In the last week, Furiex Pharmaceuticals (NASDAQ:FURX) soared 135% after its diarrhea drug proved statistically significant in two Phase 3 trials that enrolled 2,428 patients. As a result, Furiex will seek FDA approval in the next quarter, and European approval within the next year. Furiex's drug, Eluxadoline, will treat diarrhea-predominant irritable bowel syndrome (IBS-d), a disease that effects 28 million people in the U.S. and in Europe combined. Therefore, Furiex has a lot of options as it plans to market Eluxadoline: It could market alone, find a partner, or be acquired, but what's the best plan of action for investors?
Going solo or finding a partner, which is best?
There's no denying that Furiex has a lot of upside potential: The company clearly produced a statically significant result in its trials, and will enter a large market. In fact, Furiex has the opportunity to own much of this market, as competitor Lotronex is the only other FDA approved drug treating this indication, and it is a restricted drug with safety concerns; Furiex's Eluxadoline has minimal adverse side effects.
As a result, company Chairman Fred Eshelman estimates peak annual sales of $750 million to $1 billion. Thus, with a $1.1 billion market cap, Furiex is trading at just over one times peak sales potential, and in an industry that often reaches a multiple of three times peak sales.
The only foreseeable issue for investors might be Furiex's lack of cash and its need to find a partner/acquirer. The company already has a partnership with Takeda in marketing two other drugs, but currently does not have a partner with Eluxadoline. Thus, with having just $35 million in cash Furiex has about one year worth of operating costs on its balance sheet, and not nearly enough money to begin manufacturing and marketing a drug to a patient population of this size across two continents. Essentially, Furiex might need $100 million plus just for the initial phases of launch.
Hence, a partner is very important for Furiex, but with having such large potential, Furiex must ensure that it gets a fair deal. Currently, Furiex's other partnerships entitle the company to tiered royalties of just 8% to 12% and 4% to 8%. If Furiex were to settle for such mediocre royalties in exchange for a couple hundred million dollars upfront and marketing expenses then its upside in stock performance might be limited.
I'll give you an example: If Furiex agrees to a 10% royalty and Eluxadoline is a billion dollar product, then that means Furiex would be trading at 10 times its "share" on peak sales. Clearly, this would prevent dilution but might make the stock rather pricey. As a result, it is still too early in the game to know exactly how much upside exists. What investors' need is clarity with the FDA and an estimate as to how much it will cost to market, manufacture, and advertise Eluxadoline both alone and with a partner.
Personally, I'd love to see Furiex show confidence right now in its product, raise $200 million to market eluxadoline alone, and then as an investor I'd be ready to buy quickly!
An acquisition that makes sense
With all things considered, there is one more possibility to consider, and that is Furiex being acquired. The company has already said that it expects buyout interest given both the results from the study and the market potential for eluxadoline. While there are many companies that might bid to acquire Furiex, such as Takeda - already a partner - or Janssen - whom is the licensor of eluxadoline, I tend to think that Salix Pharmaceuticals (NASDAQ:SLXP) is the most likely and most interesting potential acquirer.
For one, Salix has an enormous footprint in the gastrointestinal (NYSE:GI) disorder space, and that footprint got even larger late last year when the company-acquired fellow GI focused company Santarus (NASDAQ:SNTS), which gave Salix a total of 22 different marketed products. Yet, what may be the most meaningful reason for Salix to show interest is the synergetic benefits of co-marketing eluxadoline with its drug Xifaxan.
Xifaxan is one of the more common drugs prescribed for travelers' diarrhea caused by noninvasive strains of Escherichia coli. The drug has very minor side effects and is prescribed often for many off-label diarrhea-related indications. In Salix's last quarter, Xifaxan produced sales of $165.9 million, a 20% gain over the prior year and representing a 24% increase in script growth. Thus, these are two products that will likely produce similar earnings over a course of several years.
Clearly, Xifaxan and eluxadoline target similar patient populations and would be marketed to the same physician populations. Therefore, costs could be lowered and margins will go higher if two products are marketed as one. As an investor, this makes a lot of sense, and would add to Salix's strategy of being an acquisitive company.
With that said, given the questions surrounding Furiex's immediate future I think Salix would make a better investment opportunity, at least short-term. There are real reasons to believe that Salix may make an attempt to acquire Furiex, and with Santarus, Salix already acquired a company that's growing at a rate of more than 50%. Most notably, Uceris will likely be a big hit for Salix this year - a drug that treats mild to moderate ulcerative colitis that was acquired via Santarus - as Uceris was one of the most surprising drug launches of last year.
In the first three quarters of last year, Uceris sales were $6.6 million, $16.2 million, and $19.6 million respectively; the company had originally guided for total sales of just $20 million for the entire year. Hence, Uceris has become a hit drug, and peak sales expectations have rapidly doubled to $700 million. Uceris, combined with Xifaxan, Glumetza, Apriso, and Zegerid are large reasons that Salix is expected to grow sales by 72% this year. Therefore, Salix shares might continue to soar, but even more so if it acquires Furiex and adds yet another potential blockbuster to the mix.
A lot of options
To my knowledge, no one has even hinted at the idea that Salix might acquire Furiex. Up until this week, Furiex wasn't a widely covered stock, or seen as a great buyout opportunity. However, data in biotechnology changes everything, and as an investor, you have to like the potential synergies of a Salix plus Furiex, along with Salix's willingness to acquire companies in the GI space that add new dimensions to its business strategy.
If no acquisition occurs, I still think Salix is a great investment and that Furiex could become a good opportunity. A partnership might bode well for the short-term performance of the stock, but unless Furiex gets a Pharmacyclics-like deal (50% of revenue/40% of costs) then it won't create long-term value for shareholders. Given the fact that eluxadoline won't earn $5 billion in sales, it is highly unlikely that Furiex will get a favorable partnership deal, as large pharma will account for the potential dollars earned minus costs to determine a fair royalty. Thus, for drugs that don't earn many billions annually, large royalty returns are rare.
Therefore, as I said, the most favorable outcome other than an acquisition will be if Furiex decides to market eluxadoline alone, and raises money now to get the most cash possible while causing minimal dilution. Ultimately, this approach would cause selling pressure, but that loss would create a good investment opportunity to buy the stock at a cheaper price. Then, the overhang of needing cash would no longer be a problem, and investors could ride the stock higher with fundamental gains.
As I said, there are a lot of options, and in this scenario, let's hope Furiex makes the best choice to add long-term value for shareholders.
Disclosure: I am long SLXP. 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.