Eagle Pharmaceuticals (EGRX) has been a true success story since the company went public in 2014. The major breakthrough occurred in 2015 when the company signed a deal with Teva (NYSE:TEVA), resulting in decent royalty streams as of the start of 2016.
On the back of these lucrative royalty streams, modest revenue streams from other product lines, and potential expansion of current products to other indications, investors have gotten quite upbeat on the prospects for the company. I understand this enthusiasm as the company is profitable, has a strong balance sheet and runs quite a lucrative business model.
At a +$1 billion valuation, I believe that shares are largely fairly valued at this point in time based on current information, although I would be an opportunistic buyer if shares retreated towards the $40-$50 level. The solid revenue streams on the back of the Teva deal, rapid progress that management has made since the IPO, and a focus on diversified product revenues all create appeal for investors.
A Successful IPO
Eagle Pharmaceuticals is a so-called specialty pharma company which focuses on the development and commercialization of injectable products, used in critical care and oncology.
The company essentially ¨blends¨ FDA-approved products, and tries to sell this new mix at higher prices being charged by generic competitors who simply try to re-create the branded version. By improving the mix, it aims to better address the needs of the patients, reduce costs or improve the ease of administration.
The company tries to extend commercial duration with protection or orphan drug exclusivity. It goes without saying that these periods of exclusivity are much shorter than for the branded versions, typically ranging up to 7 years if approved by the FDA. While patent protection is shorter and harder to obtain, Eagle benefits from faster approval rates and often lower chances of having products rejected.
The company went public early in 2014, selling shares to the public at $15 each. Eagle was still very small at the time, having had three products being approved: RYANODEX, argatroban and diclofenac-misoprostol. The latter of these still had to be commercialized.
The company had five candidates in advanced stages of development. These included lead candidate bandemustine hydrocholoride injection for the treatment of chronic lymphocytic leukemia (CLL) and indolent B-cell non-Hodgkin´s lymphoma (NHL).
Revenues came in at merely $19.1 million in 2014, comprising $4.6 million in product sales, $10.7 million in royalties and the remainder in other income. These revenues were by far not enough to pay the bills, and the company reported an operating loss being equal to the topline sales result. Most of the losses were the result of R&D efforts, as is typically the case.
2015 Was A Crucial Year
The year following the IPO became a huge success for Eagle.
The company closed a deal in February of that year with Teva in which Eagle would contribute its bendamustine hydrochloride (HCI) rapid infusion products that is used to treat patients with CLL and NHL. This infusion method will be used to administer Teva´s bendamustine product ¨TREANDA¨, which has been on the market since 2008, resulting in quicker infusion times.
As part of the deal, Eagle would be responsible for the regulatory work. The company obtained a $30 million upfront payment from Teva, was eligible for $90 million in additional milestone payments and would receive royalties of 20% on sales.
The company furthermore obtained a 7 year exclusivity period for RYANODEX by the FDA for injectable suspension to threat malignant hyperthermia, after tentative approval was obtained in July of 2014.
Momentum following this good news pushed shares up from $20 at the start of the year to levels double that in March. The company was quick to offer 1.3 million shares in March at $42 apiece, providing a boost to the financial position alongside the upfront payment received by Teva. This was revealed in May when the first quarter results were released as Eagle ended the quarter with $115 million in net cash. The 15 million outstanding shares had risen to $60 at that time, awarding the company a $900 million valuation, including net cash being held.
Shares continued their run higher and approached the $100 mark that summer, before falling back to $80 in August, when the second quarter results were released. Total revenues were stable at around $6 million, yet product revenues were up sharply towards $3.7 million driven by RYANODEX, diclofenac/misprostol and argatroban, the three products already approved in 2014.
These revenues were not sufficient to pay the bills as operating losses came in at $8 million. The good news is that the FDA had set an action date for the NDA of Eagle´s rapid infusion product together with Teva´s bendamustine at December of 2015. At the same time, the FDA has set an action date for Eagle´s RTU bivalirudin for treatment of patients with certain coronary conditions in March of 2016.
From that moment on it was waiting for approval of the FDA for these indications as product sales fell to $3.3 million in Q3, resulting in losses of around $10 million which were easily financed by net cash balances of roughly $100 million.
Shares approached the $100 mark again by the end of the year as December was a great month for Eagle. The FDA approved BENDEKA to treat patients with CCL and NHL, triggering a $15 million milestone payment from Teva. Eagle furthermore presented good results for RYANODEX for exertional heat strokes, while it furthermore obtained FDA approval for Docetaxel, a non-alcohol treatment for breast cancer, non-small cell lung cancer, and prostate cancer among others.
2016 Starts Difficult, Ends Well
After a great 2015, in which shares pretty much rose from levels around $15 of the year to highs of $100 in December that year, 2016 proved to be more challenging.
BENDEKA was made commercially available by Teva at the end of January. Eagle brought its Docetexal Injection to the market in early February. These introductions were much needed as product sales from its three core products fell to just $2.9 million in the fourth quarter of 2015.
Shares plunged to just $40 at the end of March, reducing the valuation of the firm from $1.5 billion in December of 2015 to just $600 million in March of 2016. Shares were pulled down alongside the overall correction in the pharma/biotech world, but Eagle´s investors were not happy with the FDA decision to not grant 7 year Orphan Drug exclusivity to BENDEKA.
Shares treaded at similar levels in May when Eagle released its first quarter results. Product sales came in at $14.1 million, comprised out of $3.8 million in sales from the four core products and $10.3 million from BENDEKA. The 20% royalty received on Teva´s sales resulted in royalty income of $9.5 million. This is important to realize, as BENDEKA contributed just two months to the quarter.
Second quarter results provided comfort to investors as shares have already approached the $60 mark again at the time. Product sales came in at $9.6 million, with BENDEKA contributing $3.3 million following a strong start. This implied that product revenues excluding BENDEKA came in at $6.3 million, up from $3.8 million reported in Q1, in part driven by the launch of non-alcohol Docetaxel Injection which added 0.6 million in sales.
Royalties on BENDEKA came in at $31.3 million, which at a 20% rate implies that Teva generated $156 million in revenues, at a rate of $600 million per annum. The company signaled that it liked the achievements as Eagle announced a $75 million share buyback program, equivalent to its entire net cash position at the time. On the back of the impressive royalty streams and low effective tax rate on the back of tax assets, Eagle posted a net profit of $13 million, equivalent to $0.80 per share.
Third quarter results were also well received, with shares rising towards the $80 mark. Product sales came in at $7.8 million, including a $2.2 million contribution from BENDEKA, for sales of $5.6 million excluding BENDEKA. This suggests a small fall on a sequential basis which looks disappointing. The market did not seem to mind that after a strong second quarter, royalties on BENDEKA fell to $26.2 million, as earnings fell to $0.73 per share.
While these results do not look particularly encouraging, Eagle continued to make progress with RYANODEX, which could be used for patients suffering from exertional heat stroke and MDMA, potentially increasing the patient population a great deal.
The company and its partner Teva furthermore received a unique J-code for BENDEKA in order to improve access and reimbursement. This triggered a $40 million milestone payment for Eagle, while it increases the royalty rate by five percentage points towards 25% of Teva´s sales, having the effect of boosting the royalty stream by another 25% per annum.
In November, Eagle announced a small deal to acquire early-stage biotech firm Arsia Therapeutics, which focuses on biologics in a $30 million upfront deal. Including milestone payments, this deal which is focused on the longer term could come in at $84 million.
Adding It All Together
Eagle currently operates with a roughly flat net cash position. While it held $59 million net in cash as of Q3 of 2016, it acquired Arsia and continued its buyback program in the meantime. With 16 million shares outstanding at $70, the company is now valued at $1.1 billion. That being said, Eagle is profitable and it still has substantial receivables from Teva outstanding. It stands to receive a milestone payment of another $40 million.
The company is still pretty much a play on BENDEKA, with annualized royalty streams coming in at a rate of $110 million based on the previous two quarters. With the royalty stream increasing towards 25% of sales, this number can grow to $137 million per annum going forward.
Product sales come in at a rate of roughly $40 million per year, comprising BENDEKA, RYANODEX, argatroban and non-alcohol Docetaxel Injection. That suggests a total revenue rate of roughly $175 million per year, of which three quarters results from BENDEKA with expenses running at roughly hundred million a year. That results in potential pre-tax profits of $75 million, which results in solid cash flows to the business given that it still has tax assets. If a normalized tax rate is applied, earnings could come in at around $50 million, equivalent to +$3 per share on a real GAAP basis.
The issue is that while the company has multiple products on the market, the company relies heavily on BENDEKA to justify the +$1 billion valuation. This is a concern as the FDA refused to grant a 7 year exclusivity period. Growth has to come from other treatments in order to bring diversification, notably by expanding RYANODEX to other indications, as sales of this medication now come in at just $5-$10 million a year.
That said the company is upbeat on the prospects for BENDEKA despite the FDA exclusivity issue, citing that it holds 6 patents that expire anywhere between 2026 and 2033. It furthermore indicated that these have held up in local courts and IPR challenges to date.
This is very encouraging, as Eagle has a lot of work to diversify away from BENDEKA. If we assume a run rate of $137 million in royalty revenues per annum going forwards for another decade, as being pure pre-tax profits, these revenue streams can be highly lucrative, even if no growth is projected. If I subtract 30% in taxes from these streams for the coming year while discount the annual cash flows at 10%, BENDEKA could still be worth $650 million to Eagle, equivalent to roughly $40 per share.
Including a potential pick-up in sales of RYANODEX and other programs, it seems that shares are rather fairly valued at this point in time, as this process takes time and effort. That being said, if shares unexpectedly revisited the $40-$50 region again, I would certainly be enticed to initiate a small position on the back of BENDEKA and the strong track record of the firm.
Disclosure: I/we 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.