastly undervalues the company based on a sum-of-parts discounted cash flow calculation.
What’s Weighing On The Stock?
Pozen’s stock decline has been driven by two forces since the beginning of the year. The first is lingering patent infringement trial against three generic pharmaceutical companies [Par Pharmaceuticals (PRX), Alphapharm Pty, and Dr. Reddy’s (RDY)] on Treximet, the company’s combination sumatriptan/naproxen sodium tablet for the treatment of migraines, and sold in the U.S. by partner, GlaxoSmithKline (GSK). Pozen promised on its third quarter conference call, held in October 2010, that a decision from the United States District Court for the Eastern District of Texas would be out before the end of the year. Well, December 31st came and went, and still we wait for a decision from the judge.
Nevertheless, Pozen remains decidedly confident in the outcome of the case. CEO John Plachetka stated on the same third quarter call that there were, "no surprises" from the generic firms. We remind investors that Teva Pharmaceuticals (TEVA) previously bailed-out of this lawsuit, potentially hinting that Pozen’s IP looked too strong to challenge. If upheld, the two patents will protect Treximet exclusivity until August 2017. Recent news that the U.S. FDA rejected the pediatric extension on Treximet is a non-issue in our view. This would have only extended the patient from August 2017 to February 2018.
The second issue that is weighing on Pozen share is the weak launch of Vimovo, Pozen’s esomeprazole/naproxen tablet for osteoarthritis pain, by partner AstraZeneca (AZN). Weak might be an understatement after AstraZeneca reported only $5 million in sales in the third quarter 2010 and $0 sales in the fourth quarter 2010. AstraZeneca has reported that prescriptions for Vimovo are growing "on plan". Those prescriptions are not generating revenues because they are all being fulfilled by free samples and deep discounting coupons. If patients like the drug, they will eventually come back for refills at full price. We expect that sales in the coming quarters will start to track prescriptions, and that should help turn Pozen’s stock around.
Our first assumption is that Pozen will win the patent infringement case and Treximet will be patent protected until August 2017. Under this scenario, we see Treximet alone with $90 million in market value. Treximet posted sales of $86.1 million in 2009 and $87.3 million in 2010. For 2011, assuming full exclusivity, we expect Treximet sales of $92 million, with low-single digit growth until August 2017 when the patent expires. Pozen collects an 18% royalty on U.S. sales of Treximet by GlaxoSmithKline. Our DCF analysis of these future cash flows yields an NPV of $90 million based on a 10% discount rate (beta of 1.45, a 4% risk-free rate, 0% debt).
Sales forecasts for Vimovo are a little harder to forecast given the slow ramp since the launch in the third quarter 2010. However, we take confidence in the fact that AstraZeneca thinks this could be a $500 million drug in the U.S., and the company recently paid Pozen a $25 million milestone for approval in Europe. Between the U.S. and Europe, we see Vimovo as posting sales of $600 million in 2018. Vimovo is designed to provide a safer gastrointestinal approach to daily NSAID therapy.
Cox-II drugs such as Vioxx and Celebrex, designed to provide safer gastrointestinal profile, peaked sales at over $7 billion worldwide in 2004 before Vioxx was pulled from the market for cardiovascular risk. According to Pozen management, approximately 50% of OA/RA patients are at risk for gastrointestinal damage. Some 37 million Americans suffer from OA or RA. Several large clinical studies have confirmed that 20-40% of those who take NSAIDs regularly have one or more ulcers in their stomach or intestines. In the U.S., there are an estimated 16,500 deaths each year due to NSAID-induced GI complications (primarily from GI hemorrhage). Given the lack of treatment options and the withdrawal of Vioxx and Bextra, only about 25% of these patients are co-prescribed a gastro-protectant.
Our 2011 Vimovo sales forecast of $81 million assumes only 1% market share in the NSAID/Cox-II class. By 2018 we believe Vimovo can capture 4% market share of the daily NSAID/Cox-II class. Our assumptions clearly do not model Vimovo to be a blockbuster, but with 10% royalty to Pozen, it is still worth an estimated $100 million in market value, even if we bump the discount rate to 20% to account for the added risk of the recent launch.
Besides Treximet and Vimovo, Pozen is currently in Phase 3 trials for PA-325/40, a "safer aspirin" product that combines 325mg of enteric coated aspirin with the PPI 40mg omeprazole (sold as branded Prilosec). It’s a novel formulation and a simple idea that builds off the already approved pathway defined by Vimovo.
We expect once approved that Pozen’s "safer aspirin" will find its way into daily aspirin therapy for cardiovascular disease. This is an enormous market. Cardiovascular disease is the leading cause of death worldwide with over 50% mortality. An American has a heart attack roughly every 26 seconds. Aspirin has been used to prevent recurrent myocardial infarction (MI) since the 1940’s when the drugs anti-platelet activation properties where first discovered. In 1988, the U.S. FDA approved the use of aspirin for the prevention of recurrent MI. Since that time, data reported in The Lancet from the ISIS-2 (2nd International Study of Infract Survival of MI) demonstrates that daily use of 162.5mg aspirin reduces the potential for vascular mortality by 23% (p<0.00001) vs. placebo in the first five weeks following a myocardial infarction. Long-term follow-up data suggest the benefit of daily aspirin use persists in the prevention of recurrent MI as long as 10 years post event. Over 50 million American’s use daily aspirin therapy. Unfortunately, of the 50+ million Americans that take daily aspirin therapy, 20% are at risk for major complications due to gastric bleeding. Roughly 25% of the people that start a daily aspirin therapy will discontinue or reduce frequency or dose due to serious gastrointestinal side-effects.
It is clear that Aspirin use is limited by gastrointestinal intolerance and bleeding. The AHA and ACC recommend daily aspirin use at 75mg to 162mg per day. The European Society of Cardiology recommends 75mg to 150mg per day. These guidelines were put into place to reduce the potential for GI-related bleeding events. Data published in the American Journal of Cardiology shows a 2-fold reduction in major bleeding events and a 3-fold reduction in total bleeding events on daily aspirin use <100mg when compared to use >200mg. Pozen’s "safer aspirin" product, a drug that is designed to provide a full 325 mg dose of aspirin while greatly reducing the risk for GI-bleeding and ulcers, could find significant use among the 50+ million American’s at risk for recurrent MI and GI-related side-effects. Pozen’s Phase 2 trial with PA-325/40 showed a 90% reduction in endoscopically diagnosed Lanza 3 & 4 GI-related damage compared to 325 mg of aspirin alone, and a 50% reduce when compare to 81 mg (baby) aspirin. The current Phase 3 trial is being conducted under a U.S. FDA Special Protocol Assessment.
We think the PA-325/40 product, along with potential follow-on products with various doses of aspirin, is worth $50 million. We are using a steeper 20% discount rate here to account for the added risk of being in Phase 3 trials.
Sum of Parts
Summing up the three products at Pozen, Treximet worth $90 million, Vimovo worth $100 million, and PA worth $50 million, we arrive at a total of $240 million. We also note that Pozen will hold still $55 million in cash at the end of the first quarter 2011. Adding in this cash value and we arrive at a total firm value of $295 million. Based on 30 million shares outstanding, we see $10 as fair-value.
DCF Assumptions: Beta – 1.45, Rf – 4%, 100% Equity, 0% Debt, Shares Outstanding – 30 million.