NPS Pharmaceuticals: Misunderstood Assets And Compelling Value Play

| About: NPS Pharmaceuticals, (NPSP)

Upcoming Catalyst - PDUFA date of September 30th, 2012 for the lead candidate, Gattex.

NPS Pharmaceuticals (NASDAQ:NPSP) - based in Bedminster, NJ is a biotechnology company that engages in the development of therapeutics for the treatment of rare gastrointestinal and endocrine disorders. With a late stage pipeline of safe, efficacious assets and a portfolio of partnered, approved treatments generating sales and substantial royalties, NPSP is an undervalued biotech stock. NPS pharmaceuticals is composed of 3 main assets: Gattex for short bowel syndrome, Natpara for hypoparathyroidism, and the Sensipar royalty stream. Each of these assets is worth $5 or more per share, for a total firm value of $15/share. The recent, positive CHMP opinion (with marketing authorization hopefully soon to follow) delivered to partner Takeda boosted the stock last week into the 8s, but this remains below the 9-10 range where the stock traded a year ago.

Short Bowel Syndrome - Short Bowl Syndrome (SBS) is a debilitating, and serious condition in which nutrients are not properly absorbed by the small intestine. SBS is primarily caused by surgical removal of large portions of the small intestines, for reasons including Crohn's disease, radiation enteritis, mesenteric vascular accidents, trauma, and recurrent intestinal obstruction. SBS may also be present at birth. Clinical manifestations of the disease include diarrhea, malnutrition, fluid and electrolyte disturbances, and steatorrhea. Approximately 10,000-15,000 patients are currently believed to have SBS in the US, and NPS has received orphan drug designation both in both the US and Europe. Treatment primarily involves extensive feeding through a vein, and is called total parenteral nutrition (PN/IV). These patients are often dependent on PN/IV fluids for up to 6 nights a week, 8-12 hours a day. As you might imagine, quality of life is severely impacted, and patients' lives often revolve around the restroom. Surgeons have experimented with various procedures to lengthen the small intestine or transplant intestinal tissues, but the procedures do not seem to have caught on in large numbers. NutreStore (L-glutamine) received FDA approval in combination with somatotropin (recombinant human growth hormone by EMD Serono) treatment but currently, annual sales are under $1 MM for NutreStore and it does not appear that human growth hormone has made an impact in the SBS market. As shown by this publication, there are significant questions about durable efficacy of this treatment regimen. Interestingly, the FDA overrode an advisory committee to approve somatotropin for the treatment of SBS.

Overall, SBS is a serious condition with significant unmet need. In addition, these patients see a limited number of doctors and surgeons, and NPS's significant involvement in the SBS community bodes well for potential market penetration.

Gattex (teduglutide) - NPSP's lead, proprietary drug candidate, Gattex, is a peptide (given to patients via subcutaneous injection once daily) for the treatment of SBS. Gattex is a recombinant version of the naturally occurring protein GLP-2 (with some modifications to improve half-life) and promotes intestinal growth and enhancement of intestinal function. The clinical data, in low doses, provides significant evidence of efficacy. In the first large, phase 3 trial however, Gattex did not demonstrate statistical significance in the high dose group. From the press release:

"In the first step of the statistical analysis, the high-dose teduglutide group was compared with the placebo group using a 0.05 significance level. If the high-dose group was not statistically significantly different from the placebo group, no further comparisons would be made. If the high-dose group showed statistical significance, comparisons were to continue to a second analysis step, where the low dose was to be compared with the placebo."

After this, in a meeting with the FDA, NPS was asked to run a confirmatory trial (STEPS) before filing an NDA, and did so with only a low dose arm (and placebo). The positive efficacy seen in the lower dose arm from the first trial was confirmed, and efficacy was durable. At week 24, patients on Gattex achieved a 34% reduction in weekly PN/IV fluids, compared to 18% for placebo (P < .001). Importantly, body weight remained stable, and liver function improved.

Importantly, 97% of eligible patients elected to enroll in STEPS 2, an open-label communication study in which all patients receive Gattex for 24 months. This is always a good sign, and I believe is a good indicator of both patient and physician satisfaction, and the unmet need in the area. Patients enrolled in STEPS 2 continued to see dramatic improvements in clinically relevant outcomes. Mean fluid intake was reduced 40%, and as of May 3, 2012, a total of eleven patients achieved independence from fluids altogether.

Even though running an additional confirmatory trial delayed filing by approximately 3 years, one positive take away from this saga is now significant numbers of patients have been exposed to both high and low doses of Gattex for long periods of time; always an important consideration for safety in orphan indications where trials are generally small and difficult to enroll.

Royalty Stream - Currently, NPS Pharmaceuticals receives a steady and valuable stream of royalties from its partnered pipeline. The most of important of these partnered products is Sensipar/Mimpara, which is currently marketed by Amgen (NASDAQ:AMGN). Rather than raise additional equity capital, NPSP has monetized this revenue stream (at a discount rate of 9%, not bad for a biotech!). Based on the steady increase in royalties, it can reasonably be estimated that once again the asset will produce cash flows for NPS in 2013. Conservatively, I have used an 11% discount rate, and I have further assumed the 15% CAGR will slow down to 10% growth year over year, and no royalties will be received after Q1 2018, when the patent expires. As shown below, the NPV to NPSP is over $400 MM, or slightly more than 5$/share (86.5 MM shares outstanding). The patents were challenged by Teva (they have quite the elite legal team) and upheld early last year.

Natpara - NPS hopes to file a BLA later this year for Natpara, recombinant full-length human parathyroid hormone (PTH 1-84) which mimics the action of natural parathyroid hormone, for the treatment of hypoparathyroidism, an indication for which NPS has received orphan drug designation. Hypoparathyroidism is a rare condition in which the body produces insufficient levels of parathyroid hormone causing lower than normal levels of calcium in the blood (hypocalcemia). Current care is supportive, involving calcium and vitamin D supplements, which generally lead to kidney complications as well as other damaging side effects. Natpara is given by subcutaneous injection once daily with the goal of reducing the amount of supplementation of vitamin D and calcium. Enrollment in this registration trial began in December, 2008, and top-line positive data was reported in November, 2011. From the press release:

"In an intent-to-treat analysis, 53 percent (48/90) of NPSP558-treated patients achieved the primary endpoint versus 2 percent (1/44) of placebo-treated patients (p<0.0001). The primary efficacy endpoint was defined as a 50 percent or greater reduction in oral calcium supplementation and active vitamin D therapy and a total serum calcium concentration that was normalized or maintained compared to baseline after 24 weeks of treatment. REPLACE was a 28-week, double-blind, placebo-controlled study. At week 24, 43 percent (36/84) of patients treated with NPSP558 were able to achieve independence from active vitamin D therapy and a calcium supplementation dose of 500 mg/day or less, as compared to five percent (2/37) for patients treated with placebo (p<0.0001)."

This is a large patient population, estimated at 80,000+, with ~60,000-65,000 insured patients. Natpara represents the first potential treatment to treat the underlying cause of the disease. As shown in my valuation below, I estimate 25% peak penetration of 60,000 patients because not all patients present with "severe" symptoms. From a safety standpoint, the treatment was well tolerated, and 93% of Natpara-treated patients completed the trial.

Pipeline - NPS is currently developing strategic paths for some early stage drug candidates targeting patients with autosomal dominant hypocalcemia with hypercalciuria. Since this is such an early stage program, I do not expect it to be a main value driver.

Risks Factors - Concerns were raised about Gattex potentially causing cancer, since three cases were observed in a Polish trial site. For reasons detailed in the previous link, I believe this issue will not ultimately affect approval, and the positive CHMP opinion reinforces this notion.

True of any expensive biologic therapy, there is cost/benefit analysis. Will payers balk at paying ~$60,000 or more per year? Are these trial results clinically significant, or just statistically significant? In this case, there are some factors that help answer these questions. Considering the current cost of SBS treatment is over $100,000 annually, and patients on Gattex need far less fluids and supportive care than before, Gattex may actually lower the cost of care overall, a compelling reason both medically and financially. With respect to clinical significance, 97% of eligible patients enrolled in the extension trial, which is about as good as it gets. With respect to Natpara, one may ask the same questions. The disease is severe with no satisfactory treatments and significant co-morbidities, but just to be conservative, I used a price of $30,000/year and only 25% market penetration of a 60,000 patient market in my financial models (see valuation section below). There is always the risk of CMC or other areas of an NDA proving insufficient for approval, and these are accounted for by conservatively risk adjusting the cash flows.

Financials and Valuation - Fortunately for investors, NPSP has significant cash on hand. According to the most recent 10-q (3/31/2012), cash, cash equivalents, and marketable securities totaled $137.7 MM. Cash burn in 1Q2012 ran at approximately $24 MM, and management expects to burn approximately $105-125 MM in 2012. At this rate, NPS has enough resources to advance the clinical candidates into 2013 without raising additional capital, but I would not be surprised to see NPS further monetize the Sensipar royalty stream as the PDUFA date approaches or raise additional convertible debt, just to be safe. NPS does have ~$17 MM of 5.75% convertible debt outstanding that matures in 2014, however the notes are callable at 100% of par after August 7, 2012. As mentioned before, NPS has partially monetized the Sensipar royalty stream, and expects the royalties to flow to the bottom line again next year. Strong institutional ownership and insider buying during the pullback in biotech stocks in November, 2011 are positives as well.

As of June 25, 2012, NPSP's market cap stands at $707 MM with 86.8 MM shares outstanding. For a company such as NPS, I believe a sum of the parts, modified DCF valuation is appropriate. As discussed before, the Sensipar royalty stream alone is worth $5/share. Below I have compiled a very basic valuation. The premise behind this model is to forecast probability adjusted peak sales, assuming it takes approximately 5 years to ramp up, then discount the approximate net profit margin of 20% back to the present. To obtain the final estimate of value, next I sum the NPV of the individual programs, then I divide by the number of shares outstanding, and ultimately multiply by a reasonable P/E ratio. This is the number at the top of the first table, the NPV. I have also included a sensitivity analysis (peak sales and PE ratios). This model does not even take into account the cash balance, milestone payments, and additional royalties NPS may receive. For example, NPS will receive low double-digit royalties on ex-North American Gattex revenues and milestone payments.

Conclusion and Future Directions - NPS Pharmaceuticals trades at a significant discount to intrinsic value. Given the recent positive CHMP opinion along with the positive phase 3 results, Gattex is well positioned to receive approval from the FDA later this year. There is even an additional late stage asset with blockbuster potential, Natpara, which should receive FDA approval in 2013. Last but not least, investors should not overlook the significant, consistent revenue provided by the Sensipar royalty stream. Investors may do well to consider NPS as part of a well-diversified biotech portfolio.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NPSP over the next 72 hours.