Over the last year, Savient Pharma (SVNT) has undergone a disappointing sales launch of a promising drug, the hiring and defection to Dendreon (DNDN) of a big name CEO, and finally the lawsuit of a creditor for forced liquidation.
Somehow during all of these crazy actions, the company was able to get the lawsuit dismissed, raise cash, and greatly right size the sales force to account for the slower launch of the new drug, KRYSTEXXA. All of these moves have left the company better equipped to survive long enough for the promising drug to thrive.
The company is a specialty biopharmaceutical focused on developing and commercializing KRYSTEXXA (pegloticase) for the treatment of chronic gout in adult patients refractory to conventional therapy.
Q2 2012 Highlights
The company reported the following highlights for Q2 2012:
- Net sales for KRYSTEXXA were $4.0 million for the second quarter of 2012, a 30% increase over the first quarter of 2012.
- For the second quarter of 2012, the Company had a net loss of $16.4 million, or $0.23 per share, on total revenues of $4.6 million, compared with a net loss of $30.2 million, or $0.43 per share, on total revenues of $2.0 million for the same period in 2011.
- Appointed Louis Ferrari to the position of Chief Executive Officer and President and a member of Savient's board of directors.
- Implemented a reorganization plan designed to improve operational efficiencies while ensuring continued focus on the commercialization of KRYSTEXXA and the advancement of its clinical expansion programs.
- Entered into definitive financing and restructuring agreements with certain of the Company's existing 2018 convertible note-holders that raised approximately $43.1 million in net cash proceeds and extended maturity by approximately fifteen months.
- Granted a favorable decision by the Delaware Court of Chancery to the Company on certain aspects of the Tang Capital litigation.
The company reported earnings basically inline with expectations excluding the significant gain from the early extinguishment of debt.
Note worthy is that the majority of the highlights for Q2 have to do with structuring the company for long-term growth versus the previous management plan of throwing together a massive sales force in order to quickly ramp up KRYSTEXXA sales. Unfortunately, the ramp never occurred, as doctors were reluctant to prescribe the drug to severe refractory gout patients no matter the obvious benefits.
The new reorganization plan announced on July 9th places emphasis on a more focused sales force. The sales force let go was focused on primary care physicians that may never refer a patient to the use of the drug. This new plan allows time for referrals and drug results to play a more prominent role.
The plan involves cutting 35% of its work force across the company effective on ironically September 10th (this article wasn't intended to coincide with this date). The initiatives are expected to save approximately $56M in annual operating expense in 2013. That amounts to $14M in savings per quarter.
New Cost Structure
The significant reduction in quarterly expenses along with better costs of goods metrics, expected at below 20% of revenue, will have huge benefits to the bottom line. The company reported a significant $36M operating loss in Q2 due to the huge operating costs along with a $4.9M impairment charge related to expired KRYSTEXXA inventory.
As the table below shows, the lowered costs of goods sold combined with the restructuring allows for a roughly $20M reduction in the operating loss. This combined reduction allows for the gross margin to expand enough to slowly whittle away at that loss.
Table - Example of New Cost Structure (000s)
|Metrics||Q2 '12||Q1 '13|
|Cost of goods sold||6,727||2,400|
|Operating income (loss)||(36,133)||(13,000)|
* Q212 numbers are taken directly from the income statement. Q113 is a rough estimate based on the cost reduction and forecast for sales growth and gross margins.
If Savient can achieve these costs savings while also expanding the revenue base, the stock could be a home run. The key will be that the company still needs to achieve quarterly revenue of $25M to just achieve operating profits. Even at that revenue level, the operating income still wouldn't cover interest expenses or the likely expansion of operating expenses.
The key though to the Q1 2013 estimates is that the company greatly reduces the operating loss to a more manageable level. Not to mention that the estimates include no benefits from a partner launch in the EU.
The stock has had a huge rebound from the bottom in July at $0.48. Investors probably aren't too late at this level as the stock around $24 towards the end of 2010 and the promise of the drug still exists.
3 Year Chart - Savient Pharma
Investors should look into loading up on the stock of Savient at these levels. The company has the potential for KRYXTEXXA approval in the EU by the end of the year and signing up a much-needed partner.
With a new lease on life, KRYSTEXXA can expand as the market allows instead of needing hockey stick growth to pay for the previous spiraling costs. Buy the stock before the market figures out the much improved model.
Disclosure: I am long SVNT.
Additional disclosure: Please consult with you financial advisor before making any investment decisions.