Valeant Is On An Acquisition Spree - Will Prurisol Get Under Big Pharma's Skin?

Includes: BHC, GSK, IPIX
by: A. Jackson

The dermatological therapeutic business has recently had its landscape rearranged. Valeant Pharmaceuticals (VRX) has vaulted to the No. 1 position with substantial encouragement from its shareholders to continue. GlaxoSmithKline (NYSE:GSK) attempted to remain in a growth mode, as it acquired a product. However, quietly and inconspicuously, India's second largest pharmaceutical, Dr. Reddy's Lab (NYSE:RDY), has positioned itself quite smartly to get under the corporate skin of both Valeant and GlaxoSmithKline with regard to the dermatological therapeutic business.

Montreal-based Valeant announced on Sept. 3 a $2.6 billion takeover of Scottsdale, Ariz.-based Medicis (MRX). It was an all-cash offer that advances Valeant as the No. 1 company in the dermatological therapeutics market. If completed, the Medicis transaction will be the fiftieth acquisition that Michael Pearson has made since he became the CEO in 2009. Medicis had $721 million in revenue in 2011. The companies claim that the deal will save $225 million a year (to be recognized in six months) by combining operations. The two figures together approximate a revenue growth plus operational savings benefit of $946 million to Valeant. Wall Street and the up-and-coming Toronto Stock Exchange voted yes on Pearson's move by bidding up the acquiring Valeant's shares by 14.8%, to a NYSE close of $58.36 (as of Sept. 4, 2012).

Pearson sees margin protection and enhancement in the aesthetic dermatological business. Products that prove effective in the removal or delaying the onset of wrinkles or acne like Medicis' Solodyn and Dysport are more apt to be market priced to individuals, as most private and government insurance programs avoid reimbursement for many types of dermatological products -- especially cosmetic ones.

Valeant's acquisition of Medicis might be the largest therapeutic acquisition that a Canadian drug company has ever made of a U.S. pharmaceutical. Quite interestingly, it was driven in large part by a Canadian CEO's desire to better position his company's sails to the accelerating winds of the free market and away from the foundering shoals of government regulation.

Valeant CEO Pearson, however, has transformed the former Biovail, a Canadian company that was substantially shackled by the margin constraints of generic drugs, HMOs, and socialist health care pricing, into an exciting growing international company that has become akin to a Harvard Business School case study on how swiftly a sizable company can grow and transform its image. In doing so, Pearson has become a Maple Leaf Icon of Canadian entrepreneurship and international business.

After Valeant's $2.6 billion acquisition of dermatological company, Medicis, and GlaxoSmithKline's (Steifel Labs) $350 million June 12 acquisition of Basilea's (NYSE:SIX) Toctino (alitretinoin), an FDA Phase III product for exzema, another event took place in conjunction with Dr. Reddy's Lab.

On June 13, 2012, Cellceutix (CTIX.OB) announced that after meeting with the FDA, it will be applying for Phase II trials for its anti-psoriasis compound, Prurisol (KM-133). Please note that Cellceutix's flagship compound Kevetrin has three separate trials planned for 2012-2013, with one beginning shortly. Two other Phase I trials are being funded by other entities, one at Harvard Beth Israel with Pfizer's multikinase inhibitors and an as-yet-unnamed large European pharmaceutical in tandem with a top 10 European university. Cellceutix's first FDA Phase 1 trial is at Harvard's Dana Farber. For a company with a capitalization of less than $125 million, Cellceutix is exceptionally rare (see "Pfizer Eyes Kevetrin" and Lynn Zehr's Seeking Alpha piece). Cellceutix is the smallest cap company to enter trials at the prestigious Dana Farber.

On Sept. 3, 2012, Dr. Reddy's Lab and Cellceutix announced a manufacturing agreement whereby Dr. Reddy's Lab would manufacturer Prurisol for Cellceutix' s clinical trials for KM-133. The announcement as it rippled through the blogs sounded very basic and matter of fact. Dr Reddy's Lab, a $5.4 billion cap international pharma performs this function not only for clinical trial compounds but also generic drug tablets and prescription compounds the world over. So the announcement appeared on the surface to deliver a small amount of high-margin business for Dr. Reddy's without reason for further excitement. However, as I researched Dr Reddy's, I stumbled upon a very interesting fact about Dr. Reddy's Lab that bears mentioning. Neatly tucked away within Dr. Reddy's high profile image as a contract drug manufacturer is a wholly owned subsidiary, Promius, that focuses exclusively on the "Development of Dermatological Drugs and Compounds."

If you know about Prurisol (KM-133) and study Promius you can certainly see that there is more than one reason why they would want to own all or the lion's share of Prurisol. Prurisol is described in this quote from Cellceutix's web site:

Prurisol was studied in SCID mice that were irradiated then grafted with human psoriatic tissue by inserting human psoriatic tissue under the skin using a trocar. Groups of ten mice were treated with Prurisol orally for 21 days with either 10 mg/kg Prurisol once/day or 10 mg/kg Prurisol twice/day, or with 7.5 mg/kg methotrexate IP once/day for five days. The mice were followed for 180 days. Endpoints were skin appearance, histological observations, PRINS expression, and blood levels of IL-20. For these parameters, Prurisol was compared to controls and methotrexate. In a second experiment, groups of 10 immunocompetent CD-1 mice were treated with one or two doses of 10 mg/kg Prurisol daily or 3 mg/kg efalizumab SC once per week for three weeks. CD4+ and CD8+ lymphocyte counts were also measured and compared to efalizumab. Result: Prurisol significantly reduced all psoriatic endpoints measured relative to control. The FDA has informed the Company that a 505(b)(2) application would be an acceptable approach for Prurisol™. Cellceutix has begun the preparatory work necessary for a Phase 2 clinical trial application for Prurisol™ based upon the FDA guidance.

After the Dr. Reddy's engagement was sealed, Cellceutix CEO Leo Ehrlich said in an Aug. 30, 2012, press release:

We have great expectations for this drug because it performed amazingly in lab studies. Our research showed Prurisol to be much more effective than methotrexate, a standard of care treatment for advanced psoriasis, as there was no recurrence of psoriasis on the animals. Visually, it eliminated all indications of psoriasis. We wanted to use only a world class manufacturer and Dr. Reddy's is internationally-renowned for their excellence in research, manufacturing and distribution.

As we continue to emerge as a leading drug developer, we are committed to working with companies and organizations that have high standards and a strong reputation. Dr. Reddy's is a perfect fit for Prurisol. Prurisol has a complex process for synthesizing and manufacturing in oral form and we are very pleased to have Dr. Reddy's handling those for Cellceutix.

Valeant, GlaxoSmithKline, and Dr. Reddy's are all moving with various strategies to either become or remain major players in the dermatology drug market. Whereas Valeant's and Glaxo's strategies have been synthetic and hence more observable, Dr. Reddy's appears slower and internally R&D driven, tucked away under it's primary pharmaceutical manufacturing business. In an NFL game we call Dr Reddy's Prurisol strategy a counterplay. However, all of us football fans know that a well timed counterplay can be one of the most exciting actions to view because suddenly, contrary to perceived expectation, a big play materializes and perhaps a touchdown is scored. Should Dr. Reddy's Lab's dermatology arm (Promius) capitalize on the informational advantage of their manufacturing business, Valeant and Mr. Pearson might have a very significant competitor in the dermatological therapeutic business that it currently dominates.

The psoriasis afflicted population in the U.S. alone is 7.5 million persons, with a U.S. treatment market value of approximately $2.5 billion a year. Remember that the Prurisol inventor, Dr. Krishna Menon, is not a marginal inventor. He was a distinguished Presidential Award winner at Eli Lilly, having had an illustrious career there. He assisted in the development of two oncolytic blockbusters that together produced billions in revenue in 2011.

At least as far as mice are concerned, Prurisol is the most effective psoriasis compound in the world today. Its invitation to proceed immediately into an advanced FDA Phase II trial is certainly validating. Fred Zucker in SEC on Sept. 10, 2012, said:

A good benchmark for the value of Prurisol can be gauged by the recent activity of Steifel Labs, a GlaxoSmithKline company. Steifel said it will be spending approximately $350 million to acquire rights to skin treatment drugs still in development from Welichem Biotech and Basilea Pharmaceutica"... It is noteworthy that Steifel's acquisition is for topical eczema treatments. Prurisol has been synthesized into an oral medication which should give it a value many multiples of the Steifel compound if a therapeutic benefit can be observed in humans. Steifel paid this price for a phase 3 dermatology drug that analysts expect will generate about 250 million dollars a year in revenue to GlaxoSmithKline.

I find Zucker's comparison to be yet below my best guess. One reason is because the topical treatments for Basilea's eczema drugs are expected to generate $250 million in revenue a year at best.
The current $2.6 billion a year U.S. psoriasis market is predicted to grow to be a $5.6 billion a year market come 2020. The Global market for psoriasis treatment is predicted to grow to 7.4 billion by 2020. Speculatively visualizing Prurisol as a drug that could command 15% of the global market, Prurisol could become a billion dollar annual revenue generator. However, assuming data similar to that of the animal preclinicals of Prurisol would be seen in humans, I believe that Prurisol's annual revenue expectancy would be multiples more than that of GlaxoSmithKline's Toctino (FDA Phase III), which is projected to be $250 million annually. Therefore, I would anticipate that as soon as FDA trials for Prurisol begin, a Glaxo/Toctino type structured deal would be the minimum for Prurisol. Prurisol could attract a suitor for multiples of what Glaxo offered for Toctino.

For those readers who follow Cellceutix and have been enthusiastic about Kevetrin, this article should help you to see that an acquisition and/or licensing valuation for Cellceutix that is based solely on Prurisol and using Zuckers conservative Prurisol valuation, could be upward of $2.00 per share. Therefore, in my opinion, everyone who buys Cellceutix under $2.00 will have obtained Kevetrin and Dr. Krishna Menon's six other preclinical drugs free. According to the end of the first quarter 2012 10Q, CTIX has approximately 133 million shares fully diluted. All this leaves in place Zucker's restrained comparison of Prurisol with a $350 million eczema product acquisition, when in fact the relevant market is far larger. And, of course, my assessment assumes positive Phase II data from Prurisol trials.

Dr. Reddy's potential counterplay with Prurisol, though it appears much less dramatic and sensational than either Valeants' bold acquisition or GlaxoSmithKline's hot product grab could, over the-intermediate term rival and or surpass either transaction. Indeed it's also possible that another pharmaceutical could step in and acquire Prurisol. In short, anyone who pays for Prurisol may just get a drug with multibillion-dollar potential (Kevetrin) for nothing.

Disclosure: I 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.