Paratek Revenue Ramp-Up Is Underappreciated By The Market And Should Drive Stock Price Gains
- Nuzyra product revenues doubled Q42019 from Q32019 when accounting for inventory to $6.1MM. Paratek trades at ~2.3 times FY2020 revenue guidance & ~1.3X consensus FY2021 revenue estimates.
- Paratek says it has enough liquidity, without additional dilution, until it breaks even in 2H2023 (debt free) with a realistic pathway to $500MM in 2024 revenues via only current indications.
- 2 additional indications & EU launches could add hundreds of millions in revenues before FY2024 (but not needed to break even by Q42023 nor hit the $500MM FY2024 revenue target).
- Recent 5-year BARDA agreement (up to $285MM) & other wins materially mitigate the risk Paratek misses its goals until FY2024 (BARDA not needed to hit $500MM revenue target in 2024).
- Should PRTK meet preliminary FY2024 guidance, our analysis concludes PRTK could trade for ~$45/share in 2H2023 (Present Value = ~$16/share today) or 5X FY2024 revenues of $500MM (with no debt).
Our analysis concludes Paratek Pharmaceuticials ("PRTK") share price could materially grow over the next few years as revenues are expected to grow ~5X in FY2020 to $75MM to $80MM per PRTK's recent guidance (from $16.5MM in FY2019) eventually totaling a preliminary and tentative PRTK target of $500MM in FY2024. Furthermore, PRTK's preliminary & tentative 2024 $500MM revenue target would include a balance sheet free of debt without dilution until then with current indications only. Should PRTK win additional clinical indications (NTM, flu, anthrax), government agreements, China NDA approval in 1H2021 and/or launch in the EU FY2024 guidance could more than double. This is why professional analysts have recent PRTK price targets as high as ~$36 (from BTIG Research). The average professional analyst price target is $15/share. Canaccord Genuity predicts $14/share. (List of PRTK Price Targets)
In the near term, the risk that Paratek won't grow revenues fivefold in FY2020 is strongly mitigated because approximately half of PRTK's estimated FY2020 revenues of $75MM to $80MM (we will say $80MM throughout the rest of this article) are already "in the bank" under the 5 year BARDA agreement discussed below. Under PRTK's BARDA agreement, the government is placing a $38MM order in Q2020. Furthermore, recurring product and royalty revenues in Q42019 were approximately $6.5MM (that were roughly double recurring product & royalty revenues in Q32019). If PRTK were only to maintain $6.5MM in recurring (non-BARDA) product revenues achieved in Q42019 into each quarter in 2020, recurring, non-BARDA, product revenues would therefore be $26MM in 2020 by simple algebra ($6.5MM in Q42019 times 4 quarters in 2020). Hence PRTK is already going into FY2020 with base revenues of approximately $66MM. It is the author's opinion PRTK is setting up a classic "beat & raise" strategy to cement PRTK's credibility and help grow PRTK's share price throughout the year.
An obvious question for potential PRTK investors is "why are markets not applying higher revenue multiples to PRTK's stock when PRTK has provided FY2020 revenue guidance of $75 to $80MM." It is the author's opinion this phenomenon may be due to a couple of factors noted below (that includes the author's response to the concern):
1. FACTOR: PRTK's FY2020 revenues, and beyond, are being generously assisted by the BARDA agreement that includes, among other things, annual PRTK orders for $38MM per year for 4 straight years. It is unreasonable to consider these $148MM in total product orders over 4 years as recurring. AUTHOR RESPONSE: The author's analysis concludes the US government, as well as governments from all over the world, are quite concerned about the lack of anti-biotic development for the world's population. The author's research suggests there will in fact be more orders for new novel anti-biotics from emerging anti-biotic companies like PRTK. Hence the author's analysis concludes it is very reasonable to consider the PRTK orders as real and recurring as any order. In any event, at a minimum, the orders certainly help PRTK's immediate cash flow.
2. FACTOR: There have been many recent, large visible failures of companies in the anti-biotic space including a recent Melinta Therapeutics bankruptcy filing. Two other anti-biotic companies (Nabriva "NBRV" and Tetraphase "TTPH") valuations are at historic lows. AUTHOR RESPONSE: The author acknowledges the 3 primary PRTK peers appear financially risky. The author's analysis suggests PRTK is, very blunty while with all due respect to PRTK peers, a much better run company. For example, TTPH's market cap is $9MM while its 9/30/2019 balance sheet reflects $11MM in net cash (cash minus total liabilities). PRTK appears to stand out from its peers. Again PRTK's BARDA Agreement will be discussed below. However, the author will note later in this article it is reasonable to conclude that the US Department of Health & Human Services ("HHS") did significant due diligence before selecting PRTK as its sole partner. Because the US government selected PRTK as its partner (from any other) lends some third party affirmation to the author's conclusion that PRTK is a better run company.
To put PRTK's enterprise valuation of $182MM (market cap of $144MM) in perspective when PRTK's share price closed on $4.78 on 2/27/2020 versus PRTK's 2020 & long term revenue forecasts (as well as third party professional intermediate forecasts per Seeking Alpha):
Should PRTK more or less meet the longer-term guidance provided last week (that only considers current indications only), our analysis concludes PRTK shares could trade for ~$45 in 2H2023 which would be only ~5 times PRTK's FY2024 directional revenue target of $500MM (based on fully diluted shares of ~56.6MM that PRTK says should not have to be diluted and with no adjustment for enterprise value because PRTK would have no debt). Furthermore, should Nuzyra be approved for nontuberculous mycobacteria (or "NTM"), Nuzyra would be the only approved NTM therapy representing a total addressable market of $740MM. Using the same valuation formula, PRTK's share price could more than double. This valuation scenario excludes countless other opportunities like a flu indication expected before the next 2020 flu season, a BARDA extension, anthrax approval, new government agreements (especially pneumonia related) and EU/ROW opportunities. Simply put, with a NTM win + a BARDA extension it is reasonable to assume $100+ per share is possible by 2024. Even without either, PRTK's longer term opportunity is compelling. The math to determine PRTK's longer-term share price potential if PRTK's hits its targets is as follows:
For those new to PRTK, PRTK is a commercial biotech in the anti-biotics space. PRTK commercialized their flagship anti-biotic product "Nuzyra" (aka "omadacycline") in February 2019. In simplest terms, Nuzyra comes in an IV and oral formulation approved for certain pneumonia and skin infections. Nuzyra's clinical value propositions and other compelling competitive advantages versus peer therapies are considerable (but available elsewhere so we will not document all of them in this article). The most significant Nuzyra clinical value proposition is the oral indication because it can significantly reduce the cost of hospital stays thereby materially reducing the overall healthcare costs (in some cases even avoiding hospital stays altogether). Nuzyra, per PRTK, is "on track to have one of the most successful anti-biotics launches in the last decade." Q42019 recurring Nuzyra product revenues were $6.0MM forecast to grow to ~$66MM in FY2020 ($38MM of which are, in substance, already in the books under the BARDA contract). When accounting for inventory (i.e. looking at only growth in prescriptions) Q42019 Nuzyra revenues grew 85% from Q32019. Per PRTK, at 12/31/2019 80% of commercial lives and more than 50% of Medicaid lives now have access to Nuzyra.
PRTK's second product, "Seysara" (aka "sarecycline"), was approved in October 2018 as an oral anti-biotic to treat acne for patients over 8 years old. PRTK licensed Seysara to Almirall. At the time of approval, Almirall expected peak Seysara related sales to be $150 to $200MM/year in the US. PRTK receives a royalty from Almirall Seysara related sales from the "high single digits to low double digits" (per PRTK's Q32019 10Q top of page 15...which totaled ~$2MM in FY2020 per PRTK investor presentation page 5). In February 2020, PRTK announced Almirall will develop sarecycline in Greater China with plans for a regulatory submission there (to the equivalent of China's FDA) in 2023. If one assumes a net 10% royalty due PRTK on $200MM in peak estimated sales in the US, PRTK's Seysara could eventually generate $20MM/year in PRTK revenues just in the US (excluding China and ROW). Hence even before the recent PRTK's Q42019 accomplishments when PRTK's market cap was only ~$100MM, the author's analysis has always concluded the markets materially undervalued Seysara. The author's analysis concludes Seysara is worth ~$150MM by itself...and double that should Seysara be approved in China in 2023/2024 (still excluding ROW outside of the US & China).
PRTK's outlook the next 1 to 5 years is so compelling from so many perspectives because of numerous recent successes it is difficult not to over-emphasize PRTK's opportunities for vast valuation gains.
In December 2019, PRTK announced that the US Department of Health & Human Services ("HHS") awarded PRTK a 5 year contract, with an option to extend it to 10 years, worth up to $285MM to:
1. Develop Nuzyra for the treatment of pulmonary anthrax ($21MM)
2. Purchase of 2,500 Nuzyra treatment courses for the "Strategic National Stockpile" or "SNS" ($38MM/year for 4 years or ~$153MM in total). They will place one order for 2,500 treatment courses in 1H2020. Subsequent 2,500 treatment courses will be ordered that will be triggered upon development milestones related to the anthrax treatment development program.
3. Post marketing (Phase IV studies) related to Nuzyra's current pneumonia indication and certain pediatric studies ($77MM). The funding for this specific tranche will begin in Q22020.
4. $20MM for security related improvements of Nuzyra manufacturing related facilities ($20MM) to make sure such facilities are secure (like fencing, alarms etc.). Funding begins in Q22020.
5. Develop Nuzyra for "prophylaxis of pulmonary anthrax" ($13MM). To be funded in 2022.
Investors are encouraged to learn more about the BARDA agreement. In addition to the award of monies to PRTK, it is the author's conclusion that what is most important is HHS selected PRTK as the sole recipient of this award. There were countless companies in the anti-biotics space in the United States that were interested in receiving this award. HHS chose PRTK from all of the anti-biotic related companies. It is commercially reasonable to assume HHS invested considerable resources ensuring HHS chose the best fit company to partner with in this multi-year commitment. Remember this is a 5 year agreement with an option to extend another 5 years. The following is an overview of the award from a recent PRTK investor presentation:
New Drug Application Submission of Nuzyra (aka omadacycline) in China
This is another potentially game changing win for PRTK. In February 2020 PRTK announced that China's equivalent of the FDA in the US has accepted a New Drug Application ("NDA") for Nuzyra (called omadacycline in China) from Zai Labs (PRTK's partner in China). Investors should consider why China might be interested in accelerating the approval of a new anti-biotic like Nuzyra in China?
Zai Labs in seeking approval of omadacycline in China for the same pneumonia and skin infection indications approved here in the United States. Under the terms of PRTK's "Zai Collaboration Agreement" PRTK is entitled to receive royalties in the low double digits to mid-teens percentage on sales of omadacycline in Greater China. PRTK will receive a $6MM payment from Zai Labs upon regulatory approval of omadacycline (if approved) in China expected in 1H2021.
Nontuberculosis Mycobacteria or "NTM" Submission
This is a "rare disease" indication for Nuzyra. At the moment there are no approved therapies to treat a subset of NTM patients (with " abscessus") in the United States. There are between 6,000 and 8,000 patients in the US with this rare disorder. Investors are encouraged to learn more about the disease. Current treatments include daily visits to the hospital to receive an expensive cocktail of anti-biotics administered by IV only. Because the patient has to visit the hospital daily for treatment it is obviously time consuming (as well as expensive). Unfortunately 80% fail treatment as well.
PRTK is hoping to get Nuzyra approved for such an indication. It would be the only approved therapy. Because Nuzyra has already been proven safe time and again it is hoped the FDA will expedite their review. PRTK should provide investors the regulatory pathway for this NTM indication within the next 12 months. This is a potential $740MM total addressable market for PRTK and Nuzyra.
As noted under the BARDA agreement, the government is essentially helping PRTK pay to develop Nuzyra for Anthrax. The opportunities for national stockpile orders thereafter are considerable (though the author is unaware of specific estimates).
As noted PRTK guided investors to expect between $75MM & 80MM in FY2020 revenues and roughly $140MM in operating expenses as follows:
Investors should consider, when accounting for inventory (or focusing on prescription revenues), PRTK revenues grew to $6.1MM in Q42019 from $3.3MM in Q32019. As noted above, PRTK forecasts ~$66MM in FY2020 Nuzyra revenues when $38MM will be shipped in Q22020 under the BARDA agreement leaving $28MM from non-BARDA or traditional sources. Should PRTK not grow Nuzyra from Q42019 they would still do $24.MM ($6.1MM in Q42019 times 4). This is why the author is confident PRTK will greatly exceed its own FY2020 revenue guidance.
PRTK peers trade anywhere from 8 to 15 times FY2020 revenues (as noted above). It is reasonable to assign a multiple on the high side to PRTK because Nuzyra revenues are only in their infancies and, as PRTK noted, could exceed $500MM by 2024. Using a multiple of 8 on $75MM (the lower end of PRTK revenue guidance) would suggest a minimum market cap of $600MM which is the equivalent of roughly $11/share. PRTK's enterprise valuation today is $182MM. It is reasonable to argue PRTK is considerably undervalued.
The following is an overview of PRTK's balance sheet and capitalization structure:
To determine a range of appropriate PRTK valuations today using $75MM to $80MM in FY2020 revenue assumptions would be as follows:
Relatively straightforward analysis like provided in this article demonstrate that PRTK has ample opportunity for vast value creation. The author's analysis, as demonstrated above, concludes that PRTK should, or will, trade much higher as the market becomes more aware of PRTK's opportunities.
Investors should also consider that PRTK trading volume has surged recently. PRTK buying was quite active while the markets were selling off materially due to CV concerns. Investors should also consider that there are approximately 7MM PRTK shares shorted that eventually will need to be covered. Simply put, should PRTK's share price grow quickly it is possible PRTK could squeeze (though to be clear shorting is not the author's area of expertise).
When considering investing in PRTK investors need to be aware of traditional risks consistent to virtually all recent commercial biotechnology companies as well as risks specific to PRTK.
Traditional risks to emerging commercial biotechs like PRTK are generally limited to commercial execution. PRTK was a clinical stage biotech for ~10 years before both products were approved in 2018 and launched in early 2019. In biotech reimbursement and hence pricing are always at risk. Regarding growing volumes, PRTK's partnership with Almirall mitigates the Saysara commercialization risks. For Nuzyra, the BARDA agreement mitigates the risk PRTK will not grow revenues more quickly than we saw Q4 2019 v Q3 2019.
Risks specific to PRTK are, no doubt, the fact that PRTK is in the anti-biotic space where valuations have suffered materially over the last 12 months. The author's analysis concludes PRTK clearly offers the best upside. While investing always includes risks, investors should remember it was PRTK (not the author) that guided to break even by the end of 2023 and ~$500MM in 2024 revenues when PRTK will be free to debt. Most important, PRTK said they could do so without additional dilution.
This article was written by
Analyst’s Disclosure: I am/we are long PRTK. 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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