Why Titan Pharmaceuticals Is Currently Undervalued

| About: Titan Pharmaceuticals, (TTNP)
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Titan Pharmaceuticals (NASDAQ:TTNP) is a very underappreciated company. However, that could change very quickly as its newest drug Probuphine has the potential to be a game changer for the company. The company just recently signed a very lucrative contract with a marketing partner for the drug in the United States and Canada. In addition, the company is still receiving royalties on its drug Fanapt.

First, to address the elephant in the room, Probuphine. Titan recently announced a commercialization agreement with Braeburn Pharmaceuticals, where it provided Titan with $15.75 million up front, and Titan stands to receive up to $215 million in potential milestones, in addition to double-digit tiered royalties. A very notable event which would trigger a payment under the contract would be the approval of Probuphine by the FDA, which would trigger a $50 million milestone to Titan. Given its market cap on March 20th of $94.77 million, this payment could easily send the stock soaring. Not to mention the opportunities for more royalties in the future from Braeburn. However, Braeburn is also bearing the commercialization costs and has agreed to put up $75 million to get the product out of the gate. Obviously, Braeburn has a great deal of faith in this product, which is a relief for investors who for years have been plagued by the Fanapt fiasco.

So what is the problem with Fanapt. Well, on the outside it looks like a really great deal with Novartis (NYSE:NVS) and Vanda (NASDAQ:VNDA) for the drug. However, that is where the elements of the great deal ends. The drug has not been selling very well, and Titan received very meager royalties on the drug. In fact Titan took essentially whatever money it was going to get and sold the royalty to Deerfield management for $5 million, and a $10 million in reduction in debt, in addition to delaying the payments it has to make to Deerfield for one year. I am not, however, faulting Titan for making this move; it really did not have that much of a choice, and in my opinion made the best out of an ugly situation. Under the agreement, Deerfield will get all of the royalties below a certain threshold (the table is shown below for your convenience)

2012 2013 2014 2015 2016 2017
Threshold net sales (millions) all Q4 $70 $85 $109.25 $120.75 $126.5


This table outlines the threshold for the Fanapt royalties to cross in order for Titan to receive any amount of royalty (Titan receives 60% of the royalties above that amount) keep in mind that Titan receives 2.5 to 7.5% of net sales as a royalty, so the drug would have to be incredibly successful for Titan to really be able to get any amount of money out of the royalty agreement. With the door to receiving Fanapt royalties essentially shut off, it gave Titan the opportunity to commercialize upfront on its royalties, and to retire some debt. Overall, the deal was decent for Titan, although it looks like Deerfield will make a killing on the deal over the long run. So Titan looks like it was able to commercialize early on a few quarters. However, it took away a substantial stream of revenue. So what makes Probuphine such an attractive drug?

For those of you who don't know, Probuphine is designed to be an implant and be able to deliver amounts of a drug to fight opioid addiction for 6 months after implant. So far the phase III results have shown non-inferiority in comparison with regular sublingual Buprenorphine. Current Probuphine estimates have the drug at peak sales of anywhere from $300 million to $500 million per year. This drug would obviously, at that level of revenue, provide a substantial cushion for Titan's research and development activities and would make Titan profitable. This drug has a PDUFA date of April 30, 2013. For those of you who might be unfamiliar with what a PDUFA date is: a PDUFA date is a date by which the FDA will make its decision (almost always it is on this date, but sometimes the FDA is a little late, rarely is it early). This date will be key, because as mentioned before Titan stands to make $50 million in a milestone payment if the drug is approved by the FDA. Now remember, this is essentially money to the bottom line as it comes at no cost to Titan, and would help to make Titan's cash cushion of $18.1 million, which it estimates would take it through to June of 2014. This is important, as it limits the short-term downside risk associated with getting diluted. Also, since Titan will not have to market the drug on its own, Titan would not necessarily have to dilute after FDA approval. I would also argue that the odds of approval have gotten much better with the strong committee performance today. The key vote in favor of recommending approval was 10 in favor, four opposed, and one abstention. Do remember that the vote is by no means final, and that anything can happen with the FDA. With cash not being a current concern, this helps to substantially lower the downside risk associated with Titan.

What would make approval likely? For this, we will need to take a quick look at the phase III trials conducted by Titan. Titan had to run a few trials in order to get to the point of where it is today. It ran two placebo controlled trials to show the effectiveness of Probuphine in Opioid addicted patients. What the patients had to do was they would be tested three times a week using a urine test for opioids. The objective was for Probuphine to beat placebo, and it to a statistically significant amount beat placebo. It also ran a bioavailability study which came back in Titan's favor. Overall, the phase III data was impressive, however, there were some concerns that Titan will still need to address with its product.

Some of the people who were reviewing Probuphine had a few problems with the drug, which in the interest of full disclosure, will be discussed here. A few times the doctors questioned whether or not there should have to be a dose escalation study for Titan's drug. Without this study, Titan's drug could be limited to a certain range of patients, however, thanks to the positive vote last night Titan might be able to do this as part of after approval testing (Phase IV). Another concern was about physically implanting the device, and as to whether a general surgeon would have to implant the device. This is a valid concern, as it would also lower Probuphine's market potential, as it would not be very convenient for the doctor or the patient to implant. Titan appears to have found a way around this, but time will tell if Titan is ultimately successful in that regard. Finally, another concern that the committee looked at was for the REMS plan proposed by Titan. According to the FDA briefing documents, the committee considered the question of:

"We will ask the committee to discuss whether the Risk Evaluation and Mitigation Strategy (REMS) proposed by the Applicant, which consists of restricted distribution and a training/certification program for providers who will implant the product, is adequate to address the risks of potential implantation procedure complications. We will ask you to consider whether the model of care envisioned, in which physicians from various non-surgical specialties will receive training in the procedures, or will be expected to have trained personnel under their direct supervision, is a realistic model that can be implemented in addiction treatment practice."

This question was the most controversial of the day, and received a 5 yes vote, 4 no vote, and 6 abstain from the committee. Obviously, this was hardly the ringing endorsement that Titan was asking from the committee. Titan and the FDA will likely have to come to some sort of consensus on what the REMS should consist of, and remember the more restrictive the REMS, we can infer that it would also lead to smaller sales.

Overall, the positive committee vote bodes well for Titan, as it shows that there is a significant need for Probuphine amongst addiction specialists. They found Titan's drug to be safe and effective, and most importantly recommended approval. While some of the committee members have addressed concerns, overall these same members voted to approve the Titan drug.

Titan's technology, which has been used to develop both Fanapt and Probuphine, has shown its ability to create drugs which can withstand FDA scrutiny. Commercialization will be another challenge for Titan, but it is a challenge which it will be able to bear with an experienced marketing partner... and an extra $50 million in its wallet. What Titan has in store next for shareholders, only time can tell. However, it seems to be quite a good deal at the current price levels, and is a buy in my book.

Disclosure: I am long TTNP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.