Critical Period For Protalix

Summary

• PLX has raised funds with a private placement.
• Warrants with an exercise price of $2.36 were issued, these could bring in more funds, but they aren't exercisable yet.
• PLX is a while away from truly high impact data that would convince the market regarding the competitiveness of its Fabry disease drug, PRX-102.

Protalix Biotherapeutics (NYSE:PLX) is an Israeli biotech company developing protein therapeutics using plant cell technology. The company sought to shore up its financial position in March with a private placement, which means existing investors were diluted, but the damage to the shareholder might not be over yet.

The private placement

On March 12, PLX notified investors that it had secured securities purchase agreements to raise $43.7M (net proceeds were expected to be $41M). The company issued and sold ~17.6M shares at $2.485 per share. In order to secure the purchase of the stock at this price, the company had to offer a bit of a sweetener. Each share came with a warrant, meaning 17.6M shares worth of warrants were also issued, with an exercise price of $2.36 per share. Now, if exercised, those warrants would bring in an additional $41.5M in proceeds, which is good news for PLX's cash balance.

Table 1: Historical prices for PLX stock. Note, the name was volatile around the time of the announcement of the private placement, and by the time of closing on March 18, the stock was well below the price of $2.485 per share. Source: Yahoo Finance historical prices.

The warrants associated with the private placement are not yet exercisable, despite the fact that with PLX in the mid $4s at the time of writing, it is in-the-money.

Figure 1: Screenshot of warrant terms. Source: Exhibit 4.1 of the Form 8-K filed March 12 concerning the private placement.

...the Warrants are not exercisable until the six-month anniversary of the Closing Date, which is more than 60 days from the date of this prospectus.

Comments on the warrants in an S-3 filing from April 17.

A concerning potential scenario

By the time the warrants are exercisable (six months from the closing date, so about mid-September, 2020) if PLX is below the exercise price, then one would not exercise the warrants. By this time, shareholders of the stock, given it is falling in this scenario, would likely have dumped their stock and may use these warrants as insurance (a hedge) on a short position. Life sciences investor and founder, David Sable, notes the issue of too many outstanding warrants in an article from 2013.

If portfolio managers own warrants and sell the stock short, they risk nothing more than the strike price of the warrants for each share sold short. If the stock runs, managers can easily cover. Even better, if managers sell the stock short and the stock price drops, they can cover the short sale in the open market, reap the profits from the trade and still own the warrant. When the shares rise again the process can be repeated, each time with a well-quantified risk.

When a large number of warrant holders hedge their portfolios in a similar way, the underlying stock has difficulty rising too far above the strike price of the warrant.

David Sable, "The Curse of the Poor Capital Structure," Wharton Magazine, May 2013.

In the PLX example then, should the stock be below $2.36 by mid-September, the name may have a hard time rising too far above that level again for a while. If warrant holders take a different strategy and instead choose to exercise their warrants and sell, each sale is a factor that can drive the price back below $2.36. Yahoo Finance has the average volume of PLX at ~138K shares per day at the time of writing. As such, 17.6M shares worth of warrants corresponds to about 128 days' worth of volume. That is a lot of shares to turnover. There would need to be some high impact news to help the stock clear 17.6M shares worth of warrants. Approval of a drug or positive data might do it, but as a company enters the commercial stage, it often finds itself in the doldrums such as the delay between NDA/BLA submission and approval or the even bigger delay between phase 3 results, NDA/BLA preparation, NDA/BLA submission, and eventual NDA/BLA approval. That period can be 12 months.

PLX underperforms and may continue to do so

The stock has generally underperformed the biotech indices and broader market over time.

Data by

YCharts

Figure 2: Past 10 years of PLX, SPDR Biotech ETF (XBI), SPDR S&P 500 Trust ETF (SPY).

The upcoming milestones are quite soft and it may not be until Q4'20 that PRX-102 sees approval in the US. What is really needed is to show that the company's lead candidate PRX-102 is going to steal market share from other Fabry disease drugs. The company is going to need results from BALANCE to do that, a head-to-head study of PRX-102 vs. agalsidase beta (Fabrazyme). That entire study is 78 patients, and so, it is hard to imagine an interim analysis (due H1'21) being a sure thing in terms of producing a statistically significant beat of Fabrazyme.

Figure 3: PLX upcoming milestones. Source: February corporate presentation.

Financial overview and conclusions

The company has done what it needed to raise an additional $41M in net proceeds, it had just $17.8M in cash and cash equivalents at the end of 2019, and despite total revenues of $54.7M for 2019, the company still reported a net loss of $18.3M for the year. The company also had $51M worth of long-term liability from convertible notes at the end of 2019. Although the possibility of conversion to shares instead of the repayment of the principal is in play, the conversion price for the 2021 Notes of "approximately $8.50" per share according to the 10-K makes this seem unlikely right now. Net cash used in operating activities was $19.4M, so at current burn rates and considering the $41M raised plus the convertible notes, PLX still doesn't look in great shape financially. The company isn't going to go bust this week but expenses could increase in 2020 as the company prepares and submits the BLA while still running BALANCE and BRIGHT, and I don't see PLX having much wiggle room to actually do that. PLX would be fine if all those warrants were exercised as another $41.5M would help address the convertibles outstanding, and so it seems even more important the name stays well above $2.36 to incentivize exercise of those options.

Don't say PLX can't go below $2.36 between now and when the options become exercisable. After all, it was just below $2.36 within the last month. I find myself bearish on PLX all things considered.

Analyst’s 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.

Comments

[originaldmax]

Topline data out today is fantastic, this'll potentially add decades to patient lives!!!!:

protalixbiotherapeutics.gcs-web.com/...

[Tombelge]

So you're saying that the BRIDGE data coming out in less than 1 month is not High Impactful data, because somehow you feel that the FDA granting Accelerated Approval pathway to PRX-102 after 2 Type-C meetings specifically discussing PRX-102 data (including BRIDGE data, and allowing for the BLA filing also in less than one month for potential Approval by end of year would be based on non-high Impactful data???? Cause your saying the FDA is happy to accept BLA filings for non-impactful data?

Thank you for clarifying how the FDA would allow for BLA filing and potential approval by end of year based on non-impactful clinical data?

[Biotech Beast]

You have to show efficacy and safety for FDA approval, specifically a favourable balance of those two. The market does not necessarily consider that high impact if there are multiple other drugs on the market for Fabry already. The market would likely consider a beat of an existing drug in a head-to-head study high impact, and that would cause the stock to trade up a lot. I don't think BRIDGE will do it because it is a switch study not a head-to-head. Just my opinion though, good luck.

[Tombelge]

First of all, your response hasn't addressed my initial question, of how would FDA allow for an BLA filing on Accelerated Approval basis within the next month, or potential end-of-2020 FDA approval, on non-high impact data? Please advise.

Secondly, FDA Accelerated Approval of product in the Fabry space does not need to show "head to head" efficacy. As per the FDA guidance which is relevant to Fabry: www.fda.gov/...

"As discussed in section II., for certain slowly progressive, low-prevalence rare diseases [with Substrate Deposition That Results from Single Enzyme Defects], sponsors can pursue various treatment strategies to halt or slow the abnormal accumulation of substrate in tissues. When the pathophysiology of a disease is well understood and the mechanism of action of the drug/biologic is well characterized, specific drug-induced substrate reduction in relevant tissue or tissues can have a reasonable likelihood of predicting clinical effectiveness. In such a case, a clear demonstration in clinical trial or trials that an exogenously administered enzyme or drug results in substrate reduction (i.e., it reaches the tissue of interest ) can serve as the basis for accelerated approval."

If the safety is clear and the disease etiology is clear and the product can show efficacy on substrate reduction in relevant tissues (note eGFR isn't even needed, but is thus far looking far better than for current ERT) it can receive FDA Accelerated Approval. Looking at the phase I/II, at just 6 month data, one can see a drop in the substrate GB3 in the kidneys of -68% across all patients, male and female and with a more pronounced drop of -84% in Classic Fabry males. Not only that but when looking at the same study's 24 month efficacy data on eGFR one can see a mean drop of only -0.82 over 2 years. When Fabrazyme's best performance is -2.2 per year.

Safety is not an issue and actually is less immunogenic than current ERTs as from both the Phase I/II data I just mentioned and from the antibody analysis from the largest Phase III BALANCE study.

Following that with the aforementioned 24 month Phase I/II efficacy data, we see in the interim 12 months data on the first 16 patients of the Phase III BRIDGE trial that the drop in eGFR is of only -0.23, again not significantly different from 0. And this we know was in severe patients with average -5.1 loss per year despite being on current commercial ERT (Replagal) for at least 2 years.

Thus it is plain to see by all, unless you're not paying attention, and the FDA seems to see it plainly too, that the data thus far does appear high-impact and hence granting Accelerated Approval pathway and allowing for BLA filing within the next month.

Hence regarding clinical/regulatory aspects it would be good to review this based on the actual relevant situation.

[M Fox]

Thank you. I am buying at this price.

[gzak 55]

Thank you for siting the risks in PLX in this articles
I wasn't fully aware to the risks you pointed..

I'd be happy to hear you thoughts on EVGN which is an AG play, trading at a MC of 28M$ , with 50M$ in Cash and Corteva (CTVA) investing in just one of EVGN holdings at a 100M$ valuation.

would really appreciate your thoughts about it.

[Biotech Beast]

Thanks, gzak 55. Sorry I haven't looked at EVGN ever before I don't think. $28M market cap with $50M in cash sounds too good to be true unless there is $20M of debt.

[biogenius]

EVGN is another example of investment community having 'not much trust'. It has a negative enterprise value.

[biogenius]

I have not heard of any small cap biotech company based in Israel that has done well.

[Biotech Beast]

It is true that trust in Israeli, Aussie and Canadian biotech seems to be low, but there are plenty of underperforming US biotechs too. I'm sure there are some examples of successful Israeli biotechs, I just haven't covered enough to think of one. But there is generics manufacturer TEVA, which is still a $10B+ company. That being said, it has been a tough 5 years for TEVA.

[avisha1968]

Have you heard of the Israely formerly called Mazor Robotics, 2 years ago purchaced by Medtronic for 1.6 billion$? The stock went sky high within a year, and there are plent others

[biogenius]

I may sound like sour grape because I was long Protalix at one time on the basis that it has a proven platform. However, as time goes on, like you, I find that there is not a lot of trust for companies outside of US and Western Europe. Other companies that I am cautious on are groups like Fortress, Vant, and NK. I am not saying that one should definitely not invest in them. I am just saying that I will take that into consideration when I weigh my risk/reward ratio.

[C. C. Abbott]

Thank you, BB, for an excellent article. Three items:

First, according to the company, the interim data (12 months) from BALANCE, expected in 1H 2021, is for non-inferiority to support the filing with the EMA. The superiority data is expected at 24 months (i.e. 1H 2022), to support the FDA filing.

Second, PLX has signed 2 agreements with Chiesi (for ex-US and US markets). Therefore, I think that if they do obtain the conditional approval via the accelerated approval process in Q4 2020, it would likely be Chiesi, not PLX, that is responsible for the launch of PRX102.

Finally, in the past, the company has claimed that the FDA was 'in alignment' (vs. agreement) with their using the accelerated approval process to submit a BLA.

However, I remain skeptical that PLX can obtain a (conditional) approval successfully, without any data from properly-controlled (placebo or active comparator), randomized trials.

Also PLX have announced that the FDA has agreed to the design of their study in pediatric Fabry patients, but the company does not seem to have started the trial yet (both existing enzyme therapies have data from their pediatric studies in their approval labels).

[Biotech Beast]

Hi CC, thanks for these notes. That obviously is not bullish as non-inferiority won't provide the marketing data the company needs at all. At least Chiesi is paying for the launch, but PLX should have to pay to prepare and submit the NDA, which isn't great, and that is while the BALANCE study is still running, so expenses aren't likely to be too low during this year.

Thanks also for the thoughts on PLX's odds of accelerated approval in the US, any rejection of the BLA could have the stock heading down to those dangerous levels where the warrants aren't in-the-money.

[Biotech Beast]

OK I added an edit to the article to clarify what expenses PLX is looking at regarding the prelaunch, just the BLA preparation and the submission. Hopefully PLX can continue to get the development milestones it needs from Chiesi. There isn't much clarity on that in the 10-K or the press release on the US deal regarding how PLX can get the maximum $7.5M per year though.
"Under the terms of the U.S. license and supply agreement, Protalix is entitled to an upfront payment of $25 million from Chiesi and additional payments of up to a maximum of $20 million in development costs, capped at $7.5 million per year."
www.globenewswire.com/...

[LQQKER]

If I were long, I'd want to make sure the warrants don't have any "make-whole" provisions should the price crater.

I'm also under the impression that, regardless, the company could still (under it's own discretion) decide to reduce the conversation price for it's warrant holders if they chose to do so. I also believe this occured with their previous round of warrants after the company would later release a new 8-k stating an amendment to the warrants had taken place which seemed to indicate a 50% reduction in exercise price.

For certain, this company has a long history of taking care of it's creditors. On Mar 25. 2007, for example, the stock fell 82.6% in a single day after the company diluted shareholders with an offering price about 75% below the previous days close.

You need to be able to trust two things here: 1) the pipeline, and 2) management. But without enough funds, both are vulnerable.

[nitjig]

This company is suckers. Since 2017 nothing new except NDA filing moving out by qtrs and plx fabry still being worked out. Share holders are taken for ride and dilution to fill company executives pay check and perks. Total scam