Supernus Is Worth A Super-Sized Portfolio Position

Summary

• Supernus continues to grow revenue and earnings and currently has no debt.
• SPN-810 and SPN-812 are progressing and will have Phase 3 results in about a year.
• Supernus is considering an acquisition to get it into the child psychiatry space ahead of SPN-810 and SPN-812 approval.
• Current valuation is reasonable given Trokendi and Oxtellar alone - approval of either pipeline medication could easily double the valuation.

It has been six months since I wrote about the possibility of Supernus (NASDAQ:SUPN) becoming the leader in ADHD non-stimulants. Since that time, I have been focusing on the antidepressant space with a series of articles. However, today I am returning to review the current status of Supernus and why it is now my largest individual stock holding.

Supernus Is Growing Revenues and Earnings

Supernus announced full-year 2017 results on February 27th. Full-year 2017 revenue was $302 million with product sales comprising $294 million of this. This was near the top end of the guidance as is fairly standard for Supernus' performance relative to its own guidance. This represented a little over 40% growth year over year, which was fairly consistent each quarter throughout the year (compared to the same quarter in 2016). Earnings growth was even more impressive with full-year 2017 operating earnings coming in at $99.5 million (an 84% increase compared to 2016 and numbers that exceeded guidance). GAAP earnings were lower year-over-year, but this was primarily due to a one-time benefit to GAAP earnings in 2016 and a one-time hit to GAAP earnings in 2017.

Perhaps more significantly, Supernus still has not reached peak sales despite several years on the market for both Trokendi and Oxtellar. This is primarily due to the addition of the migraine indication for Trokendi and the likely growing off-label use for Oxtellar. Supernus has issued guidance for revenues of $375 to $400 million in 2018. Assuming that Supernus reaches the upper end of its guidance (which it usually does), this would mean continued ~25% revenue growth year over year. Supernus has guided for an operating profit of $125 to $135 million. Again assuming that it reaches the upper end of guidance, this could be about a 35% increase YOY (it is 25% even at the low end of guidance). Supernus is projecting a tax burden of 23 to 25%, which could put GAAP earnings (assuming no additional one-time adjustments) at $94 to $104 million. This could represent about an 81% increase YOY in GAAP earnings at the top end of this estimate.

Supernus is currently operating with no debt and cash on hand of around $274 million. The ongoing profit, lack of debt, and substantial cash make Supernus a potential buyer of any company that fits its profile and needs well (this will be discussed further below).

SPN-810 and SPN-812 are Progressing Towards Results

SPN-810

Supernus is making significant progress with its pipeline. The two studies for SPN-810 for impulsive aggressive in children with ADHD are now 80% and 65% complete. Supernus has indicated that it plans to add a third Phase 3 study of SPN-810 in adolescents with impulsive aggression in ADHD. As I have written previously, Supernus also has the potential to expand testing of SPN-810 to impulsive aggression in other indications including autism, PTSD, and schizophrenia. I have noticed a gradual shift in the order that Supernus lists these possibilities with autism almost always being listed first now. This makes sense given that autism has few on-label treatments and molindone (SPN-810) has a good chance of working as well if not better for impulsive aggression in autism as it does in ADHD.

Jack Khattar, the CEO of Supernus, said in the most recent conference call that:

"Clearly one of the places the company's going to look very keenly are other indications for 810 for IA in diseases such as autism, schizophrenia, PTSD, etc. that we've said before. I think we'll be trying to frame those out in a more discrete sort of way as we move forward."

Given these comments and a general sense that Supernus needs to reinforce the early stages of its pipeline, I expect a Phase 2 study to be initiated with SPN-810 for impulsive aggression in children with Autism at some point in the next year or two. PTSD is probably the next most likely target here and also could be initiated in the next two years. I continue to believe that Supernus is underestimating the sales potential of SPN-810 - perhaps by a large margin if it could obtain the indication of impulsive aggression in ADHD, autism, and PTSD.

SPN-812

Similarly, SPN-812 is also moving forward in Phase 3 studies. This follows excellent Phase 2 studies that showed results as good if not better than Strattera (atomoxetine) with similar tolerability. These results are shown below from the most recent Supernus Investor Presentation.

This data is notable for progressively improving p-values at each higher dose. Somnolence and fatigue were noticeably increased at the 400mg dose and this led to a bit higher discontinuation rate. However, the 200mg and 300mg doses look very good and it's quite possible that even the 100mg dose would look good in a larger study. If these results can be replicated in the ongoing Phase 3 studies, then SPN-812 will be easily approved and able to compete with the generic of Strattera as well as the branded dasotraline from Sunovion, which is expected to gain approval in late 2018. I believe that SPN-812 is very likely to get approved at this point and will be additive to Supernus earnings by 2020 or 2021. However, I do feel that Supernus is overestimating its ability to get market share here. Supernus projects that it could get 3-5% of the ADHD market with this non-stimulant. This is roughly the same market share that generic Strattera currently has. I find it hard to believe that Supernus will be able to get the same market share as generic Strattera currently has because SPN-812 would face more insurance headwinds as well as competition from Sunovion's dasotraline. I believe 2% is a more realistic expectation with a 1-3% range. Still, even with a 1-3% range, SPN-812 would likely have higher sales than the currently marketed Trokendi and Oxtellar COMBINED.

Enrollment of the four Phase 3 studies of SPN-812 are already 38% complete and Supernus indicated that enrollment speed is exceeding expectations. This is not surprising to me given the above results and the desire for additional non-stimulant medications in the ADHD market. Supernus has indicated that SPN-812 may pass SPN-810 in terms of development and it could potentially file a NDA for 812 before 810. With both drugs currently due for results in 1Q 2019, this means that SPN-812 could potentially be available as soon as 2020. Supernus wants to separate the marketing of 810 and 812 by a year. SPN-812 will be an easier "sell" to child psychiatrists (due to side effect profile, etc.), so I believe this will play a role as well. Therefore, I now expect that SPN-812 will become available in 2020 and SPN-810 in 2021.

Supernus is Considering an Acquisition, but Few Sensible Options Exist

Perhaps the most interesting portion of the most recent earnings call was the Q&A that followed where Jack Khattar was very candid about the possibility of acquisitions. Specifically, he mentioned several factors that would play into any potential acquisition:

• Supernus does not want to be launching multiple products at once, so any acquisition would need to be a compound that was either ahead of SPN-810/812 or behind both of them as well as the likely addition of a bipolar indication for Oxtellar.
• Supernus sees an advantage in potentially acquiring a company that already has a launched product in the psychiatry space. This would get it into psychiatry offices before SPN-810/812 were launched and therefore give a boost to the potential launch of those compounds.

Mr. Khattar did NOT mention potential issues related to previous agreements with Shire (SHPG). As a part of the spin-off of Supernus from Shire, Supernus originally agreed to not compete with Shire in at least the amphetamine ADHD space. I have seen no indication that Supernus is released from this non-compete agreement, but there also may be aspects of this deal that are not fully known. I would suspect that there is nothing stopping Supernus from pursuing a methylphenidate stimulant as Kempharm (KMPH) is in a similar situation as Supernus and has been able to do this.

Taking these into account, then the ideal acquisition for Supernus would be a company with a product already on the market or currently ready for launch. It would ideally be a child psychiatry-focused product as both SPN-810 and 812 will be focused there. Companies that have an amphetamine stimulant are likely off-limits unless something was worked out with Shire. As a child psychiatrist, I'm aware of all the products that are currently marketed to me and those that are likely coming in the near future. These are listed below along with the reasons that they would not be a fit for Supernus.

Vyvanse/Mydayis - Marketed by Shire, which is much larger than Supernus even if just counting its Neuroscience division. While Supernus could not purchase Shire Neuroscience, I have speculated that a Shire Neuroscience-Supernus merger would make sense.

Adzenys/Cotempla - Marketed by Neos (NEOS). Neos is about the perfect size for a Supernus acquisition and this would make great sense except for the fact that Adzenys is an amphetamine and this may violate the non-compete agreement with Shire.

Dyanavel - Marketed by Tris. Tris is private and is also the manufacturer for Quillivant and Quillichew. Dyanavel is an amphetamine, so this likely violates the non-compete agreement. In addition, Tris has a relationship with Pfizer (PFE) and there may be too much going on with that relationship at the moment for Supernus to be involved.

Quillivant/Quillichew - Marketed by Pfizer. Quillivant is currently not available and Quillichew has limited availability. Pfizer has already discontinued its Neuroscience research and may be looking to sell these assets, but I would imagine that Tris has the best shot at working something out with Pfizer.

Evekeo - Marketed by Arbor. Arbor is developing other compounds, has a large non-psych division, and is at least as big as Supernus in scale if not larger. This likely makes it too big for a Supernus acquisition and it is also heavily focused on amphetamine products.

Latuda - Marketed by Sunovion. This is not going to happen because Sunovion will likely be its largest competitor for SPN-812 (vs. Sunovion's dasotraline).

Daytrana - Marketed by Noven. Noven has largely stopped marketing Daytrana due to frequent issues with supply. The people at Supernus likely are familiar with these issues due to Shire once marketing this product. Generic Daytrana is also coming soon, so Supernus shouldn't have any interest here.

There is one possibility that I can think of that would make quite a bit of sense without involving an amphetamine. A private company named Rhodes Pharmaceuticals, which is best known for its generic controlled substance medications, launched a product in 2015 called Aptensio XR. Aptensio is a combination of short- and long-acting methylphenidate in one pill. It is basically an improved version of Ritalin LA or Metadate CD. I have prescribed Aptensio on occasion and been fairly impressed with it, but have not seen one of its drug reps in many months. I am not certain how Aptensio is doing nationally, but I would suspect it could do much better in the hands of a company like Supernus. If Rhodes has been disappointed with the sales of Aptensio, then it may be an opportune time for Supernus to buy it from it. Supernus could then spend 18 months or so marketing Aptensio before potentially launching SPN-810 or 812. Even if sales were not stellar, it would give Supernus an "in" with child psychiatrists that could help give it credibility for future launches.

Supernus Stock is a Strong Buy

Given the strong growth in revenue for Trokendi and Oxtellar, the current forward P/E of approximately 20 is not unreasonable based off of those two drugs alone. However, I believe the current stock price is significantly underestimating the potential of SPN-812, SPN-810, and Oxtellar for Bipolar Disorder. It also is ignoring the cash on hand and lack of debt, which reduces the EV/EBITDA to around 17-18 and the forward EV/EBITDA even lower than that.

SPN-812 alone could double Supernus revenues within the next five years. I somewhat expect to see 400% earnings growth over the next five years between Trokendi/Oxtellar growth, SPN-812/810 approval and growth, and accretive acquisitions. At a modest P/E, that would give me a five-year target of $150/share (~$7.5 billion market cap). I have a one-year target of around $75/share based on possible accretive acquisitions as well as Phase 3 results for SPN-812 and 810. This represents 93% upside from the current share price. As a result, I recently added to my Supernus position and made it my largest holding.

Author's Note: Thank you for reading my article. Please follow me for additional articles covering the biotech space with an emphasis on neuroscience. My articles include my personal opinions and are neither financial nor medical advice. They are solely intended to show my perspective and due diligence on a given subject. Please consult with the proper professional if you are looking for specific advice for your situation.

I am a child psychiatrist and thus almost all of the mentioned companies currently market their products to me, including providing lunches for my staff and myself on as frequent as a monthly basis. The primary subject of this article (Supernus) has never marketed to me directly. In the event that Supernus begins marketing to me (either through approval of their own products or acquisition/merger), I plan to sell my Supernus shares. This is due to my personal policy of not holding the stock of any company which markets directly to me as a physician.

Analyst’s Disclosure: I am/we are long SUPN, KMPH. 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.

I have had ~6-8 marketing lunches provided to my office by by each of Neos, Shire, and Arbor. I have also had ~3-5 marketing lunches provided by each of Pfizer, Tris, and Sunovion. Prior to the last year, I have had marketing lunches provided by Noven and Rhodes. I have never had direct marketing from Supernus. I have never been paid by any of the above companies for speaking or writing articles.

Comments

[Sunny Goklani]

Thanks for the article. You clearly are aware of the competition better than others. With that, I'll like to see your thoughts to the couple questions:
1) Any thoughts on Bloomberg's article today on slowing Rx growth of Trokendi?
2) Also read the last concall - are you worried about CGRP's emerging as competition to Trokendi?
Disc.: Long since 20s, but wish I had a larger position.

[Kenneth Pittman]

I can't find the specific Bloomberg article you are talking about, but I'd assume its an echo of the Piper analyst with the neutral rating. It basically was saying that Trokendi is close to peak. From my look at the numbers I wouldn't doubt that. Especially given the CGRP's as another option.

However, I don't think Trokendi growth is in the top 4 of the reasons to invest in Supernus. #1 in my mind is SPN-810 and its not really close in my mind. #2 is SPN-812 and a close #3 is the possible Bipolar indication for Oxtellar. #4 is whatever growth comes out of their cash and accretive acquisitions. Trokendi growth is probably #5 on their growth drivers for the next 3-5 years. The only issue with Trokendi that would be a negative impact would be a significant drop in sales. While I agree that it may be peaking, I think a drop in sales is unlikely.

[Sunny Goklani]

Thanks for your reply, Ken. It helps me to not extend growth in Trokendi - which I was assuming, while also understanding your point about it not being the biggest factor. It just makes current market cap weighed a bit more to the pipeline expectations vs current commercial expectations (which are safer), imho.

[Kenneth Pittman]

I'll put it this way - the Piper Analyst had a $47 target. I think that is a reasonably fair value for the two drugs on the market (plus royalties from others). It would represent about 18x forward earnings and if we were disregarding the pipeline (and the expense that comes with that) then earnings would probably be higher. The question is how much added value does the pipeline give. I personally believe that the pipeline is worth about $29/share currently (~$1.5 billion). If we add that to the $47 for currently marketed products including royalties, then that gives a $76/share price target. That is about the point I'd consider scaling back if we got there ahead of data.

[joshBIO]

On their recent earnings call, SUPN talked about looking now at Phase 1 or 2 assets in order to fill their pipeline coming in after 810 and 812. I would be interested to learn of any assets on your radar at that stage (perhaps GNMX if their mid-year data is good?)

[Kenneth Pittman]

joshBIO - Nothing comes to me off the top of my head. I'll have to take a closer look at GNMX. Message me if I don't cover GNMX or otherwise answer you within a couple of weeks.

[Saltman512]

Thanks for replying. I use canslim investing system. It combines fundamental and technical analysis. SUPN is very strong fundamentally. Then technically, it has been going sideways for a year building a first stage base. It has now broken out of that base on very strong volume. And it also is moving to new all time high ground. This is all very positive per canslim buying criteria. And after the breakout last Thursday, it had a strong follow up day on Friday both price and volume wise.

[Kenneth Pittman]

Agree with all of the above. While I haven't used the canslim approach exactly, I do watch technicals and had noticed the consolidation and breakout with volume and followup.

[Saltman512]

Would be interested in any updated analysis on Supn after eps and cc this week. Tia.

[Kenneth Pittman]

Much of the EPS/CC confirmed my views on the stock. Trokendi and Oxtellar growth is good, pipeline is good. I took some profits with the 33% run up in 3 days, but it is still my largest holding.

[joshBIO]

I'm curious to know how you'd approach looking for a re-entry point on SUPN following the recent run up after the last ER.

[Futureent]

I've been asking myself why would institutions fork over $400m to earn .625% and a near $60 conversion price when there are better alternatives? Perhaps they are confident that the eventual transaction will be significant enough to eventually boost SUPN's market cap toward the $3b range.

[Philip3]

I think the share issue is all about an mid-size cash accretive acquisition.

[Saltman512]

Thank you, I am always curious about someone's port mgmt rules when they are talking about their largest holding.

[Saltman512]

Very nice article, thank you for sharing. Under your portfolio management principles, how high did you go (percentage wise) with your SUPN position?

I follow William O'Neil/Canslim investing, which is predicated on growth stocks purchased based on fundamentals and technical analysis. SUPN is sound on both fundamentals per canslim principles, and has set up in a first stage base with a recent 3 weeks tight pa ttern too. This is strong technically given the fact the market has been correctly lately. If the market can get back on track overall, SUPN may be able to breakout above a early sloping trendline buypoint, and above a regular buypoint in its current first stage base. On my watchlist this week.

[Kenneth Pittman]

I'm at close to 12% right now personally, but in general I'd try not to go over 8% in an ideal portfolio.
KGP

[Futureent]

2019 revenue and EPS posted on Yahoo Finance. $495.1m and $2.69 EPS.

[andrey_ymb]

Sorry for not being specific - 812
810 has negative dose response and is nothing to be excited about

[Kenneth Pittman]

It is a selective norepinephrine reuptake inhibitor. That is the same category that atomoxetine (Strattera) and duloxetine. SPN-812 (viloxazine) has been around for awhile in Europe - mainly as an antidepressant. Supernus's version is extended release. The non-ER version has some evidence in bedwetting as well, but Supernus has not mentioned this to my knowledge. That would actually be a significant advantage as there is high overlap between ADHD and bedwetting. If they could replicate that with the ER version than that is a good selling point against duloxetine or atomoxetine.
KP

[andrey_ymb]

Kenneth
Thanks for the interesting article about a stock I never considered as an investment.
I read carefully your article and SUPN Jan. presentation and could not find anything about their MOA. What differentiate them from the competition?
Thnaks

[Kenneth Pittman]

Which MOA... 810 or 812?

[ErikWilson]

Dr Pittman
Is my understanding correct that the growth in demand is soaring for ADHD meds in both groups, children and adults?
Which class of ADHD drug, stimulant or non-stimulant (812), will benefit most from the ADHD epidemic?
Which do you prescribe the most?

[Kenneth Pittman]

Adults is by far where the growth is overall and it is almost all stimulant growth.

In general, the ADHD market is about 90% stimulants and 10% nonstimulants. I probably run more like 80-20 in part because I see a very large number of children with Autism that also have ADHD-like symptoms. ASD kids have more side effect issues with stimulants and stimulants are less effective in that group than pure ADHD. I personally will likely prescribe more than the 1-3% I predicted for 812, but I don't think I'm representative of the norm there. I know I write much more Strattera than the average Child Psychiatrist (due to the ASD overlap).

I'm fairly balanced in methylphenidates vs. amphetamines. Taking all ADHD meds into account, I'll estimate my breakdown as follows:

Very Large Number of Scripts:
Concerta (generic) - MPH stimulant
Vyvanse - AMPH stimulant
Intuniv (generic) - Alpha Agonist
Strattera (generic) - Non-Stimulant
Tenex (off-label, generic) - Alpha Agonist
Clonidine (off-label, generic) - Alpha Agonist

Medium-High Number of Scripts:
Evekeo - AMPH stimulant
Focalin XR - MPH Stimulant (generic)
Short Acting Ritalin - MPH Stimulant (booster dosing - generic)
Short Acting Adderall - AMPH Stimulant (booster dosing - generic)
Cotempla - MPH Stimulant (used to be Quillivant here)

Low Number of Scripts:
Adderall XR - AMPH Stimulant (generic)
Adzenys ODT - AMPH Stimulant
Dyanavel - AMPH Stimulant
Aptensio XR - MPH Stimulant
Daytrana - MPH Stimulant
Metadate CD - MPH Stimulant (generic)
Focalin -MPH Stimulant (booster - generic)

I'm probably leaving off one or two that I'm overlooking at the moment.
KP

[dhdhoora]

Dr. Pittman -- thanks for the article. I was in $SUPN some time back and alas, jumped out. This article and your statement about being your largest holding, has encouraged me to get back in the game with $SUPN...
ATVB,
Don

[Kenneth Pittman]

Thanks for the comment. Obviously I'm a bit more confident here than some other areas - in part because management here has a proven track record.
-KP

[Small Pharma Analyst]

Need to consider product lifetime. Supernus has reached a deal with the generics - they will start marketing generic Trokendi XR in Jan 2023.

[jack20]

KP, thanks for a well written and objective article. I took a position at $37.50 the day before their announcement. With the 2 day huge market sell off we are experiencing the price has held up well. I think you have an undiscovered gem in SUPN. No debt, a growing free cash flow, and a strong focused pipeline I think they may buy something OR be bought out themselves.No question I will be buying more on any further sell off. Again, thanks for the article.

[Kenneth Pittman]

You're welcome and thanks for the feedback. While it's already my largest position, I'm not opposed to adding more if it pulled back further as well
KP

[JB5678]

Thanks for the well written article. As mentioned above 100 mil in Fcf gives supn a Fcf yield of around 5%. Fcf/ev. Also the company is reinvesting nearly all its earnings at a high rate. Combine that with high eps growth, no debt and a large cash balance, this is one of the most attractive stocks in today's market imo.

[Kenneth Pittman]

Agree. Will be interesting to see where they deploy the cash, but I believe that they have intelligent leadership that is looking for good opportunities, not just the first ones that come along.
-KP

[Philip3]

Thanks for the great article. Find the stock undervalued as well and puzzled by it.

[Futureent]

Thank you for the article. Bought a large position three/four years ago for around $11 and have sold more than half. But based on this most recent quarter I vow not to sell any more and may add. The stock is under water so far this year but I think it will gradually go back up. Now that they are generating $100 mil in free cash a year, I think this is the year they acquire perhaps a mid to late stage asset.

[Kenneth Pittman]

Agree with all of the above. I have bought and sold previously, but have never had as large of a position as I do now.
-KP