Seeking Alpha
Long only
Profile| Send Message|
( followers)  

When investing in young, small biotech companies, investors take on the risk of whether a company can become profitable, whether drugs can meet FDA approval, whether adequate funding is available to develop and market drugs, and whether the small company can find suitable, big pharma partners to help in the process.

In this article, I would like to spotlight an impressive, profitable biotech company that has tackled all four of those important challenges and is poised to enter the big leagues of viability as a more mature and profitable company. If there is such thing as a low risk, small biotech company, Acura Pharmaceuticals (NASDAQ:ACUR) would be it. Let me explain why.

Acura is a specialty pharmaceutical company engaged in the research, development and commercialization of products intended to address medication abuse and misuse, utilizing its proprietary Aversion and Impede Technologies. These proprietary technologies introduce inactive pharmaceutical ingredients into the most widely used opioid analgesics (oxycodone, hydrocodone) resulting in a final formulation designed to discourage some common methods of tampering associated with abuse and misuse like I.V. injection and nasal snorting.

In a world where abuse and misuse of opioid analgesics is described as an "epidemic" by Josepeh A. Califano Jr. (Chairman and President of the National Center for Addiction and Substance Abuse at Columbia University), Acura's patented technology provides a solution that our society at large has been craving for a while.

According to the Center for Disease Control (NASDAQ:CDC) report published in November 2011, overdoses and non-medical use of prescription painkillers have "skyrocketed" in the past decade resulting in nearly half a million emergency department visits in 2009 due to misuse and abuse. And nonmedical use of prescription painkillers costs health insurers up to $72.5 billion annually in direct health care costs.

A solution to this epidemic can mean big business for the pharmaceutical company that can provide a viable pain treatment alternative to reverse this disturbing trend.

This is why Pfizer (NYSE:PFE) has decided to make a major investment to bring a new line of abuse deterrent, commonly prescribed opioid drugs to market. Biotech investors interested in this trend should be aware that Acura Pharmaceuticals is the primary beneficiary of this Pfizer initiative.

Pfizer Financial Partnership

The strongest attribute of Acura is their multi-drug development partnership with Pfizer. Not many small biotechs enjoy such a lucrative and beneficial arrangement with the largest pharmaceutical company in the world which just happens to have $26 billion in cash on its balance sheet and over $60 billion in annual revenue.

In October of 2007, Acura signed a license, development, and commercialization deal (commonly referred to as the "Pfizer Agreement") with King Pharmaceuticals (now a subsidiary of Pfizer). The deal allows Pfizer to develop and commercialize four opioid analgesic products using Acura's proprietary and patented Aversion Technology, which has already generated one FDA approved drug, Oxecta, to be discussed later in article. The agreement covers the following drug development:

Pfizer's Opiod Drugs Using Acura's Aversion Technology

Comparable Brand Name

Status

Oxecta (oxycodone HCI) Tablets

Roxicodone, Oxy IR

FDA Approved on June 17, 2011; First commercial sale on February 2, 2012

Oxycodone HCI/acetaminophen Tablets

Percocet

Under development by Pfizer; Proof of Concept attained

Hydrocodone bitartrate/acetaminophen Tablets

Vicadin, Lortab, Norco

Under development by Pfizer; Proof of Concept attained

Undisclosed opioid analgesic tablet product

Under development by Pfizer; Proof of Concept attained

The Pfizer/Acura agreement also includes very lucrative financial benefits to Acura in the form of up- front cash payments, milestone payments, option fees and reimbursement for research and development expenses. As of December 31, 2011, Acura has received an aggregate of $78.5 million from Pfizer related to the development of these drugs utilizing the Aversion Technology. The payments break down as follows:

Description of Payment

Pfizer Payments To ACUR

Non-Refundable Upfront Cash Payment

$30.0 Million

Reimbursed Research & Development Expenses

$17.5 Million

Fees relating to Pfizer's exercise of its option to license an undisclosed immediate-release opioid analgesic tablet and hydrocodone bitartrate/acetaminophen tablets

$6.0 Million

Milestone fee relating to successful achievement for the primary endpoints for pivotal Phase III clinical study of Aversion oxycodone HCI with niacin

$5.0 Million

Milestone fee relating to FDA approval of Oxecta Tablets NDA

$20.0 Million

Pfizer Payments to Acura to date (12/31/11)

$78.5 Million

And Pfizer's past funding and payments to Acura is only just beginning. In addition to the royalties on sales of recently FDA approved Oxecta, the Pfizer/Acura deal also provides for another $76 million in direct future payments to Acura as follows:

Description of Payment

Payment Amount

Exercise of option for each future opioid analgesic utilizing Aversion Technology

$3.0 Million

Non-Refundable milestone payments for each active opioid analgesic ingredient licensed to Pfizer which achieves certain regulatory milestones in specific countries in the Pfizer Territory

$23.0 Million

One-Time sales milestone payment upon the attainment of $750 million in net sales of all Acura licensed products across all Pfizer Territories

$50.0 Million

Royalty of 5% to 25% on annual net sales for all products licensed to Pfizer across all Pfizer Territories

TBD

Potential Future Pfizer Payments to Acura

$76.0 Million

With the potential of these future payments, Pfizer's investment in Acura could eventual total $154.5 million, and this does not even include the royalties on sales of FDA approved drugs which are set to commence with Oxecta on February 2, 2013.

You can now see why Acura is a profitable company now, even though its first FDA approved drug, Oxecta, has only been commercially available for 38 days now.

Due to Pfizer's most recent $20 million milestone payment to Acura, the company was able to post impressive 2011 financial results of $10.4 million in net income, or $.22/share, for the twelve month ending December 31, 2011.

FDA Approved Drug, Oxecta

On June 17, 2011, Acura's lead product, Oxecta, was approved for marketing by the FDA. Under the terms of the agreement with Pfizer and in addition to the $20 million milestone payment, Acura will receive tiered royalties ranging from 5% to 25% on net sales of Oxecta commencing on the first anniversary of the first commercial sale of Oxecta.

Just over a month ago on February 2, 2012, Pfizer officially made Oxecta commercially available in the United States, Canada, and Mexico.

According to Acura's latest filing, what is likely to draw sales of Oxecta and future abuse-deterrent drugs is the concern from physicians over opioid prescription misuse and the increasing costs to health insurers on the treatment of opioid abusers.

"In a 2011 survey of 400 opioid prescribing physicians conducted for us by an independent research firm, 39% of physicians indicated they were highly concerned with the diversion of their opioid prescriptions for non-medical purposes and 42% were highly concerned about opioid misuse by their patients. Further, 77% and 66% of the physicians indicated that abuse of their opioid prescription by injection and snorting, respectively, would likely lead to serious adverse health consequences for the abuser as compared to only 38% for abuse by oral administration.

Several independent organizations have estimated the potential cost impact of prescription opioid abuse to insurers. An analysis of health and pharmacy insurance claims between 1998 and 2002 for almost two million Americans conducted by Analysis Group, Inc. and others indicated that enrollees with a diagnosis of opioid abuse had average claims of approximately $14,000 per year higher than an age-gender matched non-opioid abuse sample. A 2007 report by the Coalition Against Insurance Fraud, after adjusting for inflation, estimated this excess cost per patient at more than $16,000 for 2007. By applying the U.S. government's estimated 4.4 million annual opioid abusers, this organization concluded that abuse of IR and ER Opioid Products could cost health insurers up to $72.5 billion a year."

These statistics clearly show the need for abuse-deterrent drugs like Oxecta and how the two key players in drug delivery (physicians & insurers) would likely support the extended reach and circulation of abuse-deterrent drugs in the marketplace.

Conclusion

In the world of biotech investing, there is always a risk/reward equation to answer when choosing one biotech investment over another and this should always align with an investor's personal risk tolerance.

With ACUR, you have a company where I would rate the risk low due to their cash position ($35M), low annual burn rate ($10-12M), royalty revenue stream from Oxecta sales, and multi-drug agreement and financial backing of Pfizer. At today's price of $3.22, the rewards could be very high if Pfizer's Oxecta sales go well and they continue to execute on the development of Acura's patented drug technology in their pipeline.

ACUR shares currently sell at a greater than a 50% discount to the $6.80 price the stock surged to on June 20, 2011, when FDA approval news for Oxecta was announced. Now that Acura's lead product is commercially available by Pfizer (as of February 2, 2012), it seems like the perfect time to consider ACUR as an addition to your biotech investments basket.

Source: Pfizer's $150M Bet On Acura Pharmaceuticals Is Good News For Investors