An Investor's Rationale To Staying Long Pernix Therapeutics

| About: Pernix Therapeutics (PTX)

Summary

Despite the pps, PTX has a intrinsic value beyond what is currently reflected in price.

With9.5 million shares at last filing, plenty of options available to mgmt, especially options to not 'sell-out' to creditors.

The recent court and patent opinion the way for the Zohydro franchise to move forward.

Let's keep it real. I am long Pernix Therapeutics (NYSEMKT:PTX) stock and, while I may have gotten to the point of where I play hide and seek with the daily share price fluctuations, I am far from throwing in the towel on this company. I'm not stubborn to the point of becoming poor, nor do I enjoy frequent episodes of pain. Rather, I tend to have the ability to cut through the minutia and get to the nitty gritty of the issue at hand, and, as for the issue at PTX, I still see significant upside value in PTX.

Don't call me crazy (and please don't call me "surely"), but when I take a good, long look at PTX, I see far more potential and intrinsic value in the shares than is currently being represented by the stock price.

From There To Here

For many shareholders, the lingering pain of the 1:10 reverse split still causes some sleepless nights, but, from a strategic standpoint, the r/s provided some much-needed ammunition in times of need, leaving a considerably low share count that can raise significant capital at current or even discounted prices. Far removed from the threat of being delisted, PTX now trades at roughly $3.90 a share, battling back feverishly from the previous month trading lows of $2.74. Additionally, with approximately 9.5 million shares outstanding, PTX has a plethora of options available to them to keep the momentum going, inclusive of favorable court decisions, a stout IP portfolio and a pipeline of franchise quality drugs that can return considerable value shortly. For the number hawks, PTX is scheduled to announce Q4 earnings next Tuesday, so expect that a lot of trading eyes will be focused toward PTX on that day, with perhaps more funneled interest in management's comments than they have in results from months past.

Yes, I want to hear about growth and continued traction in the currently marketed drugs, but, indeed, investors are looking to understand considerably more about the hardball being played with creditors. Investors want guidance as to the impact of the recent court decisions and the strategic options that are now in play based on the company prevailing in the Zohydro ER ANDA litigation.

For those that were not paying attention, in late February, PTX announced that they had received a favorable opinion in its litigation with Actavis Laboratories FL, Inc. regarding a proposed generic version of Zohydro ER. In a release by PTX, the company stated:

Judge Gregory M. Sleet of the United States District Court for the District of Delaware concluded that Actavis' proposed generic versions of Zohydro ER infringe U.S. Patent Nos. 9,132,096 (which expires on September 12, 2034) and 6,902,742 (which expires on November 1, 2019) following a trial that took place in October 2016. The Judge has entered an order enjoining Actavis from engaging in the commercial manufacture, use, offer to sell, or sale in the United States, or importation into the United States of Actavis' Abbreviated New Drug Application (NASDAQ:ANDA) product prior to expiration of the two patents. Actavis did not assert invalidity or unenforceability of the patents at trial.

Not only was the decision a potential windfall for PTX, but it also served to validate the strength and longevity of the Zohydro ER patent portfolio. It further allows PTX to advance the Zohydro franchise well into the future, without the continued overhang of litigation and uncertain legal opinions. For investors, the decision acted as a pressure valve release, and the stock has been on an ascent ever since. The patents are strong, and the litigation appears to be ending. Both patents are listed in the FDA's "Orange Book" for Zohydro ER and are licensed to Pernix by Recro Gainesville LLC. Recro and another generic pharmaceutical manufacturer, Alvogen Malta Operations Ltd., filed a stipulation of dismissal last year ending a patent infringement lawsuit Recro filed against Alvogen concerning its proposed generic version of Zohydro ER. Thus, for the time being, we, the shareholders and PTX, are free at last.

Some Good, Some Not So Good

Those that have kids know that way too often after a child has one of these strong belly laugh attacks, it is quite frequently followed with a voracious cry. I'm not sure why we were created in that fashion, but perhaps it's because our maker wanted to make sure we knew that there was balance in life.

Such was the case at PTX when investors were told that the company had lost its arbitration case. On February 3, 2016, PTX announced:

On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35 million, plus interest (estimated to be approximately $2 to $5 million). The tribunal also denied Pernix's claim that GSK breached its obligations under the supply agreement. Pernix has already paid to GSK, or into an escrow account, an aggregate of $16.5 million, which will offset the total award. Pernix is reviewing the opinions, including the amount of interest, and intends to work with GSK to conclude the matter.

As of February 1, 2017, Pernix's unaudited cash balance was approximately $26 million, after making the scheduled payment of interest and principal in respect of its Treximet secured notes on such date.

On that day, the sun was definitely not shining on my face. But, balance reared its beautiful face and by the time February ended, the sun was not only shining back on my face but the company's primary cash cow, Zyhodro ER was fully back in play.

Such is life: You win some; you lose some. But, by the time February came to a close, PTX, at least in my opinion, is in a better place than at the start of the year. Removed are the storm clouds of legal uncertainty. And, with a clear path for Zyhodro ER, PTX can cut a deal on the remaining $18.5 million owed and concentrate on rebuilding the PTX brand and continue to deliver product traction and better financial results.

Where To Now?

PTX is not alone in the quest to be reincarnated as a beautiful stock. There are more than a handful of other drug stocks that have a similar story, Valeant Pharmaceuticals (NYSE:VRX), Infinity Pharmaceuticals (NASDAQ:INFI), and Portola Pharmaceuticals (NASDAQ:PTLA), just to name a few. And, like PTX, both Infinity and Portola have rallied back hard since the beginning of 2017. As for Valeant, the market, and Congress, still needs a poster child, and they seem to have monopolized that position, for now, sliding over 50% lower since the beginning of the year. Seeing that there can still be some good in the bad, though, gives me hope. And, if there were a way to siphon and share some of that good karma away from Infinity and Portola, I would.

Maybe I am just an eternal optimist, but I no longer obsess about past PTX transgression and focus even less on waiting for new skeletons to materialize from PTX attic. Heck, PTX is its own concern, not a subsidiary of the Bates Motel. Investors, myself included, may finally be able to take a breath of fresh air and give PTX management the time necessary to fully right this ship and create shareholder value.

If they want to spook the creditors, I'm all for it, sell a couple of million shares when needed, shore up the balance sheet and let the predators understand that the value in PTX is there for the taking, but at prices far more than the current value. The Gordon Gecko, Blue Star Airline approach to conquer and divide is so totally 1980's. Scrapping the pieces of a viable company is old school mentality. Investors today understand that while in extreme cases of distress, perhaps breaking up small pieces and salvaging them at pennies on the dollar makes sense. But, there can't be an argument made that doing the same at PTX makes sense.

PTX has a franchise drug in place, a well fortified IP portfolio, and a decent cash balance that can carry the company forward during the next round of investor "fake news" and general market turmoil. PTX management are not new kids on the block, and they will ultimately deliver back shareholder value, and rightfully so since that's what they get paid to do. While high double-digit share prices may very well be a thing of the past, once management clearly proves that the company is indeed tracking in the right direction and churning all the pistons, then it is not unimaginable to believe that share prices won't be printed at considerably higher prices than where they are today.

I can take criticism, and I can take a loss. But, just because I can handle it does not mean that I deserve it. I'm not the only believer in a PTX turnaround, and by the way the share price has been acting during the past month, many investors are also alive and well in the PTX long camp. When stocks tick higher, retail investors are typically the last to know why, it's for that reason that investors should keep a close eye on volatility and understand that erratic stock behavior isn't necessarily a bad sign, rather it's often a sign of significant news to come.

Admitting the problem is the first step in any recovery process. PTX management has admitted to having a problem long ago. Since then, they have been working on a solution and from an investor's point of view, appear to be making significant progress. For me, I can't abandon a work in progress, and as long as I believe that PTX is working diligently on a favorable solution and has a long-term vision for the company, hanging tight may be worth my while.

In the meantime, I'll stay long and stay patient, and if the stock continues to get beaten around, all I can say at that point is: "Please, sir, may I have another?"

Disclosure: This article was written by Kenny Soulstring, and it reflects my own opinions and unique articulation. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation. What I can guarantee, though, is accurate research, thoughtful analysis, and enthusiasm about any stock I cover.

I wrote this article myself, and it includes my own research and expresses my own opinions. I am not receiving compensation for it (other than from CNA Finance). I have no business relationship with any company whose stock is mentioned in this article.

Additional Disclosure: I am long PTX and may purchase additional shares within the next 72 hours.

Disclosure: I am/we are long PTX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

About this article:

Expand
Tagged: , , , Drug Manufacturers - Other
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here