Protalix Biotherapeutics (NYSEMKT:PLX), partnered with Pfizer (NYSE:PFE), has just received FDA approval for their lead product candidate, ELELYSO (taligucerase alfa), for the treatment of type I Gaucher disease. The disease results in abnormal lipid accumulation in various parts of the body. This extremely rare disease is estimated to affect 1 in 50,000 to 1 in 100,000 people. The significant difference between the Protalix enzyme and their competitors' is that it is expressed using plant cells instead of mammal or yeast cells.
Protalix completed a public offering on Feb. 22, 2012, for 4.5M shares at $5.25, giving run-up traders a perfect entry. Since dilution the stock gained almost 40% in value before FDA approval and spiked to a high of $7.88 in after hours trading on the announcement. Now that the company has an approved drug, short term traders are looking to lock in profits and long term investors are waiting on the sidelines for an opportunity to buy. In this article I will examine the near term fair value of Protalix with a 1 year price target.
According to Protalix, only ~5500 patients are currently being treated worldwide. Annual treatment cost of Cerezyme is $200K/year. Protalix's current manufacturing capacity can only serve approximately 30% of Gaucher disease patients currently under treatment.
The maximum number of patients ELELYSO can treat = 5500 patients X 30% = 1650 patients.
ELELYSO will be available to U.S. patients at a cost that will be priced at 25 percent below the cost of Cerezyme's imiglucerase ($200K X 25% below = $150K).
The maximum worldwide sales possible for ELELYSO is $247.5M (1650 patients X $150K).
Under the terms and conditions of the Pfizer Agreement, PLX is entitled to 40% of the net profits from sales of ELELYSO. Assume that after subtracting manufacturing cost, sales force, etc. that the net profit is a generous 90%. In addition PLX is subject to a 15% withholding tax rate on U.S. revenue and a corporate tax rate in Israel of 25%. Taxes are beyond the scope of this article so I will assume Protalix can offset Israeli taxes with previous losses. Protalix is also subject to a 3% royalty on revenues to the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor.
Maximum estimated yearly earnings = $247.5M sales X 90% net profit X 40% of shared revenue X 85% retained after taxes X 97% after royalties = ~$73.5M
To calculate profit margin, subtract the current burn rate of ~$37M/year (R&D + G&A).
Maximum Profit Margin = ~$73.5M yearly earnings - $37M burn = ~$36.5M.
PLX finished 2011 with $27.0M in cash and raised another $22.2M from the recent public offering and FDA approval triggered a $25M milestone payment giving them ~$74.2M in cash.
Total cash on May 1, 2012 = $27.0M + $22.2M + $25M = ~$74.2M
In a March 7, 2012 Seeking Alpha article, Ben Yoffe interviewed Dr Yoav Kedar, a biotechnology consultant for Clal Finance Brokerage, and claimed to be "the best person to talk to about Protalix." In his article the analyst applies a 7-8 sales multiple and a $150M value to the platform. Typically analysts do not start modeling sales for drugs in a pipeline until after they have passed Phase I.
Protalix maximum estimated market cap = $36.5M profit margin X P/E ratio of 8 + $74.2M cash + $150M pipeline = $516.2M
The maximum estimated price per share is $516.2M ÷ 90,098,517 outstanding shares12 discounted by 25% = ~$4.29
Keep in mind that Pfizer would have to either convert 30% of existing patients immediately over or recruit some of the estimated 4500 remaining untreated patients. If a patient is currently taking Cerezyme or VPRIV with no complications, there is no reason for the patient to switch medications. Why would a doctor risk the patient having an allergic reaction, or worse - anaphylaxis? ELELYSO was not approved for children, and if kids begin treatment on the competitors' drug they will most likely remain on that product for life. PLX is currently conducting a 12 month pediatric study, so they are most likely over 2 years away from adding these patients.
Typically a hospital formulary will review preferred medications on a yearly basis, but in this case Protalix noted on their conference call that payers will reimburse the physician requested product. Cost will be an issue for new patients, but existing patients will most likely be kept on their current treatment.
Pfizer announced that ELELYSO will have a patient assistant program similar to the current programs by Cerezyme and VPRIV. Patients in the VPRIV program will not exceed more than $500 for out of pocket prescription expenses per year and the Cerezyme program covers 100% of out of pocket expenses. As a patient, there is no monetary incentive to switch drugs, and there would be risks associated with trying a new medication.
Shire received orphan drug designation and was granted 10 year market exclusivity for VPRIV. Pfizer is currently challenging the EU orphan market protection. Bullish investors hope that since the cell lines or technology is different enough that the EMA will approve the enzyme and lift the sales ban. The simple truth is that this will not happen unless there is a shortage of VPRIV. It is likely that ELELYSO will be approved in the EU but the sales will not happen until the market exclusivity expires for VPRIV.
In February 2012, a second manufacturing facility for VPRIV was approved by the EMA. Even though the EU approved the facility the FDA issued a CRL on the same facility. Shire can still manufacture VPRIV for the EU market, but not the US market. Bullish investors and articles have hidden the fact that Shire clearly stated that the existing manufacturing site has the capacity to meet the anticipated demand in both the US and global market. A shortage is highly unlikely, so the chance of the EU Committee for Orphan Medicinal Products revoking VPRIV marketing exclusivity is slim to none.
Israel has a high population of Ashkenazi Jews, leading to a higher rate of Gaucher disease. PLX retained the rights to ELELYSO but will be responsible for maintaining a sales force. In 2006, 184 patients were receiving enzyme replacement therapy, which is one-third of known cases in Israel. Also keep in mind that corporate taxes in Israel are 25%. On the conference call, management noted that there was no shortage of Cerezyme in Israel.
The prevalence of Gaucher disease in Australia is estimated at 1 in 57,000 births. The population of Australia is ~22.3M, so simple division affords ~400 patients with Gaucher disease, and approximately half are being treated.
Brazil has ~600 patients with Gaucher disease and treatment is through the government. In August 2010 Brazil entered into a short term supply agreement for $30M with Pfizer. With FDA approval the price will likely increase but may be lower due to the bargaining power of the government.
The patients in Israel, Australia, and Brazil are included in the above calculation, so the additional approval of these markets is a non-event.
Potential for Near-Term Dilution
Protalix's management states that they believe they have enough cash to last for at least the next 12 months. PLX has 6 compounds in preclinical development, and another that completed a preliminary Phase I trial in June 2010. R&D costs in 2011 were $31M, and with six drug candidates looking to advance, it would not be unreasonable to assume clinical costs to increase significantly.
PLX is currently planning a manufacturing plant expansion at an estimated cost of $25 million with expected completion sometime in 2013.
Cash balance in one year = $74M in current cash - $31M (R&D) - $7M (G&A) - $25M = $11M + Earnings (unknown).
Will PLX wait to see how sales of ELELYSO are doing to determine if they even need to raise money? It would be prudent of management to raise money using the increased hype and awareness that goes along with FDA approval. PLX filed a $150M shelf registration on Jan 10, 2011. In Jan 2011 they issued 4M shares at $5.50 ($22M) and in Feb. 2012 another 4.5M shares at $5.25 ($24M). PLX has $104M remaining on the active shelf filing. In the real world will sales be enough to allow the company to grow without additional dilution?
I presented the maximum near term value of Protalix is in the $4 to $5 range. In reality, the value is much lower, since obtaining maximum sales is unrealistic in the first year. ELELYSO is priced 25% cheaper than competitors, but each company has their own co-pay programs, so patients have no motivation to switch medications. ELELYSO is not approved for children, so new patients will have to be recruited, and there is no financial motivation for existing patients to switch. Protalix/Pfizer best shot is to try to identify and treat the other half of the market that is left untreated in the US and Israel.
The EU approval is hyped by bullish investors, but with VPRIV having the market locked it is a non-event. The patient size of Australia, Israel and Brazil are almost insignificant to the valuation and would already be considered in the calculation above. Investors looking to buy Protalix for their plant-based recombinant protein technology as a long term investment should consider the above calculations for themselves. Wait for an opportunity after the hype of approval has worn off and the share price settles at a realistic level.
Disclosure: I am short PLX. At the time of writing I have various options spreads with combinations of long and short positions. I am short the common stock at the time of submission. I am continually updating my positions and plan to actively trade PLX in the near future.