With a large financial risk and trading at an expensive multiple as compared to peers, Titan Pharmaceuticals (NASDAQ:TTNP) has recently decided to sell shares and convertible preferred stock to enhance its financial situation. As a result of this transaction, the shareholders should be careful. Stock dilution could push down the company's stock price even further.
Founded in 1992, Titan Pharmaceuticals commercializes its FDA-approved Probuphine for management of opiate dependence. The company has also researched an implantable triiodothyronine product for the treatment of hypothyroidism and potential treatment applications to treat Parkinson's disease. However, as of today, Titan has not obtained the necessary funding to continue those research projects and the proceeds from the sale of equity will be used for the commercialization of Probuphine. Investors should understand the issues of Titan selling Probuphine in order to understand the stock price dynamics.
The image below provides stage of development of Titan's product candidates:
Probuphine consists of a six-month buprenorphine implant intended for the patients who received a clinical stability with 8 mg per day of oral buprenorphine. Further details were provided by the company in the following lines:
Probuphine is a continuous drug delivery system consisting of a small, solid rod made from a mixture of ethylene-vinyl acetate, or EVA, and a drug substance. The resulting product is a solid matrix that is placed subdermally, normally in the inside part of the upper arm in a simple physician office based procedure, and is removed in a similar manner at the end of the treatment period. The drug substance is released continuously through the process of dissolution resulting in a steady rate of release generally similar to intravenous administration avoiding the fluctuating peak and trough levels of oral dosing that pose problems in many disease settings." Source: S-1
Clinical trials published in the Journal of the American Medical Association with 163 patients and a 287 patients' trial reported in Journal Addiction indicated that Probuphine implant was superior to the sublingual buprenorphine treatment in the first six months of the treatment. The results of both trials are shown below:
Source: Journal of the American Medical Association
Source: Journal Addiction
In the following chart, it is shown that the solution proposed by Titan is slightly better than the sublingual solution in the first six months of the treatment. Please note that the results of both treatments do not seem to be radically different:
As the financials will indicate later, the revenues have not been very significant. The reasons are several, but what patients comment online is that the cost of the treatment is, first of all, too high. Pills and sublingual solutions seem to be less expensive:
Most patients claim that the implant is beneficial because risks of abuse are nonexistent and patients don't need to visit the doctor frequently. With that, many forum members showed their concerns about the surgical procedure and the implant. Most seem to prefer taking pills or the sublingual solution over having a six-month buprenorphine implant under the skin:
After the FDA approved the buprenorphine implant, Braeburn (BBRX) was the company responsible for commercializing the new solution but not for a long time. Following the receipt of a complete response letter from the FDA for its weekly and monthly depot injection products on May 25, 2018, Braeburn returned the commercialization rights to Titan.
The company accepted in several communications that the patients did not have access to Probuphine because of its complexity, timing, and lack of reimbursement from insurance providers. Titan continues to believe that the commercialization strategy was not adequate and intends to re-segment target customer markets. After more than a year of commercialization, it seems a bit naive thinking that sales will explode up after changes in the commercialization strategy.
With $1.6 million, $15.06 million, and $0.2 million in revenues in 2015, 2016, and 2017 respectively, the results have been very volatile, which the market tends to dislike. With that, net income has also been a bit unpredictable. Reporting positive net income of $5.1 million in 2016 and losses in 2015 and 2017, the operational risk seems very large on this name. The image below provides further figures reported in the last five years:
The revenues in 2018 have been better than that of 2017, but worse than 2016 revenues. In the quarter ended June 30, 2018, Titan reported $2.5 million in revenues and $3.6 million for the six months ended June 30, 2018. The income was also negative in the first part of 2018:
With this in mind, the only analyst following Titan Pharmaceuticals was very pessimistic about the company's future revenues. She/he expected revenues of $1.19 million in 2018 and less than $1 million in 2019.
Source: Revenue Estimate
The most recent balance sheet reported for the period ended June 30, 2018, showed a negative asset/liability ratio under one, which most investors will dislike. With $1.6 million in cash and $4.6 million in total assets, total liabilities, and debt of $3.5 million seem a bit worrying.
With that, the contractual obligations reported in the last 10-K do not tell a better story. Titan will have to pay $3.8 million in one to three years in debt obligations and operating leases:
With the current operating performance and financial situation, Titan is signing loan agreements that most investors will dislike. In July 2017, the company signed a loan agreement with a financial institution, which bears interest at LIBOR plus 8.4%. Shareholders need to understand very well the financial risk of Titan as of today:
With that, Titan does not anticipate to use the net proceeds from the sale of equity to repay debt, which seems beneficial. The company will use the money to increase the commercialization efforts of Probuphine:
We anticipate that we will use the net proceeds from this offering for our operations and for other general corporate purposes, including, but not limited to, building our infrastructure, including a small sales and marketing team, to commercialize Probuphine" Source: S-1
After the sale of warrants, convertible preferred stock, and shares, Titan will not only increase the amount of shares outstanding, which most investors will dislike. The company is selling several new convertible securities, which will increase the dilution risk for shareholders. The following is a list of securities that will be outstanding after the offering:
With that said, the financial situation will be enhanced after the sale of equity. The company is expected to have $15.2 million in cash with $5.9 million in total liabilities and equity of $12.3 million. Check the image below for further details on the expected capitalization:
With 26.55 million fully-diluted shares outstanding at $0.73, the market capitalization equals $19.38 million. Adding approximately debt of $9 million and deducting cash of $15.2 million, the enterprise value equals $13.18 million. Assuming 2019 revenues of $3 million, the company is trading at 4.3x forward sales, which seem a bit expensive. Other companies operating in the same space trade at about 3.26-3.58x sales:
Indivior, PLC (OTCPK:IZQVF), which markets Sublocade, Subutex, and Suboxone and holds the dominant market share of global sales, trades at 3.26x sales with revenues of $1.06 billion.
Orexo (OTCQX:ORXOF), which sells Zubsolv, trades on the grey market.
BioDelivery Sciences International, Inc. (BDSI) commercializes Bunavail and trades at 3.58x.
Alkermes, Inc. (ALKS) markets Vivitrol® and trades at 6.10x sales. However, it has a market capitalization of $6.96 billion, which does not make it a good comparable peer.
With the issuance of convertible securities and a 1 for 5.5 split executed in 2015, most investors will not appreciate the way Titan is treating its shareholders. Check the following lines about the reverse stock split:
Trading at 4.3x forward sales, which seem expensive as compared to peers, and with financial risk and stock dilution risk, many investors will pass on this name. If the company is able to sell more Probuphine implants in 2018 and 2019, the stock price may be pushed up by the market. However, with the information in mind, the likelihood seems low.
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