Catalyst Pharmaceuticals is a commercial stage, profitable and small-cap biotech with one orphan drug in the market: Firdapes, which treats Lambert-Eaton myasthenic syndrome (LEMS), a rare autoimmune disease characterized by the gradual onset of muscle weakness that seriously affect patient's physical movement and quality of daily life. Since last time I covered Catalyst Pharma, the fundamentals of the company have substantially changed: 1) Firdapes has been approved as an orphan drug for adult patients by the FDA and is now generating steady stream of revenue with a decent profit for the company; 2) FDA later approved a competing drug with the same chemical entity, but for pediatric patients only. This article intends to give an update on the overall business and some underlying risks.
Controversial pricing
After the FDA approval, Firdapse was priced at $375,000 per year. At a time when high drug price was a concern, politicians and the media were seeking targets for a good story. Catalyst Pharma was quickly dragged into a controversy. Long-time critic of Catalyst Pharma, Adam Feuerstein released a report criticizing its pricing. Soon after that, Senator Bernie Sanders chimed in with a letter sent to Catalyst CEO, requesting explanations for Firdapse's high price tag. With all due respect for senator Sanders, this actually serves a political purpose and feed a "good story" to the main street. Politicians somehow missed the point of the
Orphan Drug Act (ODA) passed in 1983, which intended to give incentives to drug developers for rare diseases like LEMS. One of the major incentives is to give more leeway to pharmaceutical companies in drug pricing because these drugs would be unprofitable given the unusually small patient population and high cost associated with clinical trials in order to meet FDA's criteria for approval, if they were priced like the drugs for larger populations. Without ODA, the unfortunate rare disease patients would face tougher situation with fewer medical breakthroughs because pharmaceutical companies would be much less financially motivated to develop treatments for rare diseases.Under political pressure, FDA approved an identical competing drug after approving orphan drug Firdapse.
Not long after the controversial debate around Firdapse's high price tag, the FDA issued a surprising approval to Jacobus Pharma, the maker of Ruzurgi. This was a shock to investors and orphan drug makers because Firdapse is an orphan drug, which means it should have 7 years of exclusive marketing rights although Ruzurgi was approved only for pediatric use. This move was most likely due to political pressure because:
1) Firdapse and Ruzurgi belong to the same chemical entity: amifampridine. The only difference was that the former is the base form. Whether the FDA violates the Orphan Drug Act is indeed questionable here.
2) Ironically the approval of Ruzurgi for pediatric use was based on clinical data from adults. FDA admitted in its press release that this approval was based on adult data: "Use of Ruzurgi in patients 6 to less than 17 years of age is supported by evidence from adequate and well-controlled studies of the drug in adults with LEMS, pharmacokinetic data in adult patients".
To my knowledge, this might be the first time ever in FDA's historic track record that it contradicted itself by giving a second orphan-drug approval of the same chemical entity to a different drug maker, even if it was for a different patient population. This could potentially undercut Catalyst's orphan drug exclusivity because doctors might write the competing drug off-label for adult use.
Catalyst Pharma filed lawsuit against FDA and lost it in the first round, will the appeal reverse court decision?
Catalyst filed lawsuit against the FDA in June 2019, believing that the FDA had violated and misapplied its regulations. The lawsuit was dismissed in September of 2020. The judge ruling the case cited that "Catalyst’s interpretation of the Orphan Drug Act is not necessarily wrong, but it is not the only reasonable way to interpret the plain language of the statute" because the statutory language of the Orphan Drug Act was ambiguous. The judge sided with FDA’s interpretation rather than Catalyst’s.
Catalyst intends to appeal the result to the Eleventh Circuit Court of Appeals. While it's not the author's intention to speculate on the appeal results, investors should note that this and future rulings in no way will affect Firdapse's exclusivity rights for adult patients.
Catalyst has seen stable revenue despite the approval of the competing drug.
Ironically, the list price of the competing drug Ruzurgi is not as cheap as Senator Sanders had hoped, depending on daily dosage, Ruzurgi costs $175,200-$292,000 annually, according to Jacobus Pharma owner Laura Jacobus. To avoid legal issue, Jacobus Pharma cannot market their drug to adults. Investors had feared that doctors might prescribe Ruzurgi off-label for adult use, eating into Firdapse's market for adult patients.
Based on the quarterly revenue trend for Firdapse (see data below), it seems that Catalyst Pharma has held onto its adult patients well. As of Q3 2020, pricing was confirmed by CEO to be stable. However, revenue has been stuck around $30M for 6 quarters since Q2 2019.
Firdapse quarterly revenue trend since launch (source: quarterly financial reports)
Based on available information, the stagnant revenue trend is due to the following factors:
1) The impact of COVID-19. Management acknowledged that COVID-19 has slowed down the diagnosis of new LEMS patients due to the restriction on office visits. As a result, net new patient adds have been slow during 2020. The management in recent conference call confirmed that they observed Q2 2020 as the bottom for new patient enrollment and October 2020 was the month for the highest new patient adds since July 2019.
2) Impact of the competing drug. To some extent, some of the patients originally on Firdapse have discontinued and switched to Ruzurgi. However, management clarified in multiple earnings conference calls that their 90-day discontinuation rate (including those switching to Ruzurgi) has remained constant at 15%, which is not bad.
3) The nature of LEMS diagnosis. Market penetration will take time considering LEMS is a rare disease. It is challenging and time-consuming for new patients to get diagnosed. Formal diagnosis is the first step before patients can get pre-authorized by insurance plans for Firdapse. Still many patients remain undiagnosed. In Q1 2020 conference call, management shared that 575 patients were on Firdapse. Considering the slow pace in new patient adds due to COVID-19, the total number is probably still around 600 patients. The total LEMS market was around 3,000 patients in the US. There is still plenty of room for market penetration.
Attractive valuation has priced in some risks
As of this writing, Catalyst closed at $3.37 with a market cap of $349M. Based on last 4 quarters' net income of $0.67 per diluted share and revenue of $118M, Catalyst Pharma is trading at PE ratio of 5 and price-to-sales ratio of 2.96. Price-to-book ratio was 2.2. Gross profit margin has been around 85%. The company exited Q3 with $127M in cash and no debt. A price-to-sales ratio of 5-10 is very common for pharmaceutical stocks. Orphan drug stocks can even trade at higher multiples. On the very conservative side, even a price-to-sales multiple of 5 could put the stock at $5.6 per share. At the current price, CPRX is undervalued.
This low valuation has priced in the risks for Catalyst, mainly related to the competition from Ruzurgi. At current price, I believe the downside risk is limited considering Catalyst's solid financial position. The competition from Ruzurgi is likely overestimated by investors. On paper, Ruzurgi was approved for pediatric use. While some doctors have prescribed Ruzurgi off-label for adult use, most physicians will likely stick to what is indicated by FDA for their respective patient population. After all, the cost to patients after insurance coverage is similar.
Recently, Catalyst was issued a patent regarding the methods of administering Firdapse. The patent is supposed to protect the company's Firdapse treatment for 9 more years beyond its 7-year orphan drug exclusivity. Soon after the patent approval, Catalyst filed a lawsuit against Jacobus Pharma on patent infringement. The case is worth watching.
What's next for Catalyst Pharma?
While the downside risk may be limited, the upside potential is somehow uncertain. The upside potential should come from the following developments:
1) Firdapse future growth in the adult LEMS market in the US. Investors' focus should be on the US market. The company is expanding into Canadian and Japanese market. The Canadian market is one tenth of the US market size. In Japan, patient size is similar to the US. But pricing in these two international markets is expected to be lower. Shareholder value creation will still largely depend on the performance in the US market.
2) Results from the recent lawsuits against Jacobus and its partner for patent infringement, and the pending appeals for federal judge's dismissal of the lawsuit against the FDA.
3) The company will likely use the cash position to acquire another business. In the most recent conference call, the management has indicated that they will likely acquire "a marketed product or a company with late-stage assets as well as other strategic combinations" and will have more to say in the next several quarters. This is a very positive sign. Given CEO Patrick McEnany's successful track record at then Royce Laboratories, he could have the vision to bring more upside surprise to shareholders.
Final thoughts
Firdapse's revenue will likely accelerate in 2021 as post-COVID time will see more visits to doctors for LEMS diagnosis, which facilitates identifying undiagnosed LEMS patients. At the current share price, Catalyst Pharma is undervalued. Investors should also consider the risks associated with the competition from Ruzurgi although available information indicates that Firdapse is holding onto its adult patient market very well and Ruzurgi has been mostly prescribed for the pediatric patient population.
