Protagonist: A Deeper Look
Summary
- Protagonist surprised investors by putting the blame for the recent PTG-100 trial discontinuation on an erroneous analysis by its CRO.
- The stock rallied 50% above $11 and might go even higher, as it traded north of $20 before the discontinuation.
- A few fundamental considerations on Protagonist's pipeline assets, dilution and dilution risks.
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It was all futile
After a long period of optimism for its pipeline of GI-restricted ulcerative colitis and Crohn's disease treatments had propelled its shares to their ATH of ~$23, on 3/26/18, Protagonist (NASDAQ:PTGX) shocked investors with the discontinuation of its UC drug PTG-100 in phase 2b after a futility analysis.
This drug is basically an "oral Entyvio". Entyvio is marketed by Takeda (OTCPK:TKPYY) and enjoying a nicely growing market share and should rake in ~$2B of revenues in 2018. PTG-100 is Protagonist's most advanced asset and its discontinuation was an enormous setback.
Protagonist was left with its Janssen-partnered PTG-200, another GI-restricted UC and CD treatment (basically a gut-restricted, oral Stelara). But this drug is still in phase 1.
Moreover, the failure increased the likelihood that the company's peptide platform would not yield the expected result of an intestinally restricted UC/CD drug. In addition, from being substantially ahead of Theravance Biopharma (TBPH) that has a very similar cooperation with Janssen (part of Johnson & Johnson (JNJ)), Protagonist was suddenly trailing its competitor.
This is important as the space is extremely crowded:
(Source - Data is from 2014. Color coding is apparently wrong. Some compounds have been subsequently discontinued, others have been initiated.)
Both Protagonist and Theravance are targeting a very early positioning in the treatment pyramid. Basically, they try to jump the queue. Even if other companies launched their new compounds earlier, they would be used only after the PTGX and TBPH compounds, thanks to almost zero systemic exposure and their excellent safety profile.
Protagonist lost ~$250M of market value following the PTG-100 discontinuation. Given an average ~30% success rate of phase 2 trials, in theory, this loss of $250M should represent 30% of the potential total value (assuming market efficiency), so a successful PTG-100 would have been valued at ~800M.
Considering the terms of the TBPH and PTGX agreements with JNJ, this means that the market had been actually very cautious in its valuation of PTG-100. This may be due to its being not-partnered, which could mean: higher risk, higher cost, lower interest by potential, knowledgeable parties, more dilution. But it could also mean that the market was suspicious about the peptide platform and the apparent ease with which PTGX had produced not only one, but two GI-restricted versions of big pharma blockbusters. This clearly transpired during the call after the futility analysis.
It was just a mistake
Yesterday, Protagonist stunned investors again by explaining that there had been a "human error" and its research organization was to blame for an unwarranted stop of the PTG-100 clinical trial program. So the program will in fact continue.
At the same time, BVF infused $22M of cash, paying effectively $8/share (~15% above Friday's close) for a ~10% stake, but getting another ~10% in higher priced warrants for free.
When the news broke, I immediately alerted my subscribers to the opportunity. I figured that there wouldn't be that much of a credibility issue, since BVF has an excellent reputation and had evidently received the good news before the market, as the cash infusion was earmarked for the continuation of the PTG-100 trial program.
As a note aside: The BVF deal is detestable. Protagonist could very well have informed the entire public about the error and then raised cash (which it doesn't even need right now), but instead it gave BVF a sweetheart deal.
PTGX traded for net cash after losing two-thirds of its value following the PTG-100 debacle. Potential dilution, if the share rockets back to where it came from, would be 20% (as the warrants would be in the money), shares outstanding ~28M and net cash about $190M or ~$7/share (as PTGX would get the exercise price for the warrants as well).
I would, however, expect the company to profit from the sudden optimism to finance its future trials with another secondary.
That said, it was pretty easy to see that PTGX would have rallied yesterday, at the very least to somewhere around $10, where the first warrants have their exercise price.
Why I sold
We got in early at $7.73 and sold for $11, making 42% within a few hours.
Why didn't I hold until the stock reached previous highs around $20 and "filled the gap"? After all, volume was getting stronger every minute.
Correct, but: I hate the BVF deal. This says something about the company and generally I don't like holding such companies for the long term.
Moreover, I am thinking about JNJ not taking the option on PTG-100 as well. Why did they take only PTG-200?
I know the UC/CD space quite well, having followed Theravance for a long time.
Here is a closer look at Stelara (ustekinumab), which is the basis of the partnered PTG-200. It looks like in the dose finding trial the added benefit at the 6mg (/kg of body weight) dose compared to 3mg was not very much. Moreover, the real benefit of Stelara is only reached in the maintenance phase, which uses a much lower, fixed 90mg dose. This is not the ideal profile, as the main benefit of a non-systemic drug would be its possibility to be dosed much higher than a systemic treatment, providing hopefully much better efficacy with less side effects.
For example, this is different from Theravance's situation. Theravance is developing a "GI-restricted tofacitinib". This Pfizer (PFE) drug had significant better efficacy but also safety issues at the higher dose, which is why ultimately a lower dose was approved. Therefore, a GI-restricted drug could potentially use the higher, more efficacious dose. This might not be the case in the case of the "GI-restricted Stelara" PTG-200.
In fact, it looks like Theravance will take a 200mg dose into the phase 2/3 trial, which is 20x the highest approved dose of tofacitinib.
As far as the now resuscitated PTG-100 is concerned, Entyvio currently profits from the terrible safety profile its competitors have. It is the first gut-specific (although not gut-restricted) CD/UC drug out there and, as such, has an improved safety profile. However, Entyvio has one severe limitation: A pretty slow onset of action, i.e., patients need to wait on average ~3 months in UC and ~4-6 months in CD before getting relief from their symptoms. This can be seen in this overview of recent clinical trials in the space:
Study | Administration | Endpoint | Placebo | Active Drug | TreatmentEffect |
RedHill’s RHB-104 MAP US | Oral | Remission at week 26 | 23% (38/165) | 37% (61/166) | 14% |
RedHill’s RHB-104 MAP US | Oral | Remission at week 16 | 29% (48/165) | 42% (73/166) | 13% |
Vedolizumab (Entyvio ®) CD1 | Intravenous | Remission at week 6 | 7% (10/148) | 15% (32/220) | 8% |
Vedolizumab (Entyvio®) CD2 | Intravenous | Remission at week 6 | 12% (19/157) | 15% (24/158) | 3% |
Adalimumab (Humira®) CD1 | Subcutaneous | Remission at week 4 | 12% (9/74) | 36% (27/76) | 24% |
Adalimumab (Humira®) CD2 | Subcutaneous | Remission at week 4 | 7% (12/166) | 21% (33/159) | 14% |
Ustekinumab (Stelara®) CD1 | Subcutaneous | Remission at week 8 | 7% (18/247) | 21% (52/249) | 14% |
Ustekinumab (Stelara®) CD2 | Subcutaneous | Remission at week 8 | 20% (41/209) | 40% (84/209) | 21% |
Drug | Induction of Response or Remission | Maintenance of Remission (in responders) | Calculated Maintenance of Remission*2 |
RedHill’s RHB-104 | 42% (week 16)3 | 59% (week 52) 4 | 25% (week 52) |
Infliximab (Remicade®) | 57% (week 2) | 39% (week 30) | 22% (week 30) |
Adalimumab (Humira®) | 58% (week 4) | 36% (week 56) | 21% (week 56) |
Ustekinumab (Stelara®) | 48% (week 8) | 53% (week 52) | 25% (week 52) |
Vedolizumab (Entyvio®) | 31% (week 6) | 39% (week 52) | 12% (week 52) |
So in a future world where oral, GI-restricted treatments are available, with fast onset of action and much higher efficacy thanks to higher dosing, enabled by zero systemic exposure, both PTGX drugs will probably be among the weaker competitors.
That said, the stock can certainly move higher from here. But this is a game which I don't intend to play. The safe and easy money has probably been made already.
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