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Investment Opinion, In Brief

The PDUFA date for Levadex, MAP Pharmaceutical's (NASDAQ:MAPP) lead product, is looming on March 26, 2012. I believe that there is a very high probability for approval and only a small chance for a Complete Response Letter. A CRL, if issued, would likely relate to the Chemical, Manufacturing and Control (CMC) section of the NDA and could probably be resolved fairly quickly. I think that efficacy and side effects as defined in the pivotal phase III trial will not create any questions from the FDA.

I believe that Levadex has blockbuster potential and, importantly, has solid intellectual property protection that should afford a very long product life cycle, potentially through 2028. I see peak sales of $500 to $750 million in the US, and I have a price target of $50 for 2015, as explained later in this report. I see the stock as having a bounce if approval is gained. However, the current market capitalization at $530 million reflects high expectations for approval.

The performance of the stock in the early launch phase is uncertain for me. Some excellent and prominent Wall Street analysts are modeling for a quick ramp of sales. However, we have seen on several recent product launch occasions that delays in gaining formulary approval can slow the sales ramp. If this occurs with Levadex, there could be some pressure on the stock if sales projections were lowered by the more bullish analysts. My estimate for sales in 2013 is $62 million and I understand that estimates from Street analysts range from $35 million to $175 million.

Instead of telling you what to do with the stock, let me tell you what I am doing with my MAPP stock. I have owned MAPP since October of 2009 and have a good profit. I am not buying or selling going into the approval and I do not plan to buy more until I can better determine how the launch is going. Even if the launch develops more slowly than bulls are anticipating and the stock weakens, I don't foresee selling my stock and would be looking to increase my position on weakness. I think that this is a stock that has excellent long term potential, but I will leave it to each investor to select an entry point on the stock. One possible strategy is to buy a small position before the PDUFA date and fill out the position at a later date in line with my strategy.

Opinion on Approvability of Levadex

Levadex is an inhaled dosage form of dihydroergotamine (DHE), a well-accepted treatment for migraines that has been in use for over 60 years. Because of formulation issues, DHE is available as an intravenous formulation in the hospital and as an intranasal formulation, Migranal, outside of the hospital. DHE is already recognized as an effective migraine drug.

A Phase III trial of Levadex produced very positive results, so much so that the FDA notified the company that it would not require a second Phase III trial for approval. MAPP had been planning to do a second trial when it received this encouraging news. This suggests to me that there is not likely to be an efficacy issue with Levadex.

An important point established in the clinical trials of Levadex is that it has altered the pharmacokinetic profile of DHE with the result that it has meaningfully improved the side effect profile. By averting the sharp spike in blood levels that occurs with intravenous or intranasal formulations, Levadex has reduced the incidence of nausea, the most troublesome side effect of DHE, from a 30% level of occurrence to 2%. In fact, in the Phase III clinical trial, the incidence of nausea with Levadex at 2.0% was less than the 4.5% seen with the placebo control. This leads me to believe that there won't be issues with side effects.

The next consideration is that Levadex is an inhaled dosage form. Drugs such as this always draw the FDA's attention in regard to effects on lung function. Levadex is a small molecule, and there is long established experience with delivering steroids and bronchodilators, which are also small molecules, on a chronic basis for the treatment of respiratory conditions. Levadex will be used on an episodic basis, perhaps 2 to 4 times each month at most as opposed to every day like the steroids and bronchodilators. I don't think this will be an issue.

Adding confidence in regard to safety are a number of successful safety studies: (1) a 12 month extension of the pivotal "Freedom" phase III trial produced a clean side effect profile, (2) a cardiovascular study showed no increase in QTc interval, (3) a pharmacodynamic study showed no increase in pulmonary artery pressure over two hours between Levadex and placebo, and (4) there was no pharmacokinetic differences with Levadex in smokers and asthmatics as compared to non-smokers and non-asthmatics.

I don't think that there will be safety or efficacy issues related to Levadex. This leads me to believe that if there are any issues raised by the FDA, it will be with the CMC section of the NDA. I have no reason to believe that there will be an issue and there is no real way to determine this from the clinical trial data. I only bring this up because CMC issues are unpredictable and do arise from time to time.

Investment Perspective

I believe that Levadex is an important new migraine product that has blockbuster potential. Triptans (Imitrex, Axert, Frova, Maxalt, Relpax, Treximet and Zomig) are the most widely used drugs used to treat acute migraine, and account for around 10 million prescriptions written each year. Each prescription contains about 10 individual treatments for acute migraine attacks, suggesting that there are roughly 100 million doses of triptans sold each year. About 25% of patients do not respond to triptans, and this is the market Levadex will initially address.

Physicians treating migraines generally prescribe a generic version of the original triptan drug Imitrex to each new acute migraine patient, and if this doesn't work, they will prescribe a second triptan and perhaps a third. The market for Levadex initially will be for patients who fail to respond to two or three triptan drugs. This is about 25% of triptan treated patients and represents an addressable market of roughly 25 million doses per year. Generic triptans are priced at about $10 per dose, and branded triptans are priced at $25 per dose or more. I expect Levadex to be priced in line at least with the branded triptans, and more likely at a premium. Branded triptans sell at about $25 per dose and at this price the addressable market in the US is $625 million. However, the price of Migranal, the nasally administered dihydroergotamine brand, is about $70 per dose and at that price the addressable market is $1.8 billion.

MAPP announced a partnering deal with Allergan (NYSE:AGN) in which both parties will market Levadex to neurologists and pain specialists, which is roughly 25% of the triptan prescribing market. The partners will share costs and split profits 50/50 in this market segment. Allergan is already marketing Botox to this group of physicians, and adding Levadex to treat acute attacks would be complementary to Botox. Botox is used to treat chronic migraine patients who suffer 15 or more attacks per year. Even after Botox treatment these patients may still suffer around 7 or 8 attacks per year, so Levadex should complement Botox very well.

MAPP has retained all marketing rights to Levadex for physicians (largely primary care) who write the remaining 75% of triptan prescriptions in the US. MAPP exclusively owns all foreign commercial rights with the exception of Canada where Allergan will also co-promote. I expect partnering deals for these two market segments could be consummated in 2012. I would expect upfront payments of $30 to $60 million and mid to high-teens royalties from these deals. If Levadex is approved on March 26, 2012, MAPP will receive another $50 million milestone payment from Allergan upon first commercial sale and possibly $25 million more dependent on whether milestones related to labeling are achieved. This could increase the cash balance by $105 to $135 million in 2012.

The anticipated cash inflow from Allergan and anticipated partnering milestones would bulwark an already strong balance sheet, which had an estimated $100 million of cash at the end of Q4 2011. I estimate that the operational burn for the four quarters of 2012 will be about $50 million, so MAPP could end 2012 with $155 to $185 million of cash. My sales and earnings model projects a burn rate of about $50 million in 2013, $6 million in 2014 and profitability in 2015. At the end of 2014, poised for profitable operations, the company could have $100 to $130 million of cash. The company has an exceptionally strong financial position and I see no need for the company to raise any more equity.

An already strong patent portfolio was bolstered by a recently issued pharmacokinetic profile patent that promises to provide protection from generics until 2028. Another important barrier to entry for a generic would probably be the difficulty in duplicating the action of the Tempo inhaler. It is likely that any company that wanted to market an inhaled dihydroergotamine inhaler would have to develop their own device and then do their own phase III trial. The resultant product could receive approval, but would not likely be interchangeable with Levadex. I think that Levadex holds the promise of an exceptionally long product life cycle.

A summary of my sales, royalties and EPS projections is presented below:

FY 2011FY 2012FY 2013FY 2014FY 2015FY 2016
Levadex US Sales by AGN JV08,00062,000125,000175,000250,000
Levadex Royalties by other US Partner004,20010,85021,87530,625
Levadex Foreign Royalties000005,000
Collaboration Revenues66,50062,0000000
EPS ex collaboration revenues($1.71)($1.92)($1.49)($0.19)$0.73$2.01
EPS with collaboration revenues$0.44$0.05($1.49)($0.19)$0.73$2.01

Source: SmithOnStocks.

MAPP is very hard to model because in the US, Levadex sales will be sold in a joint venture with Allergan in which profits will be split 50/50. This means that an income statement for the joint venture must be constructed in addition to the principal income statement for MAPP. In addition, there will be a royalty stream for US sales of Levadex outside of the Allergan joint venture and a foreign royalty stream also outside of the Allergan joint venture.

Street estimates are all over the place as we look out into 2016 with a range of sales from $143 million $450 million and with EPS ranging from $2.30 to $5.50. The one common thread is that everyone is looking for a quick ramp in sales in the 2013 to 2016 timeframe. I am looking for sales of $250 million and EPS of $2.01.

My 2015 target price for MAPP is based on applying a 25x P/E ratio to 2016 projected EPS of $2.01. This results in a $50 price target for 2015. I think that the long term prospects for the stock are very appealing, but I am quite concerned about near term sales projections from Wall Street. My 2012 sales estimate for the Allergan-MAPP collaboration is $8 million and for 2013 it is $62 million. However, some highly respected Wall Street analysts have much higher sales estimates.

My concern is based on the slow uptake that has characterized most biotechnology launches over the last few years. Human Genome Sciences' (HGSI) Benlysta, Cadence's (CADX) Ofirmev and Savient's (SVNT) Krystexxa come to mind. Each of these launches was disappointing relative to Street expectations due to managed care hurdles and cautious physician adoption of new products.

This presents me with a quandary. I have owned the stock for nearly two years, and will continue to do so. However, if my estimates on the Levadex launch are correct, the stock could react negatively in 2012 and 2013, the first years of the launch, if sales fail to measure up to high expectations and some analysts have to lower their sales estimates.

Company Overview

MAP Pharmaceuticals is a specialty pharmaceutical company developing inhaled medications which can improve the therapeutic profile of both old and new drugs. Its lead product Levadex has been developed for the acute treatment of migraine attacks. It is an inhaled dosage form of dihydroergotamine mesylate (DHE), a generic drug which has been used for over 60 years to treat migraines. Because of poor bioavailability, DHE has primarily been administered with injections and this has limited its use largely to hospital emergency rooms. There is also an intranasal version of DHE called Migranal that has had limited usage due to poor bioavailability, side effect issues and interactions with other drugs.

MAPP signed a lucrative partnering agreement with Allergan to co-market Levadex to neurologists and pain specialists in the US and Canada. MAPP intends to build a 50 person specialized sales force to work alongside Allergan and is also evaluating options to commercialize Levadex in physician specialties beyond the Allergan agreement. It is in discussions with other companies to market to primary care and other physicians not included in the Allergan agreement in the United States. The company is also in discussions with potential partners about commercialization opportunities outside the US.

MAPP's Technology Platform

MAPP has a versatile and strong technology platform that is based on two key components. The first is the creation of drug particles and formulations that can be applied to small molecules like dihydroergotamine and potentially to peptides and proteins that allows them to be delivered through inhalation. The second is the development, engineering and manufacturing of aerosol delivery devices, such as the Tempo inhaler used with Levadex. Tempo is a proprietary, pressurized metered dose inhaler that dispenses drug automatically when the patient inhales.

In the case of Levadex, MAPP has been able to develop an inhaled dosage form that allows for easy self-administration by the patient, as contrasted with the injectable formulations of DHE that are used in hospitals. It has also been able to improve the pharmacokinetic profile of dihydroergotamine so that it has retained the efficacy of injectable DHE while largely eliminating side effects, most notably nausea. In comparison to the nasally inhaled DHE product Migranal, Levadex's superior pharmacokinetics has dramatically increased efficacy, significantly reduced side effects and nearly eliminated drug interactions that are a serious issue with Migranal.

This technology platform can be used to develop additional products, which like Levadex can meaningfully improve the delivery, efficacy and safety of older drugs. One of its most important aspects is that it is very hard for generic companies to challenge products developed by MAPP. Generics depend for success on a clear recipe for copying innovative drugs such as a small molecule with a known chemical composition. The technology of MAPP uses a great deal of art that is not readily available and is hard to duplicate. The engineering and art that goes into the inhalation device is similarly difficult to copy.

It is probably the case that companies trying to market an inhaled DHE product will not be able to follow the relatively simple process usually used in introducing generics, which is based largely on showing comparable pharmacokinetics. Based on current state of the art regulatory practices, they may have to do clinical trials to gain approval, and even with success they would not be deemed substitutable for Levadex. The bane of existence for many small, innovative drug companies is short product life cycles due to successful generic challenges. In this regard, MAPP is much more differentiated and more strongly positioned.

Source: MAP's Levadex Will Likely Be Approved March 26