I had never heard of Furiex Pharmaceuticals (NASDAQ:FURX) before Tuesday. Despite having two approved drugs, and a third in phase III clinical trials, the company flew largely under the biotech radar. However, it was hard to miss the news Tuesday when positive results in their phase III trials in diarrhea-predominant irritable bowel syndrome (IBS-d) sent the stock from $46 to over $118 in the first minutes of trading.
Clearly, something had gone very well for Furiex, but with the price moving so quickly there wasn't much time to analyze the situation. Luckily, the company and its pipeline are fairly small and simple so due diligence was relatively easy. Eluxadoline, the IBS-d drug which just completed the phase III trials, is Furiex's main asset. Furiex owns worldwide rights to the drug, and it is very likely to be a blockbuster. Its two other drugs are approved and on the market, commercialized by partners with Furiex earning royalties. The company only has 24 employees, ~$80 million in debt, and they are prepared to partner Eluxadoline or sell the company, whatever course of action maximizes shareholder value. With a market cap of almost $1.2 billion, the debt won't be an issue. And the company plans to file an NDA with the FDA by the end of Q2-- with accelerated approval, Eluxadoline could be on the market in 2014.
Furiex is in an enviable position, and if Eluxadoline does become a blockbuster ($1 billion in annual sales), the current share price will prove to be an enormous bargain. Let's consider Eluxadoline's prospects. The clinical trial results are laid out in this press release. The primary endpoints differed slightly between the FDA and the European agency. Both doses met their primary FDA endpoints (a composite score for both pain and diarrhea improvement) in both trials. The high dose met its primary European endpoint in both trials, but the low dose only reached statistical significance in one of the two trials. The magnitude of improvement relative to placebo was around 50% (~30% response for Eluxadoline vs. ~20% for placebo). Secondary endpoints looked at diarrhea and pain responses separately, and while both showed numerical improvements, only the diarrhea responses reached statistical significance. Side effects were generally mild or moderate. Higher doses of Eluxadoline had led to significant pancreatitis problems in earlier trials, but the lower doses in these trials showed only mild pancreatitis in 0.3% of patients, and symptoms resolved when treatment was stopped.
These are solid though not spectacular results, but the side effect profile is very good, and side effects are where IBS drugs have generally run into problems. The one currently approved IBS-d drug is Lotronex. It was removed from the market in 2000 based on life-threatening adverse events, but due to the lack of other treatment options it was allowed back on the market with significant restrictions on its use. In this marketplace, a safe, effective drug like Eluxadoline should do very well.
How big is the market? That is somewhat difficult to gauge due to the fact that no good treatments have ever been available to fill the market demand. I will attempt to estimate the market size in a two ways. First, let's look at the population size. Roughly 12% of adults have IBS and one third are diarrhea-predominant, which means there are roughly 10 million IBS-d patients in the US. Assuming half of patients treat at a cost of $1000/year, that would give a $5 billion market. The market outside of the US is likely comparable in size, so that would be a $10 billion dollar global market. Furiex would only need to capture 10% of this to reach $1 billion in sales. Another way of estimating the market size is looking at the constipation-predominant IBS (IBS-c) market. IBS-c patients also represent roughly one third of the total IBS population. Ironwood Pharmaceuticals (NASDAQ:IRWD) and Forest Laboratories (NYSE:FRX) launched their IBS-c drug, Linzness (linaclotide) in late 2012, and the estimates I've seen for it are between $1.35 and $2 billion. Based on those numbers, $1 billion doesn't seem at all unreasonable for Eluxadoline. Furiex's CEO gives an estimate of $750 million to $1 billion for peak sales of Eluxadoline. Based on all of this information, I use $1 billion as my own peak sales estimate.
Based on these estimates for Eluxadoline, how can we estimate the value of Furiex, then? I'll try to estimate the NPV of each of Furiex's drugs, and use that to guess what price a larger pharmaceutical company would pay to buy out FURX. Starting with Eluxadoline, we have to subtract out the mid-to-high single digit royalties owed to Janssen (a subsidiary of Johnson & Johnson (NYSE:JNJ)) and try to estimate the peak profits on this drug. I think the peak profits would be about $750 million, which with a 10% discount rate gives me an NPV of roughly $2.65 billion. Furiex's second drug is Nesina (Alogliptin), a DPP-4 inhibitor like Merck's Januvia, which launched in the last year and has peak sales estimates of $1 billion. Furiex is entitled to 4-12% royalties on Nesina, so I assume peak royalties of $60 million and NPV of $210 million. The third drug is a very minor premature ejaculation treatment, Priligy, which I estimate to be worth $20 million. These estimates are all very rough, and you should certainly do your own calculations, but based on these numbers Furiex should be worth roughly $2.85 billion. Even if a large pharma buyer demands a discount, $2.4 billion still seems entirely achievable for Furiex, which would be a 100% gain from current levels.
Another way of estimating Furiex's value would be in comparison to Ironwood, with their very comparable IBS-c drug, Linzness. Ironwood shares 50% of profits on Linzness, and has a market cap of $1.55 billion. With 92.5% of worldwide rights to Eluxadoline (subtracting JNJ's royalties), Furiex should be worth in the ballpark of $2.85 billion, right in line with my estimates above.
What could go wrong from here? The FDA approval process is always tricky, and Eluxadoline's approval may not go smoothly. Based on the recently published results, Eluxadoline looks extremely likely to be approved, but approval could be delayed or restrictions could be placed on the label, reducing the value of the drug and Furiex. Alternately, competition might limit Eluxadoline's market potential. Salix's drug Xifaxan (rifaximin) is currently in phase III trials for IBS-d, with results expected this quarter. However, given that Xifaxan has a different mechanism of action from Eluxadoline, the large need for IBS-d treatments, and that Eluxadoline could reach $1 billion in sales with only 10% market penetration, I don't think that competition is a serious concern. Given recent market jitters, Furiex getting bought out at an unreasonable discount might be a bigger worry.
In light of the quick timeline Furiex has given for filing Eluxadoline with the FDA, and that they have been in partnering discussions on this drug for some time, I expect things to move quickly from here. The drug will be approved by the end of this year, and in all likelihood a major partnership or buyout will happen well before then. If everything goes smoothly, the gains should be large and (relatively) quick from here.
Disclosure: I am long FURX. 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.