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Why Investors Should Be Careful Approaching IntelGenx's PDUFA Date

IntelGenx Technologies(OTCQX:IGXT) has risen 100% since December 12th on prospects of its Anti-Migraine Versafilm product being approved by February 3rd's PDUFA date, and it's clear why investors are excited. IGXT has already proven that it can bring a drug through approval to market (Forfivo XL) and by all accounts it's Versafilm product has a great chance at approval. First, let's ignore that has received enough press on internet message boards that people should become wary of whether it's obtained a "pump and dump" status(For instance, this user appears to be a proponent of "dumping", while this user appears to be a "pumper"), and that since January 17th, 38% of all volume on it's trades are investors shorting the stock. It appears a large sell off is occurring today, with the stock briefly hitting 90 cents at one point.
But we're not here to put the merits of IGXT's price movement on trial, so let's continue on.

The the Anti-Migraine Versafilm drug is an oral-film product that delivers the drug Rizatriptan, which is marketed by Merck Pharmaceuticals under the trade name Maxalt-MLT. That is, it is a generic product of an already approved drug. Contrary to popular believe, if we read between the lines, what is being approved here is not the drug, but the delivery method itself. Results indicate that the product is safe, and that the 90% confidence intervals of the three relevant parameters Cmax, AUC(0-t) and AUC(0-infinity) are well within the 80 - 125 acceptance range for bio-equivalency. Nobody can know for sure if the drug will be approved, so let's look at both scenario's

The FDA Rules No

This result is simple, IGXT heads to the bottom of the ocean. I don't say this lightly, but it's clear that the entire company portfolio is essentially built upon Versafilm's delivery method. If the FDA does not approve the product, a drug that has already been approved and has a satisfactory bioavailabilty compared to Maxalt-MLT, then they are essentially saying that something is flawed in the delivery method itself. This will call into question not only potential revenue achieved from the migraine drug(a market of $2.5 Billion dollars), but the upcoming ED drug, as well as the Buprenorphine/Nalaxone drug as well that is currently under development by Par Pharmaceuticals (a $1.5 Billion market). Some investors may also be excited about their erectile dysfunction product in development, but we can't be ensured that it'll ever get to market. Nothing is ever a sure thing in the biotechnology world. The only thing IGXT would have to go on after being told no by the FDA is existing revenue. It brought in only 804k through 9 months, compared to 2012 where it made $1.198 million for the calendar year. Let's assume IntelGenx continues it's pace, and reports 2013 revenue of 1.072 million. I thought companies were supposed to increase revenue, not decrease it. Anyway, industry wide, biotechnology firms average a 10.27 ratio for price to sales.
With 56 million outstanding shares divided by 11,009,440, IGXT has a fair value of 19.65 cents a share. Right now, it is clear that approval has already been more than priced into the market value of the company's shares, closing at 1.04 as of January 27.

The FDA Rules Yes

Let's face it, if the FDA approves IntelGenx's migraine drug on February 3, it's positive for the company and it may be positive or negative for investors. As I explained earlier, I believe approval has already been priced into IGXT's shares, and would expect a sell off to occur prior to or right after approval. As of right now, the company's shares are worth roughly 20 cents.

First, let's look at IntelGenx's track record. When Fortivo XT was approved, the company said that they were forecasting income from the drug in 2012 of $2-million, climbing to more than $7-million in 2014, when Forfivo XL sales are estimated to reach $30-million. 30 Million? They're only on track to barely crack $1 million in 2013 revenue. That's a gross error in estimating future revenue for investors. In 2012, the CEO said of Fortivo XT's approval: "2012 is a breakthrough year for the company, because we believe this launch will make us cash flow positive this year, and it is sustainable".

Is it Mr Zerbe? Is it? Considering IGXT has a negative EPS in 2013, it's clear that the drug was not all it was cracked up to be prior to commercial launch.

I think we can safely say that the company would overestimate future revenues obtained through sales of its migraine VersaFilm product as well. It lists on its website that as of 2012, the drug Rizatriptan film is based on achieved sales of $638 million. Raghuram Selvaraju, managing director at Aegis Capital Corp recently released an independent analysis on IGXT and in 2006, was ranked the top-ranked (#1) biotech analyst in The Wall Street Journal's "Best on the Street". In his analysis, he said "In our view, while sales of the IntelGenx drug are unlikely to ever approach the peak levels achieved by Maxalt, they could exceed $100mm annually by the 2020 / 2021 time frame.

Ok, so not only is 2021 7 years from now, and by then the market will grow for Maxalt to a lot more than $638 million, IGXT will only be able to bring in a small percentage of that market at best, and that's if more competitors don't evolve in that time to take more market share from them. Remember, the company also only receives a percentage of sales in the form of royalties, not the entire $100 million.

After its migraine drug is approved, investors can look forward to an ongoing lawsuit for patent infringement regarding IntelGenx's Buprenorphine/Nalaxone pain product that is currently under development by Par Pharmaceuticals. This patent does not expire until 2022, and should the lawsuit hold up, the company would have to virtually stop development. If it somehow found a way to bring the product to the FDA for potential approval, they would have to wait 30 months before a decision anyway according to the Hatch-Waxman Act. This market also faces stiff competition from BioDelivery Sciences International (NASDAQ:BDSI), and its pain drug BUNAVAIL.

Some would tout the ED drug as a blockbuster as well, but IntelGenx estimated its sales to only reach $120 million 6 years after release
And we know how far off their estimates can be if Vortivo XT is any indication.

In conclusion, short term investors could face huge upside and downside potential with the upcoming decision on February 3rd, so I would be careful with your investment decisions in the near term. Long term, I don't believe the company will be as successful as some hope, so err on the side of caution when investing in IntelGenx Technologies, as approval already seems to be priced in to the share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I saw the recent buzz on IGXT and thought that I ought to do more research into the company before buying shares. I decided not to puchase any shares, as my portfolio is composed of long term investment opportunities, and I don't think that IntelGenx warrents that classification.

Stocks: BDSI, IGXT