Catalyst Pharmaceuticals Partners Inc(NASDAQ:CPRX) shareholders received a surprise piece of bad news when the FDA issued a refusal to file letter over the company's drug Firdapse. A refusal to file letter means that the FDA does not believe that there is sufficient information from which it can make an accurate determination on the drug. Investors were, understandably, shaken by the news and a large sell off of shares occurred. However, this setback could create a buying opportunity for value based investors as long as the setback does not meaningfully remove the chance that Firdapse will ultimately be approved.
Firdapse is a version of amifampridine (DAP 3,4), which is currently used as an off-label treatment for Lamebert- Eaton Myasthenic Syndrome (LEMS). Amifampridine is one of the only known drugs to meaninfully help LEMS patients, and therefore it can be extremely valuable to investors.
Catalyst currently holds the rights to Firdapse in North America, which it licensed from Biomarin Pharmaceuticals (NASDAQ:BMRN). Catalyst will owe Biomarin royalties on net sales of Firdapse, should it successfully obtain approval, and will also have to pay milestone payments. Catalyst was able to obtain breakthrough therapy designation for Firdapse, which allowed for Catalyst to have a faster approval timeline for Firdapse and create a rolling new drug application (the application that was subsequently hit with a refusal to file by the FDA).
Race to Approve Firdapse
The timeline for Firdapse approval is extremely important for the company. The quicker that Catalyst is able to get Firdapse approved, the less of a risk that the company will face. What Catalyst is attempting to do with Firdapse is to take a drug that is currently being used for LEMS that is unapproved for that indication and is off patent. If Catalyst is able to obtain FDA approval, it will be able to freeze other drugs off of the market for seven years due to the orphan drug approval process. This would help for Catalyst to take a drug that is essentially already used by patients and finding a way to charge for it.
While this method has been very controversial lately, with companies like Vertex Pharmaceuticals Inc(NASDAQ:VRTX)and Turing Pharmaceuticals facing scrutiny over drug pricing, this can be a very profitable area for investors to look for returns. From a sheer investment standpoint this drug should be very profitable to Catalyst should it be able to obtain FDA approval for Firdapse.
The timeline is closing, however, due to a threat from Jacobus Pharmaceuticals (a privately held company) which has already been providing a similar version of the drug for free to patients for the last twenty years. Jacobus has promised to seek FDA approval for its version of the drug, and is currently running clinical trials. If Jacobus is successful at obtaining FDA approval before catalyst, it would freeze Catalyst out of the market for seven years. With Jacobus conducting the requisite trials and already being able to distribute the drug to patients, there is a substantial chance that if the timeline for Catalyst's approval is moved too far back, that Jacobus could swoop in and protect its marketshare. This would also substantially harm Catalyst's stock as its lead drug would essentially be worthless for the next seven years and even after that time period, it would be hard to compete with Jacobus for the LEMS market. It does not appear as though Jacobus is very far in terms of the drug approval process, but it is still a threat that Catalyst Pharmaceuticals investors should take into account. The longer that Catalyst has to take in order to get Firdapse approved, the greater the risk posed by Jacobus Pharmaceuticals.
The Sky Is Not Falling
While investors were understandably shocked by the FDA's decision, we do not yet have clarity on what is going to be required for Catalyst to be able to rectify this issue. It is possible that this could involve additional clinical trials in order to be able to provide the FDA with sufficient information in order to be able to approve Firdapse. The main concern for investors should be the costs of the clinical trial that the company would have to run. It is unclear, however, if a clinical trial is going to be needed in order to decide this issue. It is possible that when Catalyst meets with the FDA that there was a different problem that caused for the FDA to issue its decision, which could mean that the problems are much less than those currently anticipated by the market. This would present a substantial catalyst for investors and would cause for the stock price to move up substantially.
In order to fully look at the impact of this decision by the FDA, it is important to understand what a refusal to file letter means. This letter simply means that upon submission of the application, the FDA felt as though it did not have a sufficient amount of information in order to be able to be able to make a determination on whether or not to approve the drug. These letters are rather rare, as usually the FDA and the company will have met multiple times before the submission of the application and therefore a company will have been tipped off if the FDA has concerns about the amount of data in the application. While embarrassing, this does not mean that the drug has been 'rejected' so to speak or that this is meaningfully going to impact the chances of Firdapse getting approved for use. It is also unlikely to impact sales of Firdapse, provided of course that Jacobus does not enter the market in the meantime.
Firdapse had promising results from its phase three clinical trial. In its clinical trial, Firdapse was able to meet both of its primary endpoints, which helped to show an improvement in patient mobility when taking the drug. Firdapse was also safe and well-tolerated. With these phase three results being positive for Firdapse, it is unclear why the FDA is requesting additional information in order to be able to make a determination on Firdapse.
Why Is Firdapse Such A Compelling Investment Opportunity?
There are an estimated 3,500 patients in the US living with LEMS, and Firdapse could potentially be the only drug on the market that is able to help them. Some peak sales estimates have the drug reaching over $300 million per year in revenue for Catalyst. This drug is even more compelling due to the fact that it would not likely require a large traditional sales force. With such a small patient population, the biggest challenge will be finding the doctors that treat the patient population, but it is unlikely that Catalyst will have to resort to a large amount of advertising or to having many sales reps in order to be profitable off of the drug. This would mean a higher net income for shareholders, and a higher amount of money that Catalyst could put into expanding its pipeline, which could include finding other indications for Firdapse.
A main factor to consider when looking at Catalyst is the financial health of the company. Especially since additional clinical trials could be a possibility, an investor who wants to invest in Catalyst needs to be able to make sure that the risk of dilution is minimal.
Due to its nature as a drug development company without an approved drug, Catalyst does not currently have any way of generating revenue. This causes for the company to have to post net losses and rely on shareholder support until such time as it is able to get a drug approved and onto the market. Fortunately for shareholders, Catalyst has a rather large pile of cash that it is able to use in order to help finance its ongoing operations. As of its most recent quarterly filing, Catalyst had $32.75 million in cash, another $3.7 million in Certificates of Deposit and $26.50 million in short term investments. This gives a total short term assets of cash and cash equivalents to be $62.95 million. Catalyst was also using cash at a rather conservative pace, reporting net losses of $14.417 million through the first three quarters of last year. This would suggest that the company will have a cash runway that is sufficient to see Firdapse through to FDA approval. Investors should be wary, however, that should there be additional clinical trials necessary in order for the FDA to feel comfortable approving Firdapse, that Catalyst's cash burn rate could increase substantially and therefore increase the risk of dilution.
When looking at any investments, especially in a company as small as Catalyst, investors need to consider the risks. When looking at Catalyst, the biggest immediate risk is the question of what it will have to do in order for the FDA to be satisfied with its filing (and ultimately to achieve FDA approval). The risk here would be that the company will have to run an additional phase III trial, which would add millions of dollars in costs and potentially years to the approval process.
Another major risk for Catalyst is the emergence of other market competitors. With Jacobus Pharmaceuticals researching its own version of a drug for LEMS, this could represent a substantial risk to Catalyst investors, should Jacobus be able to surpass Catalyst. While I believe that this risk is comparatively low, as a lot of the results that have been presented have been early results, it is a substantial risk to Catalyst.
The final major risk for the company would be for the US Government to pass legislation that limits Catalyst's ability to obtain revenue from Firdapse. With recent hearings on this exact business model, it appears as though legislators are paying attention to the high costs of prescription drugs. While Congress acting on its frustration may be unlikely, Catalyst investors will have to be wary of any potential government intervention into Catalyst's business model.
Catalyst's bad news may present a compelling buying opportunity for investors. With Catalyst having a drug that is likely to eventually obtain FDA approval, and a patient base that has to have access to the drug in order to maintain quality of life, Catalyst has a compelling investment story. The main information for investors to look out for will be whether or not Catalyst will have to run additional clinical trials in order to satisfy the FDA's concerns. Even in that case, Catalyst could still be substantially undervalued.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CPRX over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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