Prolor's 2012 Catalysts Will Drive Takeover Premium

| About: PROLOR Biotech (PBTH)
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PROLOR Biotech (NYSEMKT:PBTH) has been one of the hottest stocks, gaining nearly 50% over the last three months. Since the company operates in the biobetter / biosimilar universe, its pipeline has a greater relative probability of success compared to most other healthcare firms. Going forward, the company has several emerging catalysts: Phase III trial for hGH-CTP in adults and Phase II for children; clinical trials for Factor IX-CTP and Factor VIIa-CTP; and clinical trials for MOD-6030. Below I highlight just some of the specific areas where upside will materialize.

Factor VIIa-CTP

PROLOR has delivered yet again. On February 14, the company announced impressive results from a comparative study for its Factor VIIa-CTP hemophilia drug. The study demonstrated Factor VIIa-CTP's superiority to commercially available Factor VIIa in several respects: hemophilic mice receiving Factor VIIa-CTP showed (1) a superior survival rate in a bleeding test, (2) superior and longer pro-clotting thrombin generation, and (3) significantly greater in vivo recovery. The experimental mice were genetically modified to imitate humans with hemophilia.

Says CEO Dr. Abraham Havron:

The fact that our CTP technology has now demonstrated its efficacy in enhancing the longevity of Factor VIIa and Factor IX, which are both enzymes, is another confirmation of the ability of this technology to prolong the biological activity of a variety of therapeutic proteins belonging to different functional families.

While animal models have often been viewed as unreliable, Factor VIIa-CTP is fundamentally different. This is so because PROLOR is not employing any novel biological mechanism behind the drug, but rather taking something that has proven to work - and selling to the tune of ~$1.5B per year - and attaching CTP to it. Adding CTP to existing drugs has further proven successful. Merck's (NYSE:MRK) CTP drug, Elonva, for example, is already on the market and gaining momentum.


In an earlier article here, I highlighted how PROLOR Biotech's blockbuster hGH-CTP product may be worth more than $1B in its own right. Around a week later, Morgan Joseph reiterated its "buy" rating on the Israeli healthcare company with a price target of $16 (implied 158.1% upside). The report only further solidifies my confidence that hGH-CTP will become a leading multi-billion dollar solution in both Europe and the US.

An estimated 21.8M of the European and US adult population, or 3.8%, are candidates for hGH-CTP therapy. If the product is priced at $2.5K and penetrates just 3% of the market with a 25% royalty fee, PROLOR will yield just north of $400M from hGH-CTP. At an industry normalized price-to-sales ratio of 2.5, this implies that hGH-CTP value for PROLOR shareholders is north of $1B. Strong growth prospects leading up to this estimated peak penetration will push the multiple up higher as revenues materialize around 2014 / 2015.

Several factors explain why Morgan Joseph is so bullish about the product. First, the Phase II trial demonstrated that it could be injected weekly instead of daily like current offerings. All commercially available human growth hormone drugs made no less than $298M worth of revenue in 2010. Average sales were $680M with Novo Nordisk's (NYSE:NVO) Norditropin leading at $922M, followed by Pfizer's (NYSE:PFE) Genotropin at $850M. hGH-CTP will be the first FDA- approved long-acting version of human growth hormone. The human growth market is estimated at $3B and it is compounding 7% annually.

Second, a pilot study has now demonstrated that hGH-CTP could be injected just twice monthly instead of daily. If anything, however, this has underestimated the product's potential. The short 30-day duration of the study, the absence of dose titration, and the fact that patients in the study were only given 15% or 50% of regular cumulative hGH dose all limited the ability of hGH-CTP to showcase its effectiveness. No matter, IGF-1 levels still responded impressively to hGH-CTP.

Third, having aggressive secured IP protection around everything from production and manufacturing to the composition of hGH-CTP, PROLOR has established significant barriers to entry that boost its bargaining power. As other Seeking Alpha publishers have rightfully noted, this renders PROLOR an attractive takeover target.

Takeover Target

It should be stressed that the chairman of Teva Pharmaceuticals (NYSE:TEVA), another Israeli biotech, owns more than one-fifth of PROLOR. Teva shareholders have expressed the need to open new sources of growth. The company recently announced that Jeremy Levin would become CEO. Levin previously worked at Bristol-Myers Squibb (NYSE:BMY) and oversaw 17 acquisitions in just four years. His background grants him the deep industry knowledge that would push for a PROLOR takeover.

Pfizer, which is estimated to grow EPS anemically at a CAGR of 1.7% over the next three years, would equally benefit from dissipating investor fatigue. As PROLOR advances towards the catalysts mentioned herein, the takeover premium is likely to become increasingly pronounced.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PBTH, PFE over the next 72 hours.

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