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Shilpa Siddhi, M.S., M.B.A., Ning Yang, Ph.D.

Protalix (NYSEMKT:PLX) is a specialized biopharmaceutical company that has revolutionized medicine and cell therapy by manufacturing the recombinant therapeutic proteins through its ProCellEx system. Protalix's pipeline includes therapeutics for Gaucher disease, Fabry disease, Biodefense, CNS, and autoimmune diseases. The company is also evaluating programs for monoclonal antibodies, cytokines, and vaccines. In May 2012, Protalix, along with its partner Pfizer (NYSE:PFE) received FDA approval for ELELYSO (taliglucerase alfa), which is an enzyme replacement therapy for Gaucher's disease, while in June 2012, the European Medicines Agency (EMA) recommended against the approval of Elelyso.

Protalix had total cash and cash equivalents of $59.3MM at the end of Q2 FY2012. With a total diluted share count of 92MM (as of May 12, 2012) and a stock price of $4.87 (as of September 14, 2012), Protalix has a market cap of $447.6 MM and an enterprise value (EV) of $465.2 MM.

On September 27, 2012, Protalix announced that the company has received marketing authorization for Elelyso for the treatment of Gaucher disease from the Israeli Ministry of Health. Protalix retains the commercialization rights to Elelyso in Israel. For the purpose of this report, the sales revenue for Israeli market has not been factored in.

Proprietary ProCellEx Technology: ProCellEx is a proprietary next generation recombinant protein expression system that uses genetic engineering and plant cell culture technology. This technology can be used to produce a wide variety of complex human proteins and recombinant drugs to address a variety of diseases. This technology offers significant advantages over existing expression systems, including cost effectiveness, safety, and entry into certain patent-protected markets. Penetration into patent-protected market increases the product opportunities for biosimilars, biobetters and novel biologics.

Pipeline: Protalix has a limited pipeline of biosimilars mostly in the preclinical stages except PRX-105, which has completed Phase I trials. In August 2012, Protalix received FDA clearance to initiate Phase I/ II trial of PRX-102, the company plans to commence enrollment of Fabry disease patients in the fourth quarter of 2012. The company is dependent on significant investment in clinical trials to strengthen its pipeline. It appears as if their strategy is to find commercial partners for the products.

Figure 1: Product pipeline of Protalix

Compound

Indication

Phase

Market Opportunity

Elelyso

Gaucher disease

FDA-approved

$1.25 B

PRX-105

Biodefense & CNS

Phase I

$700 MM

PRX- 102

Fabry Disease

Preclin

$600 MM

PRX-106

Autoimmune

Preclin

$6.5 B

Oral Glucocerebrosidase

Gaucher disease

Preclin

$1.25 B

PRX-107

Undisclosed

Preclin

$500 MM

PRX-110

Undisclosed

Preclin

$500 MM

(Source: Protalix corporate presentation)

Gaucher Disease: On May 1, 2012, Protalix, in partnership with Pfizer gained FDA approval of ELELYSO for the treatment of Gaucher disease in the U.S. Pfizer has exclusive worldwide rights on Elelyso, while Protalix retains 100% rights on Israel market. Future revenue and expenses for the development, commercialization, and losses were shared 60% and 40% between Pfizer and Protalix, respectively. Protalix has received an upfront payment of $60 MM for the execution of the agreement, and an additional $5 MM for the pediatric investigation plan. In June 2012, it received $25 MM milestone payment for the FDA approval of taliglucerase alfa. Marketing applications have been submitted by Pfizer to the National Sanitary Vigilance Agency (ANVISA) of Brazil, and to the Australian Therapeutics Goods Administration and by Protalix to Israeli Ministry of Health (MOH) relating to the potential marketing and sale of the product. In June 2012, the EMA's Committee for Medicinal Products for Human use recommended against the marketing authorization of taliglucerase alfa. The company has passed good manufacturing practice audits performed by MOH, and ANVISA. From 2009 when Genzyme reported limited production of Cerezyme causing limited supplies, taliglucerase alfa was made available in USA, France and Brazil under compassionate care.

Gaucher disease is a rare, serious lysosomal storage disorder with severe symptoms affecting approximately 1 in 40,000 individuals worldwide with a high incidence in Ashkenazi Jewish population. There are three types of Gaucher disease: type 1-most common form of this condition also called non-neuronopathic Gaucher disease because the brain and spinal cord (central nervous system) are not affected, type 2 and type 3- are acute and neuronopathic forms because they affect the central nervous system. In this report we will focus on type 1 Gaucher disease for the long-term treatment of adult patients with a confirmed diagnosis. There are about 8000 patients in US. Gaucher disease represents a large commercial market due to the severity and chronic nature of the disease. The enzyme replacement therapy is the standard of care to replace the mutated or deficient natural glucocerebrosidase enzyme (GCD) and the treatment will be done over the patient's lifetime. Taliglucerase alfa is a plant cell expressed recombinant GCD for the treatment of Gaucher disease. Proteins produced by ProCellEx technology contain uniform glycosylation (key for GCD enzyme's action), which results in increased efficacy and consistency, and are less expensive.

Comparative Therapeutics for Gaucher disease: Cerezyme, produced by Genzyme [acquired by Sanofi (NYSE:SNY) in 2011], was the first enzyme replacement therapy approved by FDA in 1994, followed by VPRIV from Shire PLC (NASDAQ:SHPG) in 2010. The European Union (EU) has granted VPRIV orphan drug status and 10-year market exclusivity from Aug 2010. Actelion's (ALIOF.PK) Zavesca (a small molecule compound) was approved in the EU for the oral treatment for Gaucher disease patients who cannot be treated with the enzyme replacement therapy. In 2011, Actelion reported net sales of CHF 68.4 MM (~$74.4 MM).

Cerezyme is one of Genzyme's flagship products, producing the sales of $719.6 MM, up to 18% of the Company's total revenue in 2010. In 2011, Sanofi reported sales of €441 MM ($579MM) from April to December of 2011, a growth of 11% compared to the same period in 2010. In 2009, there was a disruption of Cerezyme production, which was resolved by the fourth quarter of 2010. In 2010, about 4700 patients (2010- 10K of Genzyme) were treated with Cerezyme which gives ~75% of the market share of the 6000 Gaucher patients treated worldwide. Cerezyme has been on market for about 17 years and has treated about 5600 patients including children. In January 2012, Genzyme received the approval of Framingham manufacturing plant by FDA and EMA, which was built to overcome the short supply of Cerezyme and Fabrazyme. Cerezyme's sales were €149 MM and €150 MM for the Q1 and Q2 of 2012, down of 13.9% in the comparable Q2 of 2011. At this rate, Cerezyme sales might be ~€600 MM (~$750 MM) for 2012 which is almost the same as in 2010 and 2011.

VPRIV is approved in 38 countries, Shire reported worldwide VPRIV sales of approximately $256 MM in 2011, a growth of 79% compared to 2010 (US approval in Feb 2010, EU approval in Aug 2010). Approximately 1500 patients were treated with VPRIV in 2011, which gives it a market share of 25% of the 6000 Gaucher patients treated worldwide. VPRIV was at advantage to gain some of the market share from Cerezyme when there was a shortage of Cerezyme in early 2010. VPRIV sales were $154.4 MM during 1H 2012, 26% increase when compared to $122.3MM during 1H 2011.This shows that VPRIV's market share is slowly increasing.

Figure 2: Comparison of Elelyso with Cerezyme and VPRIV

Elelyso

Cerezyme

VPRIV

Company

Protalix

Sanofi (Genzyme)

Shire

Expression system

Plant cells

CHO cells- mammalian cells

Human cancer cell line

Regulatory agency approval

FDA

FDA + EU

EU + FDA

Cost

$150,000

$200,000

$170,000

Dosage

60 units/ kg of body weight administered once every two weeks by intravenous infusion

Initial dosage may vary from 2.5units/ kg of body weight 3 times a week to 60units/ Kg of body weight once every two weeks by intravenous infusion

60units/ Kg of body weight once every two weeks by intravenous infusion

Side effects

Headache, chest pain or discomfort, fatigue, hives, abnormal redness of the skin, increased blood pressure, back or joint pain, and flushing. Some common adverse reactions were upper respiratory tract infections, throat infection, flu, urinary tract infection, and pain in extremities

Side effects in less than 15% of patients like nausea, abdominal pain, vomiting, diarrhea, rash, fatigue, headache, fever, dizziness, chills, backache, rapid heart rate. Some had severe reactions including anaphylactoid reaction, chest discomfort, shortness of breath, coughing, low blood pressure, cyanosis (bluish discoloration of the skin)

Headaches, muscle pain, dizziness, fatigue, changes in blood pressure, joint pain, nausea, fatigue, and fever. The symptoms generally fade with time. More serious side effects include: fever, upper respiratory infections and poor blood clotting

Post translational modifications

No additional glycosylation or other modification is required which results in enzymes with uniform glycosylation patterns. Increased glycan efficacy and consistency

Additional glycosylation step adds time and cost to the production process

Additional glycosylation step

adds time and cost to the production process

Enzymatic activity

Equivalent to superior to Cerezyme

Steady state enzymatic activity within 30 minutes

Equivalent to Cerezyme

Patients developed antibodies to the agent

2 patients developed antibodies

15 out of 100

1 in 100

Half life

18.9 to 28.7 minutes

3.6 to 10.4 minutes

11 to 12 minutes

Composition of matter patent expiration

2024

September 2019

February 2027

Source: LifeSci Advisors

Elelyso is equivalent or even superior to the other two enzyme replacement therapies (Cerezyme) available on the market in terms of safety and efficacy. Elelyso is cheaper than the comparable therapies. Gaucher disease market is now competitive which means there is risk to the commercial success for Elelyso . The Elelyso approval does validate the company's plant-based manufacturing platform.

Elelyso showed positive efficacy and safety results from a 15-month follow-on extension study and a nine month switchover study. A 15-month follow-on extension study demonstrated continued statistically significant improvement in all parameters with a similar safety profile as was seen in phase III clinical trial. A nine-month worldwide, multi-center, open-label, switch-over clinical study evaluating the safety and efficacy of switching Gaucher patients on Cerezyme with taliglucerase alfa was conducted during the shortage of Cerezyme. This study demonstrated that patients remained stable with regard to spleen volume, liver volume, platelet count and hemoglobin concentrations, and drug was well tolerated with no drug-related serious adverse events observed. A pediatric study with the naïve pediatric patients suggested that taliglucerase alfa can be used as an alternative therapy for pediatric patients with Gaucher disease. These additional data demonstrate that Elelyso has the same safety profile as other therapeutics and is well tolerated by pediatric patients.

In terms of cost to the patient, the Cerezyme program covers 100% of out of pocket expenses and the VPRIV program's out of pocket expenses do not exceed $500 per year. Although Elelyso is priced 25% cheaper than its competitors and Pfizer has established a Gaucher Personal support to provide an assistance program to cover 100% of the prescription co-pay expenses for eligible patients who have health insurance, there are no financial incentives for existing patients to move to a new product.

Protalix's current manufacturing facility has a production capacity to treat 30% of the currently treated Gaucher patient population. The Company is investing $25MM to expand the manufacturing facility, to increase the production capacity of Elelyso. This is to be completed in 2013 and once finished the Company expects to be able to treat about 80% of the population. According to Protalix, only about half of the Gaucher patients worldwide receive treatment. With approximately 8000 Gaucher patients in US, of which 4000 receive treatment, the number of patients being treated will switch over to the new treatment remains to be seen.

The company intends to establish a sales force to market taliglucerase alfa in Israel and for other products if approved in North America, European Union and other significant markets. The company intends to spend $30MM in 2012 to build an internal sales and marketing team.

Cash burn is expected to increase due to expenses related to the building of the new manufacturing facility and the sales force.

The company is actively pursuing the following:

Biodefense and CNS program: A Phase I clinical trial for a pegylated recombinant human acetylcholinesterase (AChE) product candidate, PRX-105, was completed in 2010. A single dose, intravenous administration was safe and well tolerated. An alternate splicing variant of PRX-105 correlated to play a potential role in Parkinson's disease. The company is preparing for further efficacy trials for this product candidate in larger animals.

Fabry Disease Therapeutics: Fabrazyme from Genzyme was approved for the treatment of Fabry disease in the EU in 2001 and in the U.S. in 2003. Replagal (from Shire) is the other treatment for Fabry's disease. In 2011, Sanofi reported €109 MM (~$143.2 MM) in worldwide Fabrazyme sales while Shire reported $475.2 MM in Replagal sales. The two approved drugs have been on the market for several years. PRX-102 may gain approval in 4-5 years.

To alleviate symptoms of autoimmune diseases: Tumor- necrosis factor inhibitor Enbrel (Entanercept), from Amgen (NASDAQ:AMGN), is an approved medicine to relieve the symptoms of certain auto-immune disorders. Enbrel is one of the biggest selling drugs, and its patent was supposed to expire in 2013. In 2011, Enbrel's worldwide sales were reported to be $7.4 B by Amgen and its partner Pfizer. PRX-106 has the same amino acid sequence as Enbrel, which might reduce the risk and time required to get the product to market. Many pharmaceutical companies are in the race to develop a biosimilar of Enbrel once the patent expires. In November 2011 Amgen obtained a new patent, which may extend protection until 2028, which might block the biosimilars.

Intellectual property: Protalix has filed US and international composition of matter patents for taliglucerase alfa, and PRX-102. As of December 2011, Protalix holds 31 patents and 81 pending patent applications with respect to various compositions, methods of production and methods of use relating to ProCellEx protein expression system and their proprietary product pipeline. They also hold a joint patent, joint patent application and licensed rights to six patents and seven patent applications.

Collaborations: Protalix has established licensing agreements with technology transfer arm of Israel's Weizmann Institute of Science and Hebrew University of Jerusalem, Boyce Thompson Institute of Cornell University and has collaborations with Teva (NYSE:TEVA), Icon Genetics.

Royalty payments: Protalix has paid 1.6MM to the academic institution relating to taliglucerase alfa. Future milestone payments are subject to 2.5% royalty, and 0.75% royalty for the revenues generated until 2016 when the patent related to taliglucerase alfa expires. Protalix is obligated to pay sublicense, milestone, and royalty payments from net sales to its collaborators and a 3-6% royalty to Office of Chief Scientist of the Israeli Ministry (OCS) if the revenue was generated from the product that had received grants from OCS.

Market potential for Biosimilars- Protalix is focusing on the biosimilars and biobetter market, which already has established approved markets. According to an article by IMS health Global biologic spending was $138B in 2010 compared to $311MM for biosimilars.

Milestones: In June 2012, Protalix received a $25 MM in milestone payment from Pfizer for the taliglucerase alfa approval.

Market dynamics for Taliglucerase alfa:

We assume that Elelyso will be launched in the U.S. in the FY2013, and will hit 10% U.S. market share for Gaucher disease. According to Protalix, Elelyso will be priced at a 25% discount compared to Cerezyme, which means Elelyso will be $150,000/patient/year.

With 8000 Gaucher patients in US, 4000 being treated, translates to $60 MM in sales (4000 X 10% penetration X 50% patients in US X $150,000/patient).

Protalix gets 40% of shared revenue (Pfizer agreement) Gross revenue margin of $24MM ($60MM x 40%)

Stock evaluation: Protalix had a total cash, and cash equivalents of $59.28MM at the end of 2Q12, including the $25MM in milestone payments received from Pfizer for taliglucerase alfa approval. The company has a yearly cash burn rate of approximately $43 MM (10K-2011). With a total diluted share count of 92 M (as of May 12, 2012) and a stock price of $4.87 (September 14, 2012), Protalix has a market cap of $447.6 MM. With no debt (as of 6/30/12) the enterprise value of the company is $388.32MM. With a beta of 1.16, we estimated that the required rate of return (discount rate) for the stock is 16.8% based on the capital asset pricing model. The net sales estimate for 2013 is assumes ~10% market penetration. We assume that Elelyso will gain 24% market share by 2017. With 16.8% discount rate and a trailing P/E ratio of 20, one can estimate that Protalix currently has a firm value of $492.6MM. Including the market standard percentages for probabilities of success for the programs in the Protalix pipeline yields a market opportunity of close to $500MM in valuation for the company. Therefore, we think that the stock is being valued solely on Elelyso and should trade higher based upon pipeline progress and any beat on Elelyso sales.

References:

http://www.imshealth.com/deployedfiles/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/Global_Use_of_Medicines_Report.pdf

http://www.accessdata.fda.gov/drugsatfda_docs/label/2010/022575lbl.pdf

www.sec.gov/Archives/edgar/data/732485/0...

http://www.health.gov.au/internet/main/publishing.nsf/Content/469AE02626D16E92CA256FDC00198F2F/$File/CEREZYME%20PI%20ANZ%20A0909-01.pdf

http://www.cerezyme.com/

phx.corporate-ir.net/phoenix.zhtml?c=101...=

http://www.sec.gov/Archives/edgar/data/732485/000095012311020797/b83552e10vk.htm

http://www.gauchercare.com/en/patient/about.aspx

www.vpriv.com/

Source: Protalix Biotherapeutics: Eyes On Elelyso Sales And Advancing Pipeline