Despite the run-up in Momenta (NASDAQ:MNTA) over the past year and the recent announcement that Baxter (NYSE:BAX) is dropping Momenta's lead biosimilar compound, we believe there is still considerable upside remaining over the next 12-24 months. Momenta's impending approval of M356 (generic Copaxone - TEVA) with Sandoz with equal profit-sharing should drive shares higher assuming a May launch (when patents expire). The company's unique ability to characterize biologics may give it an edge in the biosimilar market by enabling the company to avoid large trials, shortening time to market, and the possibility of being deemed interchangeable with the reference biologic. Its partnership with Baxter to supply biosimilars provides it a major player for commercialization and may be the first step in being acquired. Conservatively valuing the company's portfolio indicates an upside price target of $28, 50% higher from current levels. The impending approval of Copaxone provides a cushion on the downside of 25%.
Company and Technology
Momenta is an innovator in the analysis, characterization, and design of complex molecules. By understanding the link between a compound's chemical structure, its manufacturing process, and its function, the company has created a pipeline of complex generics and complex mixture drugs, plus a pipeline of biosimilars. The company's unique process of characterization may enable its biosimilars to be deemed bioequivalent and possibly interchangeable with branded biologics, though we believe that may not occur for some time.
Biosimilars are not technically generics of biologics because they are made from living organisms, so there is likely to be some difference in molecular structure, although the therapeutic result may be the same as its branded reference drug. In March 2010, an abbreviated regulatory process was codified in Section 351(k) of the Patient Protection and Affordable Care Act of 2010. This new pathway opens the market for biosimilar and interchangeable versions of a broad array of biologic therapeutics. In February 2012, the FDA released three documents containing their preliminary guidelines for applications under the Section 351(k) pathway. These guidelines state that the FDA will use a step-wise review that considers the "totality-of-the-evidence" in determining extent of the clinical development program. This approach puts a substantial emphasis on structural and functional characterization data in evaluating biosimilar products for approval. It would allow for more limited clinical trials than current biosimilars, saving tens of millions in development costs and a considerable amount of time. Momenta believes the guidance aligns with its strategy to show minimal or no functional or structural differences from the branded product which would support interchangeability.
Momenta has demonstrated its ability to produce complex generics. Through its partnership with Sandoz (generics unit of Novartis), Momenta produces enoxaparin, a low-molecular weight heparin of the branded drug Lovenox which is used to treat deep vein thrombosis and acute coronary syndrome. The length and sequence of the polysacharride chains that comprise enoxaparin make it difficult to manufacture. The Momenta/Sandoz version was the first of its kind and approved in July 2010.
Using its unique characterization process, Momenta is developing an extensive pipeline of complex mixtures and biosimilars. The company's partnership with Baxter gives the latter access to six of its biosimilar compounds to be chosen by February 2015. Baxter has already chosen three: M511, an oncology monoclonal antibody, and M923 and M835, both of which are anti-inflammatory/autoimmune biologics. Baxter recently announced that it has decided not to pursue M511, thus leaving Momenta to pursue this program on its own, at least for the moment. We assume neither M923 nor M835 is Enbrel (etanercept), since Baxter has a separate deal with Coherus for a biosimilar. Patent expirations during the period indicate the most likely candidates to be Humira or Remicade as shown in the chart below. Similar reasoning leads us to believe the oncology MABs are biosimilars of Rituxan, Avastin, or Herceptin.
Under the terms of the agreement, Momenta would receive up to $50 million for each biosimilar chosen by Baxter plus a high single-digit royalty or one half of the royalty plus 30% profit-sharing.
M356 - Generic Copaxone
Copaxone® (glatiramer acetate injection) from Teva is a drug consisting of a complex mixture of polypeptide chains. It is indicated for reducing the frequency of relapses in patients with relapsing-remitting multiple sclerosis (RRMS). With its Lovenox partner, Sandoz, Momenta is awaiting approval of M356, a generic of Copazone. Copaxone generates almost $3 billion in revenue in the US and $4 billion globally. Importantly, unlike Lovenox, Momenta will share equally in the profits.
With Teva having exhausted its appeals, Copaxone should lose patent protection in May 2014, opening the door to generic competition. Momenta and Mylan have generics. It is believed that Momenta's will be the first to market. Although Mylan management has indicated that it will be ready to launch in May, we believe that is doubtful. As Craig Wheeler, CEO of Momenta points out, Mylan licensed the product from Natco who sells the product in India. It is believed that Teva evaluated this product and found it to be different than the branded version. So the product needed significant work before it could be ready for the US market. Plus, it is commonly known that Mylan has less expertise in analytical chemistry that Momenta has been using at FDA for the past five years. So, although a launch by Mylan is possible in May, it is not likely. However, we have accounted for this in M356 valuation.
Given the spate of oral RRMS treatment approvals, their efficacy, ease of administration and better side effect profile, and the introduction of glatiramer from other companies, sales of Copaxone are expected to decrease by over 50% over the next 3-4 years. This is despite the fact that Teva gained approval of a higher dose of Copaxone with injections three times per week versus the current daily injectable. Although fewer injections are desirable, we question how significant this is in defending the franchise, since RRMS patients face serious consequences for non-compliance and cost pressures continue to rapidly build within the healthcare system. Unless Teva is willing to lower the cost of the new Copaxone, a less-expensive alternative will be attractive to managed care and possibly to patients if the daily injection saves significant out-of-pocket costs. Resources expended by Teva to defend the Copaxone franchise from oral therapies will benefit other players in the glatiramer market like Momenta.
Biologics in the EU are 10%-35% less expensive than the branded counterparts. According to the journal Managed Care (Reinke, Oct 2012), biosimilars will be 10%-25% less than branded reference drugs in the US. That, coupled with more oral therapies available, means a shrinking revenue base for the glatiramer market. The chart below summarizes our assumptions on the glatiramer market over the next few years.
US Glatiramer Market
A profitable company with one marketed drug and another late-stage drug trades at 3x-5x sales (e.g., MDCO). If we assume 4x sales, Momenta has to generate the equivalent of $250 million in revenue (we say equivalent because Momenta will share in the profits, not the revenue) in today's dollars to reach its current $963 billion market cap. That is 11% share of the current $2.2 billion glatiramer US market estimate in 2017. This assumes the entire company's valuation depends on glatiramer. We also assume that Momenta's glatiramer will be marketed for half of 2014 since Copaxone's patents expire in May, attaining a 25% market share by the end of the year.
Given Sandoz's strength in the generics market, the Momenta/Sandoz glatiramer should be able to sustain approximately one-third of the market. Given the shrinking market and price declines, peak sales would be in 2017, the one year after we believe Mylan will also enter the market. The market value of Momenta at 4x revenue in 2017 (20% discount rate) sales is $977 million, approximately the current market capitalization. Thus, there is very little value assigned to the pipeline.
Momenta's pipeline valuation presents a bit more of a challenge because the exact timing of biosimilar launches and whether they will be deemed interchangeable is also unknown. Interchangeability would be a boost to the valuation, although we do not account for this occurring in our valuation.
As shown in Table 1 above, our base case conservatively assumes either M923 or M835 is on the market in 2020 with eight competitors, the average number working on Humira and Remicade. If all competitors had equal share, they would generate $796 million in revenue each. Although there will be price reduction, the market sizes will be comparable to the current market since the market continues to grow through patent expiration in 2018. Additional parameters are an 8% royalty rate to Momenta plus 35% discount rate to account for the risk. This adds $5 per share.
Table 2 shows a similar framework for M511, except we believe Momenta will extract a much higher royalty rate of 16% if it partners the compound later in development. This adds an additional $4.
The combined per share value is $28, 50% above the current value.
There are two near-term risks to MNTA. Approval of the Copaxone biosimilar could be delayed until 2015 and Mylan could, in fact, launch its biosimilar in May as well, though we believe the latter unlikely. If Momenta's M356 is delayed until 2015, using the same parameters with one additional year, the downside is approximately to $15 or 21%, since the market is giving the pipeline little value.
There is a high probability that Momenta's M356 will be approved prior to the May patent expirations. Although anticipated, we believe the approval at the very least supports Momenta's current valuation. The company has demonstrated that it can characterize complex molecules and mixtures, and its technology has been validated by two large industry players - Sandoz and Baxter - lending credibility to the viability of the company's pipeline. As outlined in Table 4 below, there are also several likely events that provide additional support to our valuation or add to it, making MNTA one of the best long-term speculative plays in the biosimilar space, providing a better than 2:1 reward to risk. If the company's unique characterization process enables it to attain interchangeability, Momenta will become a partner of choice, if not an acquisition target. Both of which would drive the shares even higher.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.