Map Pharmaceuticals (MAPP) recently received a complete response letter (CRL) from the FDA for its lead (and only) product, Levadex. Map Pharmaceuticals and its partner Allergan had a plan to co-promote Levadex for the treatment of acute migraines in the United States, where Map would book the revenues and equally share in the profits (losses). Of course, this was contingent on the approval of Levadex, which did not occur. While Map has traded down since the CRL, the price is holding up surprisingly well. The company has noted that the CRL is over relatively minor issues and should easily be addressed. As such, Map bulls expect resubmission later this year and approval in 2013. In this article, I want to examine the fair value of Map assuming this exceptionally bullish regulatory view.
In order to generate a fair value for Map, I want to model the discounted cash flow of Levadex in the US acute migraine market out to 2020. Of course, any calculation of fair value requires a number of assumptions and in my first set of calculations I want to be as generous as possible. According to the Map 10-Q the acute migraine market was $1.7 billion in 2011 with the leading product being Maxalt bringing in $450 million in revenue (roughly 26% of the total market). In my best case scenario for Levadex, I will assume that the migraine market grows at 3%/year and that it becomes the market leader with 26% of the market in 2019 (reaching 25% of market in 2018).
Aside from assuming a fast growth trajectory and Levadex becoming the market leader, I will also assume 85% gross margins, R&D and SG&A expenses that start at $56 million in 2012 and grow 3%/year, and a 15% tax rate when the company becomes profitable. In addition, as per the agreement with Allergan, I have Map taking either half of the projected losses or half of the projected profits and use a 12%/year discount factor. I believe that Map will need one final dilution in 2013 to expand its sale force, although it is only 10%. Finally, I expect the share count to increase 3%/year with management options.
The combination of these exceptionally bullish assumptions produces a discounted cash flow estimate of $9.83/share and that includes adding in the $99 million in cash that Map currently has on its books. In other words, even if one assumes no regulatory risk and a dream case for Levadex commercial opportunity, then Map is over-valued. Adding in a 10% risk that the approval is delayed a year brings down the fair value to $9.54 and an additional 5% rejection risks puts that fair value at $9.05.
Of course, is it reasonable to have as your expectation that Levadex will become the best selling drug in the acute migraine space? Probably not. In a second analysis, I take the same set of assumptions but change the expected market share to a respectable 13% (reached in 2018). It should be pointed out that this is not an overly bearish estimate as 13% would make Levadex a successful product in the acute migraine space. In terms of discounted cash flow in this bullish, but not dream, scenario, the fair value of Map is $4.43/share and decreases as one adds in regulatory risk.
I started by noting that any estimate of the current value of Levadex discounted cash flow involves making a number of assumptions. In the dream case, I attempted to be as generous (but reasonable) as possible and in the bull case I took down the market share to what I believe is the most likely best case. Regardless of one's assumption of market share, Map is gross over-valued. Perhaps my analysis is missing some other piece of the puzzle such as ex-US sales or expansion into other indications and this is creating a false picture. I would counter that these additions cannot be assumed, require more investments (so one would need to increase both R&D and share count), and will not appear until much later in the time frame so would be heavily discounted. In addition, these analyses assume a very rosy regulatory path, which many would argue is biasing the analysis in favor of Map.
The bottom line is that my assumptions are probably not perfect but point to what appears to be indisputable conclusion and that is Map is over-valued. The only way one could justify the current valuation is to assume a market share that would be unprecedented in the acute migraine space or that the geographic and indication expansion occurs at an extraordinary rate and with no regulatory risk. Investing based upon impossibly bullish assumptions is not a way to make money. Levadex might very well get approved and it might very well have an important role in the treatment of acute migraines but even with those assumptions the price of Map needs to decline to accurately reflect this bullish possibility.
Disclosure: I am short MAPP.
Additional disclosure: I am not short the shares but have April $15 puts.