Teplizumab's At-Risk PHASE II trial showed promising results in significantly delaying the onset of T1D in pre-symptomatic patients by a median of three years relative to placebo.
PRVB offers an attractive buying opportunity and a modest valuation at these oversold levels. With Teplizumab alone, I believe the fair value of the stock should be in the US$14-49.
Due to COVID-19, PRVB’s Phase 3 PROTECT trial has been delayed. However, investors have no reason to worry since data from the PROTECT trial is not required for the BLA.
Provention Bio will require further financing during 2020-2022. As such, PRVB may further dilute shareholder value through an imminent public offering that is on the horizon.
Provention Bio (NASDAQ:PRVB) is a US biotechnology company developing biologics that target immune-mediated diseases. PRVB's therapeutic initiatives target endocrine diseases, infectious diseases, and respiratory diseases. This report will serve as a thorough overview of PRVB's late-stage clinical asset, Teplizumab (PRV-031), as I strongly believe the company’s valuation is tied to its success.
Teplizumab's At-Risk PHASE II trial showed impressive results in delaying and preventing Type 1 Diabetes (T1D) by a median of three years. Based on this result, PRVB submitted a rolling NDA/BLA submission on April 16, 2020, for the "at-risk" population. Furthermore, Provention submitted a non-clinical module and expects to submit the clinical module in Q3/20, and the CMC module in Q4/20. Once the final module of the BLA has been completed, the FDA will make a filing decision and set a PDUFA goal date.
Earlier on in 2020, Provention commenced its Phase III PROTECT Study in patients with "newly diagnosed" clinical-stage T1D. However, due to the COVID-19 pandemic, the Phase 3 PROTECT trial has been temporarily suspended. However, data from the PROTECT trial is not required for Teplizumab’s BLA in 2020. If there is no delay in the review process, PRV-031 (Teplizumab) will be able to receive FDA approval by Q4/20.
To guide investors’ due diligence processes, I will focus on the following areas as they have not been covered in much detail by other SA authors.
The attractiveness of the Diabetes Market: Market Size, Growth, Competitive Landscape, and Unmet Need.
The attractiveness of "Teplizumab" compared to Insulin and other clinical candidates; how prescribing behavior will change as we look 5-10 years ahead.
The potential likelihood, as well as the risks and hurdles associated with the approval of Teplizumab’s BLA, Phase 1, and Phase 3 trial
Risk-adjusted NPV (rNPV) valuation for Teplizumab and the target price of PRVB.
The table below is a short summary of Provention's clinical pipeline. I do not believe its other early-stage candidates will act as material drivers for the company’s share price in the 2020-2021 time period.
Source: Biotech Insight Research - Collected through the company presentation, 10k pg 5, clinicaltrial.gov
I will briefly explain the mechanism of action of Teplizumab as it is important for investors to understand its advantage over Insulin. Diabetes manifests when our body is unable to regulate its blood sugar levels. To regulate blood glucose (sugar) levels, we require beta-cells within the pancreas to produce a hormone known as insulin. T1D is characterized by so-called "bad antibodies", more formally known as "autoantibodies", that destroy these precious beta-cells in the pancreas.
Teplizumab is an anti-CD3 antibody that halts the bad "autoantibodies" from attacking beta cells, thereby preventing beta-cell destruction. Teplizumab stops the root cause of T1D so that it could delay or cure T1D. This eliminates the need for insulin therapy since patients would have enough beta-cells in the pancreas to produce adequate amounts of insulin, allowing their bodies to naturally regulate blood sugar levels. If T1D progresses and beta-cells die out, patients are required to administer exogenous forms of insulin for the rest of their lives. Unfortunately, insulin alone does not cure or delay the root cause of T1D.
1. The High Unmet Need in the Type 1 Diabetes Market Offers an Attractive Investment Opportunity
Large Market Size & High Unmet Need
The type 1 diabetes market is attractive largely because of its size, growth, and favorable competitive dynamics. According to Informa's market landscape report, the Type 1 diabetes market generates strong annual revenue of US$4.9-6.9 billion, and is projected to grow at a moderate CAGR of 3.9%. Currently, insulin is the only therapy available for the management of type 1 diabetes. With no novel therapeutic entry since its discovery approximately 100 years ago, we have not seen anything else replace its status as a cornerstone therapy in the management of T1D.
High Unmet Need, Finding a Curative Treatment for T1D
The biggest downside to insulin therapy is that it is not curative and must be taken chronically over the course of a patient's lifetime. Moreover, insulin is very cumbersome for patients due to the frequent daily administration and monitoring of blood glucose levels which is required. As such, there is a tremendous unmet need for a cure or therapy that can delay type 1 diabetes.
5-Year Competitive Landscape
Then comes the next question—are there any non-insulin therapies currently under clinical development that could potentially compete with Teplizumab in the next 3-5 years?
Pipeline Analysis:No Real Competitors Until 2025 at the Earliest:
I believe phase 1 and pre-clinical candidates (i.e., Semma Therapeutic's T1D program) do not pose a threat to Teplizumab because they are 5-10 years away from FDA approval. However, Phase 2 and 3 candidates could pose a potential threat. There are several immunotherapies that are in phase 2, such as CD40s, Interleukin-21, TCR Stem Cell treatment, and TNF-alpha. However, none of these clinical-stage candidates will be approved within five years. In reference to two competitors, Novartis's fully humanized CD40 monoclonal antibody, Iscalimab, and GSK's CD3 monoclonal antibody, Otelixizumab, are currently undergoing phase 2 clinical trials. Each of these candidates is being studied as "treatments" for diagnosed T1D patients, not for the prevention or delaying type 1 diabetes. Even if they are approved, Teplizumab will still be able to defend its market share.
2. Clinical Trial results, A possible Paradigm Shift:
I will only focus on the key data points that are pertinent to investors:
Between 8-45 years old, but mostly 8-18 years old (72% of the study population).
Patients need a relative with type 1 diabetes.
Need at least two confirmed diabetes autoantibodies.
Based on Updated results published on June 15, 2020, a single 14-day course of teplizumab (PRV-031) significantly delayed the onset of T1D in presymptomatic patients by a median of three years compared to placebo.
46.6% of teplizumab patients free of type 1 diabetes compared to 16.4% of placebo.
Teplizumab treatment was associated with a greater on-study C-peptide (p=0.009) compared to the placebo.
Teplizumab improved glycemic control; many high-risk patients still exhibited dysglycemia.
A meaningful increase in blood and bone marrow side effects were detected.
REGULATORY: FDA stated that At-Risk trial data is adequate to support the submission and review of the rolling BLA.
2019-2022 (Expected) PROTECT Phase III trial
Age: STRICTLY between age 8-17.
Unlike the At-Risk trial, Phase III will look at patients with newly diagnosed type 1 diabetes (T1D).
Requires only ONE positive autoantibody (At-Risk trial required two).
The patient doesn't need to have a relative with type 1 diabetes.
Primary Endpoint: (AUC) of C-peptide after a mixed meal tolerance test (MMTT) at Week 78.
PRVB paused PHASE 1 protect study around 2019 March due to the COVID-19 pandemic. I expect them to re-initiate sometime the end of this year or early next year. However, it all depends on how COVID-19.
What this means to investors moving forward:
The results from the At-Risk trial were convincing, and clearly, the FDA wants to approve Teplizumab for the pediatric population. If Teplizumab gets approved, I hypothesize that repeating the treatment or adding another agent (i.e., Rituximab or Abatacept) may delay or even perhaps prevent T1D altogether. Positive results will encourage the commencement of additional combination trials.
The PROTECT phase III Study will provide more evidence for its usage as a treatment for newly diagnosed patients. Likely, these trials may take another 2-5 years to complete, as both primary and secondary endpoint investigations end in week 78, and will require a lengthy peer-review process. However, I believe that after its approval in the "At-Risk" patient group, through RWE (Real World Evidence), PRBV will be able to explore new patient groups and combinations. As a result, PRVB may be able to boost sales through off-label prescribing.
Many investors are likely wondering what the probability of success for the phase 3 trial is. Statistically, phase 3 trials for endocrine disorders have a 65-70% probability of success, according to Alacrita Consulting Research. Other data points to keep in mind are, Protege PHASE III and small scale open-label study by Bluestone and Herold in 2005. First, the Protege trial used the HbA1 level as the primary endpoint, and total AUC mean C-peptide as a secondary endpoint. PROTEGE Phase III trial failed because it did not meet the primary endpoints of "REDUCING daily insulin usage and the patient's HbA1c levels," however, it did successfully show preservation of C-peptide levels in the pediatric population. Furthermore, small scale open-label, randomized, controlled trial (N=42, Age group between 7.5-30 yo) study in 2005 also showed preservation of the C-peptide level. Based on these two trials, I believe there is a good chance of PRVB meeting the clinical endpoint. Moreover, even if this phase III fails, it will take 1-2 years for the results to be published. Most importantly, it will not impact Teplizumab's BLA approval for the at-risk population, thereby minimizing risk in the next 12-18 months.
3. Challenges and Risks:
Lack of Routine Autoantibody Screening Protocols: Currently, diabetes patients are not readily screened for autoantibodies, and healthcare facilities do not have the capacity or technology to screen them. Inclusion criteria for both Phase 2 and 3 trials include positive results for autoantibodies. This means that every potential patient needs to be screened for autoantibodies, and at least 2 of these autoantibodies must be presented to receive Teplizumab. Without autoantibody screening, I do not think Teplizumab will be prescribed.
Family member Screening: The trial recruited the non-diabetic relatives of patients with type 1 diabetes. They were screened with autoantibodies and an oral glucose tolerance test. I would argue that most diabetes patients who present with new-onset type 1 diabetes mellitus are not going to be the relatives of patients. For the prescribing to ramp up, we need a community-wide screening program (screening the majority of the population and implementing a system to share the test results). However, such testing could impose a bottleneck for the treatment even after FDA approval.
The intravenous route [IV] of administration: Teplizumab is an Intravenous infusion. Patients need to receive 30 minutes of infusion for 14 days in a row. This cannot be administered at home, and the patient will have to visit a nearby hospital or clinic. This inconvenience may lower the rate of adoption and successful outcomes.
Side-effects: Treatment in approximately 10% of patients was discontinued in the large scale Protege phase III trial. Moreover, in the Phase 2 At-Risk Trial, in the active cohort, SEVERE (Grade 3) side-effects were reported in 65.2% of the participants. Even if the side-effects are transient, this is slightly concerning. Teplizumab is an anti-CD3 MAb—a treatment that lowers T cell activity, and this may cause patients to become immunocompromised, ultimately resulting in increased rates of infection. This side-effect profile may have a potential negative influence on prescribing behavior, especially in the pediatric population where the risk of negative side-effects likely outweigh the benefits of delaying type 1 diabetes.
Uncertainty in drug Pricing: Based on Provention Bio's Q3 earnings call, the CEO stated that the company hopes to treat approximately 10k at-risk patients in the United States and that this will translate to a market value of US$1 Billion. In order for this projection to make sense, each patient would be required to pay roughly US$100k for a 14-day standard regiment. I believe a $100k price tag is justifiable considering that average diabetes patients incur mean medical expenditures of $16,752 per year, and a life expectancy that is approximately 16 years shorter if diagnosed before the age of 10. In addition, there are also numerous psychological benefits of Teplizumab over standard insulin or SGLT-2 inhibitor treatment regimens. For example, Type 1 diabetes daily insulin care (administering insulin, monitoring blood glucose levels, testing for urine ketones, and recognizing/treating hypoglycemia) is a bothersome process for young children. Furthermore, the diagnosis of diabetes could have a negative psychological impact on children. Various recent studies have shown that this can be manifested as depression and anxiety. Therefore, the $100k price tag is considered fairly priced, in my opinion. However, if this drug is being used with other agents (i.e., insulin or other biologics), PRVB may have to adjust the price and negotiate with payers as they usually do not reimburse the full amount that they would pay for a mono-therapy. As we are in the midst of an election year, it is difficult to predict what type of healthcare reform may take place.
4. Risk-Adjusted NPV Valuation: Estimated rNPV of $1.7-2.7 billion with Teplizumab alone.
*Unit: US$Million, Key Assumptions listed in the reference section
*Risk Adjustment - The model assumes to Teplizumab to receive approval by end of 2020 for the "at-risk" population. Therefore the risk adjustment factor (likelihood of reaching revenue) is 100%.
Risk-adjusted NPV: After applying the likelihood of approval (75-90%) to the NPV, we yield US$800M-2.9B of rNPV value. This aligns with Cantor Fitzgerald's projection, peak sales of US $700M in "at-risk" patients multiplied by peak sales multiple of 3, leading to a valuation of US$2.1B. A positive result from the PROTECT Phase 3 trial will undoubtedly increase revenue for PRVB. However, looking at the study design (Primary endpoint at 78 weeks) the trial result will be announced by 2023 at the earliest.
In addition, If we account for two other Phase II clinical-stage candidates, PRV-3279 and PRV-6527, the valuation should post gains of approximately US$50M assuming an average rNPV valuation of the other phase 2 candidates discounted at a rate of 11%. However, I have not included these two candidates' valuation when projecting the target price. As a result, my target share price is more than likely conservative.
Target Share price in 2020:
Considering that there are 56.06 million shares outstanding, even with Teplizumab alone, I believe PRVB's fair value is within US$15-52 range. Therefore, the current market price is trading approximately 20% below the lower end of the estimated intrinsic value of Templizumab. My target price is US$32.00. However, this target price is subject to change if dilutive events were to take place in the near term. I will discuss this risk in detail in the "Risks" section below.
The likelihood of Approval (LOA) of BLA application for the "At-risk" population lies between 75-90%. Informa Pharma's Analyst assumed a 90% likelihood and Cantor Fitzgerald's January report assumed a POS of 75%. LOA of PROTECT Phase III and Prevention Phase I trials are 77.8% and 84.3% respectively based on average historical LOA for Endocrinology orphan drugs (Page 20). BLA for the at-risk population is the bread and butter for 2020's price action. Investors should not worry too much about phase III and Phase I data as it will be announced in 2022-2023 the fastest. That is a long time ahead. Due to unforeseen reasons, if the BLA does not go through, this could bring the stock price down 50-80% as PRVB relies heavily on Teplizumab.
Patent Expiration: Assuming approval for the at-risk population in 2020, Teplizumab will be protected by a patent for 12 years (expires in 2032). It is important to note that the Orphan drug status will allow exclusive marketing for 7-years post-approval. Europe's patent will expire in 10 years (2030).
License Agreement and Royalty: PRVB is obligated to pay MacroGenics contingent milestone payments totaling $170.0 million upon the achievement of certain regulatory approval milestones (i.e., $60.0 million payable after approval of a BLA in the US). Moreover, there are additional contingent sales milestone payments to MacroGenics totaling $225.0 million with a single-digit royalty on net sales of the product. My model only accounted for regulatory and sales milestones. Potential milestones/royalties for the third-party obligation were not included in the model as not enough detail was disclosed in the 10k statement. The current rNPV model may be an overestimation depending on the terms of this contract.
*Detailed assumptions listed in the reference section
FDA's BLA rejection: If this happens, PRVB's share price could drop 50-80% considering PRVB's valuation is heavily dependent on Teplizumab. However, after reading Teplizumab's strong phase II data, this is far less concerning.
* NasdaqGS: PRVB Historical Debt April 14th, 2020
Enough Liquidity?: Provention Bio ended Q1/20 with US$76.6M in cash and no debt on its balance sheet. Looking at the previous year, the company burned through US$36m in cash. This entails that the company has a cash runway of approximately 2 years. Based on my cost projection model, I project Provention Bio would need an additional US$300M during the 2020-2021 timeframe due to milestone/royalty payments and commercialization costs. In order for Provention to fund its operations, we believe Provention will have to license-out Teplizumab and/or raise more money through a public offering. After the FDA approval, Provention will be able to out-license Teplizumab's European and Asian rights easily considering its unique clinical profile and lack of competition. While I do believe that a buy-out is possible, I worry about PRVB's propensity to dilute its value by frequently issuing equity to the public. As a result, this has the potential to dilute shareholder value. For example, after PRVB underwent its IPO in July 2018, it has since issued 31.09M new shares to the public (PRVB has 56.06M shares outstanding).
"Price is what you pay. Value is what you get." - Warren Buffet
Currently, Provention Bio is often overlooked due to COVID-19 vaccine development initiatives as well as the recent tech rally. Also, the delay of the PROTECT Phase III trial was another factor that drove the current sell-off. Considering the high probability (75-90%) of Teplizumab receiving government approval as well as its currently oversold share price, I believe this is an excellent opportunity for investors to enter. With an FDA stamp of approval on the horizon, PRVB’s share price has the potential to double in value. Teplizumab is a revolutionary drug with significant potential to address unmet medical needs that modern medicine has not been able to for the last 100 years. However, in order for this drug to be widely used in practice, screening protocols must be implemented nationwide. Teplizumab has the potential to be used in combination with other therapies (i.e., insulin, rituximab, or abatacept) thereby acting to delay or even cure type 1 diabetes. As a broader indication, Diabetes is a very prevalent and deadly illness that claims 1 in every 7 healthcare dollars spent in the United States. Diabetes is not going anywhere, and when the COVID-19 dust settles, PRVB may be trading in the neighborhood of US$20-50 per share.
Reference and Footnotes
*Revenue projection by BioMedTracker analysts and P&L from PRVB's 10k.
*For the Unlevered Free Cash Flow calculation, I have ignored depreciation, amortization, and Working Capital and assumed that all investments are immediately depreciated.
* Salesforce Projection: I have built a model to project the cost of establishing a sales force for the US. This is a rough projection and conservative numbers were used. Key variables include number of potential prescribers, average detailing required per physician, and an average number of calls that sales reps make a day to project the number of sales representatives that PRVB may need to hire. PRVB has two options to structure a sales force: internally or by outsourcing to a contract sales organization(CSO). Through CSO, PRVB may be able to save approximately 25-30% of the costs. ZS Associate's assumption on newly launched oncology products was used (10.4 annual detailing per physician).
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