Treximet Royalty Sold for $75 Million
On November 23, 2011, Pozen (POZN) entered into an agreement with CPPIB Credit Investments (CIT) whereby the company sold the U.S. royalty rights to Treximet for $75 million in cash. The transaction is retroactive back to October 1, 2011. Pozen retained the potential to receive 20% of the total royalty payment starting on April 1, 2018, (the time of the U.S. patent expiration assuming pediatric extension). CIT assumes all financial responsibility for any and all outstanding Treximet patent litigation.
We view the deal as a home-run transaction for Pozen. Our previous NPV analysis of the Treximet royalty payments from Glaxo totaled $53 million (assumed 14% discount rate using CAPM). CIT’s payment to Pozen of $75 million in cash equated to a cost of capital of around 10%. We believe this was a highly efficient transaction for management. Pozen exited the third quarter 2011 with $46.4 million in cash. We now forecast Pozen will exit 2011 with approximately $111 million in cash. This equates to $3.60+ per share. Additionally, we expect operating burn in 2012 to decline significantly once the two phase 3 PA-325/40 trials complete in the first half of the year. Accordingly, we believe Pozen will still have more than $85 million in cash at year end 2012.
Vimovo Ramp Continues
Separately, on November 17, 2011, Pozen CEO, John Plachetka, stated that he believed worldwide Vimovo sales could exceed $100 million in 2012. We remind investors that since the end of the third quarter 2011, AstraZeneca (AZN) has reported launching the product in a total of 16 countries outside the U.S., bringing the total to 25. We expect the ramp in Vimovo sales will slowly gain steam outside the U.S. throughout the next few years. Additionally, AstraZeneca is working to gain coverage under Medicare Part-D for Vimovo in January 2012. Current coverage is around 20% in the U.S. AstraZeneca believes it could get this number to 60% by year-end 2012. This would better position the product competitively vs. Celebrex. We continue to believe that our forecasts for Vimovo remain on track with peak sales of at least $250 million worldwide, over $150 million of which we expect internationally.
Stock Remains Undervalued
We believe Pozen’s stock remains significantly undervalued based on the two core remaining products, Vimovo and PA325/40, and the solid cash balance. As noted above, Pozen should exit 2011 with $111 million in cash. That's $3.65 per share. Additionally, operating burn for 2012 should decline from 2011 and we forecast that the company will still hold more than $85 million in cash at year-end 2012.
Sales of Vimovo remain on track to achieve our peak target of $250 million worldwide. As AstraZeneca launches the product in new countries around the world, we believe the royalty payments alone will be enough to bring Pozen to cash flow positive levels by 2014. Similar to the discount the market was applying to Treximet, we believe the market is vastly under-valuing the NPV on Vimovo. Based on $250 million in worldwide sales with an estimated 10% global royalty rate, the cash flow associated with Vimovo to Pozen should be valued at approximately $50 million, or $1.75 per share. We calculate this value using a 14% discount rate (via CAPM). Above we noted that the captial cost for the Treximet transaction was only 10%.
The PA franchise remains the wildcare for Pozen. However, what is clear is that the market is currently valuing PA at next to nothing. We remind investors that Pozen has hired Keelin Reeds to help it find a commercialization partner on PA. The phase 3 data from both PA trials is expected in the second quarter 2012. Based on the positive phase 2 data and the positive data from the long-term safety study, we believe both phase 3 trials on PA will be a success, and present little risk at this point. We remind investors that both trials are being run under a special protocal assessment (SPA). The NDA should be filed in third-quarter 2012. We expect a deal in 2012 and approval in 2013.
Pozen's stock is currently trading just above cash value ($3.65 per share). The market is applying virtually no value to Vimovo or PA. The cash flow payments on Vimovo are worth $1.75 per share. We think PA is worth a similar $1.50 to $2.00 per share. That makes Pozen worth $7 in our view. The Treximet transaction was done to unlock significant value for shareholders. At today's price, investors can buy Pozen for its residual cash value and wait for management to enter into additional deals or transactions to unlock value around both Vimovo and PA.