With the release of beneficial data in October, shareholders of Proteostasis Therapeutics (NASDAQ:PTI) should have enjoyed the recent stock returns. The stock price increased more than 400% in less than two days. The name seems exciting. It does seem a bit undervalued compared to other peers conducting similar research. Additionally, new data is expected to be released in the first quarter of 2019. Beneficial results could push the stock price higher.
With that, investors will need to review the company's cash on hand very closely. The cash burn rate seems very high. If Proteostasis Therapeutics needs to raise capital to fund future research, stock dilution could make the stock price decline.
Business, Product Candidates, Next Catalyst And Pipeline
Incorporated in Delaware and headquartered in Cambridge, Massachusetts, Proteostasis Therapeutics is a biopharmaceutical company developing treatments for cystic fibrosis and other illnesses caused by dysfunctional protein processing.
Source: Company's Website
The company has several product candidates, but the most relevant ones seem to be PTI-801 and PTI-808. The former is an investigational oral CFTR modulator called corrector for the treatment of cystic fibrosis in patients currently stable on Orkambi. Currently at Phase 1-2 of development, the company enrolled participants to test the safety, tolerability, and food effect of PTI-808 in adults diagnosed with CF and currently stable on Orkambi:
Source: Company's Website
Regarding PTI-808, it is an investigational oral CFTR modulator for the treatment of cystic fibrosis. The company conducted a Phase 1 study designed to assess the safety, tolerability, pharmacokinetics, and food effect of PTI-808 in adults (healthy volunteers):
Source: Company's Website
On October 17, 2018, the company released positive data regarding PTI-801 and PTI-808, which made the shares explode up with large volume. From $1.89, the share price increased to more than $10 as of October 18, 2018. The stock returns were larger than 400% in a short period of time.
According to the company, 21 individuals were treated with both product candidates or placebo. The tests, which tried to assess safety, tolerability and pharmacokinetics, were successful. The following lines provide further details:
The reaction of the researcher was very positive, which should have contributed to the share price increase. It is included below. With that, market participants should note that the company is still at an early stage. Still a lot of work is to be done to have the products approved by the FDA.
"These data are the first results seen using an entirely new CF doublet, compare favorably to standard of care, and demonstrate the potential of next-generation CFTR modulators to further improve outcomes in this disease." - Source: Press Release From October 17, 2018
The most relevant question right now is when more data are to be released. In this regard, Proteostasis Therapeutics seems quite an interesting name. In Q4 2018, the company is expected to work on combining PTI-808, PTI-801, and another product candidate called PTI-428. The data is expected to be released in 2019. Investors should remember the date. If positive results are delivered, the market could react as it did in October 2018.
The image below shows the pipeline as reported in the last annual report:
Cystic fibrosis is an orphan disease. About 70,000 to 100,000 patients have been diagnosed with cystic fibrosis worldwide. There is no cure, and the median age of patients in the U.S. in 2016 was only 30 years.
There exist three products that contain CFTR modulators to treat cystic fibrosis namely Kalydeco, Orkambi, and Symdeko. The main issue is that they address the genotype present in approximately half of the patients suffering from this disease. There seems to be a large amount of patients who cannot be treated with CFTR modulators. Read the following lines for further details:
"A substantial portion of the global CF patient population have no access to disease targeting therapies either due to label exclusion or lack of market access." - Source: 10-K
In 2017, sales of Orkambi and Kalydeco were equal to approximately $2.2 billion. Additionally, the market is expected to surpass $4 billion by 2020. The target market is therefore quite large. There are not many individuals suffering from this disease, but insurance companies seem to be accepting the payment of these treatments.
Balance Sheet: Abundant Amount of Cash
With an asset/liability ratio larger than 3x, the financial shape of Proteostasis Therapeutics seems solid. In addition, the amount of cash shown in the balance sheet seems large. As of December 31, 2017, liquidity is equal to $74.756 million, including cash, short-term investments, and restricted cash. The liquidity comprises of 79% of the total amount of assets.
The amount of liabilities is not a worrying factor. As of December 31, 2017, the total amount of liabilities equals $25.655 million, which is less significant than the total amount of cash on hand. The image below provides further details on this matter:
Total amount of contractual obligations should not worry investors. The company will need to pay $2.5 million in less than one year and $3.46 million in one to three years. The image below provides further details:
Cash Burn Rate Is Quite Large
Proteostasis Therapeutics receives milestone payments from other companies that collaborate with it. This money is recorded as revenue, and it is not a small amount. Keep in mind that the company recorded $8.38 million and $5.34 million in 2016 and 2017 respectively. For instance, check the following lines about an agreement:
"Under terms of the Astellas Agreement, Astellas purchased from the Company convertible promissory notes totaling $5.0 million with terms consistent with those of other investors that purchased convertible promissory notes issued during 2014. In addition, the Company will be eligible to receive research funding support, based on the establishment of an annual research budget, and future research, development and sales milestone payments of up to $398.5 million." - Source: 10-K
With that, investors will not appreciate the fact that the company is burning cash at a fast rate. The research and development expenses in 2016 and 2017 were equal to $33.95 million and $53.65 million respectively. In addition, the net losses were equal to $37.23 million and $59.43 million in 2016 and 2017 respectively. The net loss per share was $2.34 and $2.06 in 2017 and 2016 respectively. With this information in mind, investors should expect to lose about $2.06-2.34 per share every year. The image below shows further details:
The cash flow statement shows that Proteostasis Therapeutics used CFO of $41.92 million and $52.39 million in 2016 and 2017 respectively. With this cash burn rate, Proteostasis may burn the cash reported as of December 31, 2017, in less than two years, and investors should be concerned. If the company uses all its cash and cash equivalents, equity sale transactions are likely. As a result, stock dilution could increase, which could lead to a share price depreciation. The image below shows the cash flow statement as reported in the annual report:
As of October 18, 2018, with 36.635 million shares outstanding at $7.89 per share, the market capitalization equals $289 million. Deducting cash on hand of $74.756 million, the enterprise value equals $214 million.
The prospectus reads that Proteostasis Therapeutics competes with the following companies among other groups:
- Vertex Pharmaceuticals Incorporated (VRTX)
- Galapagos NV (OTC:GLPGF)
- ProQR Therapeutics N.V. (PRQR)
- Flatley Discovery Lab, LLC
- Laurent Pharmaceuticals, Inc.
- Translate Bio, Inc. (TBIO)
- Corbus Pharmaceuticals Holdings, Inc. (CRBP)
- Eloxx Pharmaceuticals (ELOX)
- Verona Pharma plc (VRNA)
- Treventis Corporation
- Arvinas, Inc. (ARVN)
- Progenra, Inc.
- Proteologics Ltd.
Among the companies that could be compared with PTI, there is ProQR Therapeutics. It has an enterprise value of $203 million and a market capitalization of $696 million, which makes sense since ProQR is testing different product candidates including those indicated for cystic fibrosis. The image below provides its pipeline:
Source: ProQR's Website
Eloxx Pharmaceuticals trades with a market capitalization of $482 million and an enterprise value of $479 million, which is larger than that of Proteostasis Therapeutics. Its pipeline does not seem very different from that of Proteostasis Therapeutics. It is shown below:
Source: Eloxx's Website
Eloxx, like Proteostasis Therapeutics, seems to be mainly focused on the treatment of cystic fibrosis. Thus, their target market seems to be similar. Does it make sense that the market capitalization of Eloxx is approximately 1.66x that of Proteostasis Therapeutics? Proteostasis Therapeutics seems to be a bit undervalued compared to Eloxx.
Even after delivering large stock returns, Proteostasis Therapeutics seems a bit undervalued compared to peers. Eloxx Pharmaceuticals has a larger market capitalization than that of Proteostasis Therapeutics with similar stage of development. It is also targeting cystic fibrosis.
The next data is expected to be released in 2019. If Proteostasis Therapeutics again delivers beneficial returns, additional stock returns seem very logical. The market capitalization could enlarge to the level of Eloxx. With that, investors should also follow the amount of cash owned by Proteostasis Therapeutics. The cash burn rate seems very significant. If the company has to raise capital to finance the Phase 2 studies, stock dilution will result in a price decline.
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.
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