Protalix Bio Therapeutics: Have I Found My Next 20-Bagger?

Jan. 13, 2016 8:13 PM ETPLX, DYAX, FOLD, GNFTF, ICPT, PFE, RHHBY, SHPG, SNY, BIIB, TEVA29 Comments
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Value, Deep Value, Growth, Long-Term Horizon

Contributor Since 2008

Hello! I'm a former Investment Representative with a large private securities firm, once holding active Series 7 and 63 licenses. I have a BBA degree in Marketing. I have been investing in stocks for over 30 years. I consider myself a value and special situations investor, not a day trader. I force nothing. I wait for the opportunities to come to me. I believe that day trading is a losers game and that 95% who participate eventually go broke, with some doing so multiple times. Never quit your day job because you'll never want to be put in a position of trying to force trades in order to generate income. You can become wealthy investing in select individual securities within a diversified portfolio no matter your work schedule. Will sometimes hedge or speculate conservatively with stock options. Am on (temporary?) hiatus from from my website and stock alerts. To learn more about me, check out my lqqkerinsider.com website. 

Disclaimer:

Because I hate spending weeks writing long fabulous articles based on facts, facts intertwined with my own personal experience in past similar situations, spending many a key stroke gushing on and on about the glorious possibilities that lie before us all... only to then have to add an asterisk(*) at the end with disclaimers and forced comments about how I might be completely wrong, how the stock might go to zero instead, or worse... well, I just didn't want to do that at the end. So let's go ahead and get it out of the way right now instead:

I might be wrong. Not helping my odds of being correct are the fact that this is about a small-cap company with a market value hovering right around $100MIL. Small-cap stocks carry additional risk by their nature. Additionally, this is also a biotech company. Small biotechs are in constant need of cash to fund their ongoing R&D activities, sometimes experiencing losses for decades before even sniffing the possibility of a profit.

Despite the above risk, I've recently chosen to take a considerable position in common shares of this particular company. I believe this company is selling at a signficant discount to it's true value. Additionally, I plan to hold this security for years.

Current Position - PLX

Also please note that this article was rejected for publication by SA due to:

... it reads as overly bullish, and we're having trouble following the thought progression due to a scattered presentation. We're also looking for a more considered risk assessment, especially for microcap biotech stocks.

After receiving the above rejection, I then had a gentlemanly email exchange with one of the SA editors in charge of the biotech sector. He informed me I could re-work the article and resubmit for a possible reconsideration... but I ultimately declined to even try.

As I explained to him, I thought the biggest issue was that I wrote this article through the eyes of an investor who knew what things to look for, whereas he and/or SA were editors perhaps more concerned with structure, flow, or other similar aspects.

In the end, I was not willing to sacrifice any portion of my hard work, research, and multitudes of links to please an editor. I have more pride than that. Additionally, any company that needs a constant barrage of SA articles to keep it afloat perhaps should not be in existence anyway.

Okay, I'm done with the disclaimer and disclosure parts.

Now let's get the party started!

Protalix Bio Therapeutics, Inc:

Hello Protalix (PLX), say hello to your newest shareholder. I'm digging you out of the trash heap upon which you've seemingly been tossed. I have big plans for you, but all in due time. Meanwhile, you will be placed in a shoebox and left undisturbed where I expect you to bear fruit for many a year going forward.

PLX is a biopharmaceutical company based in Karmiel, Israel that was founded in 1993. The company is focused on the development and commercialization of recombinant therapeutic proteins based upon its proprietary plant cell-based protein expression system, named ProCellEx.

The company went public by means of a reverse merger in 2006 with a Florida shell company by the name of Orthodontix. The deal was largely put together by Dr. Phillip Frost who, at the time, was listed as No. 283 on the Forbes 400 list of richest Americans (now listed as No. 129). Prior to putting the PLX deal together, Mr. Frost was serving as CEO and Chairman of the Board of Directors of Ivax Corp when it was bought out by Teva Pharmaceutical (TEVA) in 2005 for $7.4BIL. Once the Protalix and Orthodontix deal was consummated, it represented one of the largest reverse mergers to have ever taken place, valuing PLX at nearly $1BIL.

PLX's ProCellEx system uses advanced genetic engineering and carrot and tobacco cell culture technology to enable the production of a wide range of complex, proprietary, and biologically equivalent human proteins to address a variety of diseases.

PLX believes their expression system, or platform, offers many potential benefits over traditional mammalian, yeast-based, or even whole-plant platforms. These benefits include: significantly lower production cost, scalability, the consistency, potency, and safety of end product, and a broad range of protein expression capabilities... including enzymes, cytokines, hormones, and mAbs.

By their nature, plant cells do not carry the risk of infection by human or animal viruses. Because of this, the company is not required by the FDA (or other regulatory authorities) to perform constant monitoring procedures for such viruses. Additionally, plant cells grow rapidly under a variety of conditions and are not as sensitive as mammalian cells to changes in temperature, pH, or oxygen levels. As a result, neither does the ProCellEx system require the highly complex, expensive, stainless steel bioreactors typically used by mammalian production systems.

Translation: In addition to the ProCellEx system having the ability to produce potentially superior drugs, these drugs can be produced with less risk and at a significant cost savings vs traditional methods.

Here's a great article that appeared in the June 23, 2015 edition of Plant Biotechnology Journal that goes into more detail regarding the ProCellEx system.

PLX also believes their drug development program carries less risk of failing (ie: FDA rejection) due to fact they've primarily targeted superior versions of already proven, well-tolerated, commercially successful therapeutic proteins.

The company's beliefs seem to have merit as PLX was able to obtain FDA approval for the very first drug developed off the ProCellEx platform and is now experiencing additional positive results in other clinical trials, including phase I and II, for other indications.

In January of 2015, the company modified its primary focus by announcing a newly implemented strategy for accelerated growth. This strategy centers around prioritizing existing and new pipeline candidates to focus on bio-better products with clinically superior profiles that offer a clear competitive advantage. Biosimilars will no longer be a focus of the company and will only be considered in the case of proteins that are highly difficult to express or that represent early to market opportunities.

Regarding those biosimilars, here's an article that speaks of their increasing popularity. It also points out how they tend to experience slow market growth... in part due to skepticism from the doctors who are needed to prescribe it. And here's an article that poses the question of whether bio-betters could eventually squeeze out the incentive to even develop biosimilars in the first place.

Evolution of the Protalix strategy

PLX's new strategy also seems to address the lone issue biotech critic Adam Feuerstein seemed to have with the company three years ago when he praised their ProCellEx platform but questioned how it was going to be utilized.

All else being equal, biotech companies that possess any type of platform system that appears to be working are my favorite to invest in. That's because, once a platform has proven itself once, it seems the companies that possess them continue to demonstrate abnormally higher success rates with future drugs being developed off the same platform.

DYAX Corporation: A Comparison:

Speaking of successful platforms, one look no further than DYAX Corporation (DYAX) with their successful Phage Display Technology platform. I started buying into DYAX in 2011 and continued to amass a large position in the stock through 2012 until it became my largest bio-tech holding ever. The below screen shots show my accumulation of the stock over a 15 month period...

What I loved about DYAX was not only that they already had one FDA approved drug (KALBITOR), but also had 18 more under development with partners including Eli Lilly/ImClone (LLY), Amgen (AMGN), Roche/Genentech (OTCQX:RHHBY), Sanofi (SNY), Merck (MRK), Biogen (BIIB), Alexion (ALXN), and even more under confidentiality agreements. Not bad for a company that had a market cap under $150 million. Additionally, all those 18 drugs being developed with partners... DYAX's cut was to average only around 2.5%. Only Kalibitor did they own 100% of the rights to.

Another thing that helped persuade me to not only keep adding shares but also to "stand-down" (ie: make this a long-term investment) was the increasing strength of the management team.

On Feb 29, 2012, Dr. Burt Adelman came out of retirement to join DYAX as their Chief Medical Officer with the role of leading the company's development and regulatory strategy. Previously, Dr. Adelman had been employed by BIIB for 16 years and had served them in numerous positions with increasing responsibility including: Director of Medical Research, Vice President of Regulatory Affairs, Vice President of Development Operations, and Executive Vice President of Research and Development. He had also led Biogen's successful development of the drugs Angiomax, Avonex, Amevive, Tysabri, and more.

So, guess what happened over at PLX on Nov 02, 2014? It was the day Mr. Moshe Manor came out of retirement to join PLX as their new President and CEO. Previously, Mr Manor had been employed by TEVA for 28 years and had served them in numerous positions with increasing responsibility, including: Director of Teva Israel, Senior Vice President of Global Innovative Resources (where he was responsible for generating over $3BIL in sales with the drugs Copaxone and Azilect), Group Vice President of Global Branded Products (where he led TEVA's Innovative Commercial and R&D franchises), and President of Teva Asia & Pacific. Mr. Manor also holds an MBA in Economics.

The point I'm trying to make is this: People with big-time resumes don't just come out of retirement to join tiny $100MIL market cap companies with no future. They have to see opportunity! And with TEVA currently sporting a market cap over 670x that of PLX, there is opportunity aplenty for Mr. Manor in his new venture.

The fact that TEVA had worked with PLX in past partnerships during Mr. Manors tenure also did not go unnoticed by me. Nor did the fact that it was only three months after his arrival that Mr. Manor rolled out the new, more focused, more aggressive strategy that will essentially ditch the idea of creating biosimilars.

So, how is DYAX trading today? On Nov 2nd, Shire (SHPG) offered to buy the company for $37.30/share with that figure rising to $41.30/share if DYAX's 2nd solely owned drug (DX-2930) is eventually approved by the FDA. Today, DYAX's market cap currently sits at 5.5 billion. That's a 23-bagger in less than 5 years for anyone keeping score... and if DX-2930 is approved, it will be 25-bagger.

The Present:

Similar to DYAX in 2011, PLX currently has only one drug approved by the FDA: Taliglucerase Alfa (ELELYSO)... approved for adult use on May 01, 2012 and for pediatric use on Aug 28, 2014. The drug is an enzyme replacement therapy (ERT) for the long-term treatment of patients with a confirmed diagnosis of Type 1 Gaucher Disease, the most common form of the disease. The drug is administered intravenously. ELELYSO was the first FDA-approved plant cell based recombinant therapeutic protein ever developed. (In Latin America, the drug is marketed as UPLYSO).

PLX's partner with this drug is Pfizer (PFE), and it's PFE who'll reap most of the rewards from the partnership. Initially they shared revenues and expenses for the development and commercialization of ELELYSO on a global 60%/40% split, excluding Israel where PLX retained 100% rights. However, on Oct 13, 2015, this agreement was ammended in exchange for an additional $46MIL investment from PFE ($36MIL cash plus the purchase of 6% of PLX's outstanding shares). This amendment gave PFE 100% rights to ELELYSO globally (up from 60%) but now excluded Brazil where PLX obtained 100% rights (up from 40%). PLX expects this arrangement to eliminate up to 12.5MIL in annual payments to which PFE was entitled with the original agreement.

Speaking of Brazil, the country has not yet become the milk producing cow that PLX expected of them when PLX first contracted with the country. In order to supply their country with the lowest cost alternative to competing Gaucher Disease treatments (UPLYSO was priced at a 25% discount to market leader Cerezyme), Brazil entered into a supply and technology transfer agreement with PLX in June of 2013, which then became effective in Jan of 2014.

This agreement with Brazil {actually the agreement was withFundacao Oswaldo Cruz (or, Fiocruz)... an arm of the Brazilian Ministry of Health} was a seven-year supply agreement calling for the sale of $40MIL of UPLYSO to Brazil over the course of the first two years combined (2014-2015) and then $40MIL each year thereafter for the next five years (2016 thru 2020). As a point of reference, it's estimated that the Brazilian market for medications for the treatment of Gaucher Disease is currently around $65MIL/year.

PLX's obligation to transfer the required technological know-how (in order to allow Brazil to construct it's own manufacturing facility) was to occur in four steps, with the final transfer not taking place until the Brazilian agency had purchased at least $280MIL of the drug. However, the agreement also allowed for an additional five-year term, as needed, to complete the technology transfer (thru 2025).

To give you an idea of how the agreement is working out thus far... for the quarter ending Sept 30, 2015, UPLYSO sales to Brazil equaled 1.3MIL. If we were to be generous and extrapolate this same figure over 8 quarters, it would equate to $10.4MIL over the course of 2014-2015, or roughly 26% of the figure previously agreed upon. Additionally, per the original (and thus far only) agreement, PLX pays a fee equal to 5% of the net proceeds to an agency for services provided in assisting PLX complete the agreement. Currently, only 10% of Brazil's adult Gaucher patients are being treated with UPLYSO.

Just to give you an idea of the high hopes this drug initially provided when approved by the FDA, there was once speculation that PFE might offer up to $1BIL for PLX. That speculation peaked exactly one year and one day after the FDA approval of ELELYSO when PLX hired Citigroup to examine sale options. PLX shares spiked 20% on the news to close at $6.41, giving the company a then market cap of $606MIL.

Worldwide product sales of ELELYSO in 2014 equaled only $25.9MIL. Not helping matters was the drug ultimately being rejected in Europe in November of 2012 due to a 10-year exclusivity agreement previously awarded to Shire's Vpriv in August of 2010. However, this European approval delay is now solely an PFE issue since PFE now owns the worldwide rights to ELELYSO with the exception of Brazil.

Currently, there are only two competitors to ELELYSO in the intravenously administered ERT space for Type I Gaucher Disease:

  1. Imiglucerase (Cerezyme) - Manufactured by Genzyme, a division of SNY. FDA approved in 1994. Sales were $783.6MIL in 2014 (reflecting 1.0 Euro to 1.1 Dollar exchange rate), an increase of 4% over 2013.
  2. Velaglucerase Alfa (Vpriv) - Manufactured by SHPG. FDA approved Feb 26, 2010. Sales were $367MIL in 2014, an increase of 7% over 2013.

Per PLX's 10-Q (pg 6) for period ending 09/30/15: PLX has the right to terminate the Brazil Agreement, the company is continuing to supply Fiocruz despite the low purchase amounts thus far, and the company is in discussions with Fiocruz regarding potential actions Fiocruz could take to comply with its purchase obligations.

The Pipeline:

As mentioned previously, PLX is currently experiencing positive readouts on its pipeline of drug candidates. These drugs are currently owned by PLX in their entirety. Let's take a look at them:

Protalix "Bio-Better" Pipeline

PRX-102 - for the treatment of Fabry Disease:

On Nov 16, 2015, PLX wrapped up a successful end-of-phase II meeting with the FDA to discuss the company's proposed Biologics License Application (or, BLA) plan for PRX-102.

In their meeting minutes, the FDA noted that interim results from PLX's six month phase I/II clinical trial showed favorable trends in both the severity and frequency of abdominal pain and in the frequency of diarrhea. The FDA also noted that during the recent enzyme replacement therapy (or, ERT) shortage (and here), patients who had to reduce or discontinue ERT dosing developed worsening GI signs and symptoms within a few weeks to few months. Guidance from the FDA suggested that no additional non-clinical studies would be required to support a BLA for PRX-102.

Separately, PLX anticipates only a small sample size of patients will be needed to achieve statistical significance in Phase III. They also expect the testing required to be short (approximately six months). This trial is expected to commence in early 2016. The primary endpoint will be Gastrointestinal Symptoms with key secondary endpoints... including renal function. The company planned to submit a special protocal assessment (or, SPA) request to the FDA before year-end 2015. Though, as of date of this article submission, no follow-up information has been provided, I'd expect to see that news at any time.

In addition to the above six-month trial, PLX will also be conducting a separate 24-month trial where PRX-102 will be compared head-to-head against Fabrazyme. This trial is also expected to commence in early 2016. It will be conducted in patients who are currently being treated with Fabrazyme. The primary endpoint will be improvement in eGFR.

Lastly, per PLX's 8-k from Nov 16, 2015 and Nov 23, 2015, the FDA has indicated to the company that results from its completed six-month trial in combination with (only) interim results from the on-going 24-month trial would be enough to support marketing authorization from the FDA.

What is Fabry Disease? Fabry Disease is a rare inherited genetic lysosomal storage disorder caused from a build-up of globotriaosylceramide (also known as: Gb3, GL-3, or ceramide trihexoside). Gb3 is a natural substance in the body and is made up of sugar and fat. Gb3 is normally cleared out of cells with the help of alpha-galactosidase-A (alpha-GAL) and lysosomal hydrolase. With Fabry disease, however, the body doesn't produce enough alpha-GAL to break down Gb3. Overtime, the excessive build-up of Gb3 in cells can cause damage (sometimes severe) in tissues throughout the body.

It's estimated that up to 1 in 40,000 males has Fabry Disease, whereas the estimated prevalence in the general population is believed to be 1 in 117,000 people. In the United States, it's believed that over 11,000 individuals carry the Fabry Disease gene based on currently published statistics.

Other reports, however, are beginning to suggest that the disease might be significantly under diagnosed with the actual prevalence much higher. Based on recent newborn screening studies in Austria, Taiwan, Japan, and Italy, it's now believed up to 50,000 Americans could be effected.

Symptoms of Fabry Disease can include: gastrointestinal problems, heart problems, kidney problems, skin problems, hypertension, fatigue, hearing loss, osteoporosis, neurological diseases, and gastrointestinal diseases. Because Fabry Disease is associated with such a wide range of symptoms, it often goes undiagnosed. In fact, data from the Fabry Registry report the average age of symptom onset to be 10.5 years of age, but with the diagnosis of Fabry Disease not occurring until an average of 28.5 years of age.

To see a synopsis of how devastating this disease can become, one need to look no further than the homepage of the National Fabry Disease Foundation. Simply scroll down to the section titled: "Why Early Diagnosis of Fabry Disease is so Important!".

There are currently two drugs available to treat Fabry Disease, but only one of them is FDA approved:

  1. Agalsidase Beta (Fabrazyme) - Manufactured by Genzyme, a division of SNY. FDA approved in 2001. Sales were $504.1MIL in 2014 (reflecting 1.0 Euro to 1.1 Dollar exchange rate), an increase of 20.1% over 2013.
  2. Agalsidase Alfa (Replagal) - Manufactured by SHPG. Approved elsewhere, but denied approval in the US in Feb of 2012. Sales were $500MIL in 2014, an increase of 6.9% over 2013.

Another player attempting to enter the market, Amicus Therapeutics (FOLD), had been in Phase III trials with orally administered Migalastat but suffered a setback in October with the FDA requesting additional studies. Even if eventually approved, it should be noted that Migalastat would only be for patients with amenable mutations (which makes up less than 30% of the Fabry population).

Looking even further out into the horizon, SNY's Genzyme division is also working on an orally administered treatment for Fabry Disease. They are currently enrolling participants for a phase II 30-month trial not expected to be completed until March 2019. So, even if ultimately successful, we are probably looking at year 2020-2022 before this player entered the market.

Fabry Disease is currently treated by intravenous administration of alpha-galactosidase-A every two weeks. While PLX's method of delivery would be the same as SNY's and SGPH's, the similarities just might end there. Why? Because preliminary results are indicating PRX-102 is superior and will soon be able to stake claim to the designation "best-in-class" drug for the treatment of Fabry Disease. This eventual designation was even foreseen back in 2011 by the company's founder, Dr. Yoseph Shaaltiel. Meanwhile, here's a nifty little article that attempts to answer the question: Which is best, First-In-Class or Best-In-Class?

Just to give you one idea of how effective this drug is testing, currently only 19% of those treated with PRX-102 have experienced "treatment induced antibody formations". Compare this figure with current best-in-class Fabrazyme which has a 89% of their patients developing antibodies. One of the great benefits of a low antibody formation is that it allows more of the dosage to be available to fight the disease... and not be lost to antibodies.

Toss in PRX-102's exceptional safety profile (98% of adverse events considered mild or moderate), reversal of the estimated glomerular filtration rate (or, eGFR) slope (which suggest improvement in kidney function), and significant 36x longer half-life (the time it takes for a drug to lose half of its pharmacologic activity) vs competitors, and it's looking like a potential likely slam dunk.

It should also be noted that the company was already experiencing great results with it's lowest .2mg/kg dosage in Phase I/II but ultimately found the results to be even greater when administrating a 1mg/kg dosage. (Note: It's the 1mg/kg dosage that PLX has chosen to use in it's Phase III trials after it's earlier trial compared three dosage levels: .2mg/kg, 1mg/kg, and 2mg/kg). Some of the results experienced at the lowest .2mg/kg dosage included:

  • Major reduction of 86% in Renal Peritubular Capillary Gb3
  • Significant improvement in all pain parameters
  • Stabilization of cardiac and kidney function with favorable trends

CEO Moshe Manor spoke highly of the phase I/II results:

"We continue to see excellent results from PRX-102 and are very pleased with what we see in our lowest dose of the study. Now that we have viewed results from 12 months of the study, we believe that PRX-102 has a significant potential to improve the condition of Fabry patients, particularly compared to the currently available enzyme replacement therapies."

Additionally, several of the principle investigators also spoke regarding the phase I/II results seen with the 1mg/kg dosage:

Raphael Schiffmann, M.D., M.H.Sc., an investigator with the Institute of Metabolic Disease, Baylor Research Institute, Dallas, TX:

"PRX-102 has a different chemical structure with a different PK profile, which is probably the cause for the very low formation of antibodies...."

"Renal disease represents one of the main causes of morbidity and mortality among Fabry patients, and may not be adequately controlled by current standard of care. As a principle investigator in the ongoing clinical study, I am very encouraged when eGFR levels are kept stable."

Dr. Derralynn Hughes of the Lysosomal Storage Disease Unit, Institute of Immunity and Transplantation, Royal Free London NHS Foundation Trust, London, UK:

"Significant improvement in Gb3 levels with stability in renal function and cardiac parameters were observed after a relatively short period of time with low antibody formation."

PRX-106 - for the treatment of Non-Alcoholic Steatohepatitis and/or Inflammatory Bowel Disease:

On Oct 5, 2015, PLX announced pre-clinical data from PRX-106. Though initially brought into preclinical study with the intent to target Inflammatory Bowel Disease (IBD), encouraging indications from the study has led the company to announce they'll also consider Non-Alcoholic Steatohepatitis (or, NASH) as a potential indication for a proof-of-concept trial in patients.

PRX-106 is a plant cell-expressed recombinant anti-tumor necrosis factor (anti-TNF) drug that will be administered orally.

Also known as an TNF Inhibitors, anti-TNF drugs are designed to suppress the physiologic response to TNF's, a group of cytokines that can cause cell death. TNF is also involved in autoimmune and immune-mediated disorders such as rheumatoid arthritis, inflammatory bowel disease, psoriasis, refractory asthma, and more. For reference, autoimmunity is when a persons immune system reacts against normally-occurring antigens in the body as if these antigens were foreign.

In preclinical studies, PRX-106 was found to alleviate immune-mediated hepatitis and reduce interferon gamma levels in concanavalin-A (ConA) inflammatory mouse models.Furthermore, the drug was shown to alleviate liver damage, reduce serum triglycerides, reduce liver necrosis, reduce liver enzymes ALT and AST (thus leading to improved liver biopsies), and also demonstrated a trend in the reduction of liver fat.

What is Non-Alcoholic Steatohepatitis? NASH is liver inflammation and damage caused by a buildup of fat in the liver. It's usually a silent disease with few or no symptoms. Patients generally feel well in the early stages and only begin to have symptoms once the disease is more advanced... typically when the person is between 40 and 50 years of age.

Though not normal, it's estimated that many people have a buildup of fat in the liver. For most people it causes no symptoms or problems, but in some the fat causes inflammation and damages the cells of the liver. If this occurs, the liver will no longer function as well as it should. This, in turn, can then lead to scarring of the liver which can lead to cirrhosis and carcinoma. NASH is similar to the kind of liver disease associated with long-term heavy drinking, but NASH occurs in people who do not abuse alcohol... hence the "NA"SH (non-alcoholic) distinction.

Things that put people at risk for NASH include: obesity, insulin resistance, type 2 diabetes, high cholesterol, high triglycerides, and metabolic syndrome. However, NASH can also happen in people who have no risk factors. Experts still do not know why some people with liver fat buildup get NASH while others do not. Various studies have estimated that between 20-30% of all adults have fatty livers, including 50% of diabetics and 80% of those who are obese. NASH is believed to effect between 2-5% of the population in the US, or roughly 16 million Americans.

NASH has now been referred to as the "Next Big Global Epidemic" and the "Next Hepatitis C". Indeed, analyst now forecast that the market for NASH related treatments could reach $35BIL to $40BIL by 2025. Speaking of NASH exclusively, it's projected that the market is growing at a 25.6% annual clip and will reach approximately $1.7BIL by 2020.

Currently, there are no specific therapies or FDA-approved drugs to treat NASH. Most recommendations given to people with the disease are to: reduce their weight, eat a healthy balanced diet, increase physical activity, avoid alcohol, and avoid unnecessary medications.

So, just how desperate is the marketplace for a drug that can treat NASH?

On January 9, 2014, Intercept Pharmaceuticals (ICPT) released an interesting piece of news: that their phase II FLINT trial... which was a test of their obeticholic acid (or, OCA) drug in 283 patients suffering from NASH... was stopped early due to highly positive results in their primary endpoint.

Result: ICPT stock went from $72/share to over $445/share in only two days. (That would be a 6-bagger for anyone keeping score.) Market cap wise, ICPT went from having an approximate $809MIL valuation to a $5BIL valuation in 48 hours.

ICPT historical chart

Even Adam Feuerstein seemed to be on board with the dramatic 600% price increase, explaining his reasoning here.

Though ICPT has now moved into phase III testing of OCA for the treatment of NASH with liver fibrosis, enthusiasm for its NASH therapy has faded somewhat. Why? Because on Oct 28, 2015 the company announced results of a mirroring phase II trial conducted on adults in Japan. That trial failed to meet its primary endpoint of a two point improvement on a standard liver disease measure. Even worse, OCR was demonstrating a questionable safety profile at it's highest dosage (50% adverse events vs 8% with placebo). Here's a great Seeking Alpha article that goes into more detail regarding this failed trial.

Additionally, French biopharmaceutical company Genfit SA (OTCPK:GNFTF), also reported a setback on March 27, 2015 when its phase II trials of Elafibranor (GFT505) failed to meet its top line goals for the treatment of NASH. Despite the setback, Genfit (like Intercept) has chosen to continue on with a phase III trial. Here's another article by the beloved Adam Feuerstein regarding his opinion of the failed trial.

Could PLX trump ICPT and GNFTF (or any others) in the race to find a successful (and safe) treatment against NASH? Let's take a preliminary look at the PRX-106 safety profile which has now been assessed multiple times:

  • A 14-day repeated administration in rats of dosages 5x the highest intended dose were evaluated along with a control arm. No adverse symptoms resulted and all blood parameters were persistent and normal. Furthermore, no abnormalities in gross necropsy pathology were seen in any of the animals.
  • A two month toxicology study to support longer duration clinical studies was successfully completed with no treatment-related adverse reactions observed among all experimental groups.
  • A phase I trial in healthy volunteers demonstrated that it was safe and well tolerated. Additionally, it showed biological activity in the gut and the inducement of regulatory T-cells.

Impressed with PRX-106's preliminary results, Prof. Yaron Ilan, Chairman of Medicine at the Hadassah-Hebrew University Medical Center in Jerusalem (where the phase I trial was conducted), and former President of the Israel Liver Association commented:

Taken together, the data from the pre-clinical and clinical studies suggest the orally administered PRX-106 is safe and can exert a profound anti-inflammatory effect in liver disorders.

The data support the notion that PRX-106 can serve as a potent immune modulatory agent that can alleviate inflammation of the liver in a safe manner that will not suppress the immune system, which is currently one of the main concerns in other product candidates currently in development.

Here's a full list (as of Nov 11, 2015) of biotech companies currently working to develope a drug to treat NASH. This information (and more) can found online here.

Nash Competitors List

Now on to PRX-106's next indication:

What is Inflammatory Bowel Disease? IBD is a disease that involves chronic inflammation of all or part of the digestive track. Primarily, it includes Ulcerative Colitis and Crohn's Disease. Symptoms usually involve severe diarrhea, pain, fatigue and weight loss.

More specifically, Ulcerative Colitis is a chronic disease of the large intestine (colon), in which the lining of the colon becomes inflamed and develops tiny open sores (ulcers) that produce pus and mucous. It is the result of an abnormal response of the body's immune system where it mistakes food, bacteria, and other materials in the intestine as foreign or invading substances. As a result, the body then sends white blood cells into the lining of the intestines to battle the supposed bad guys.

Crohn's Disease can effect any part of the Gastrointestinal Tract (or, GI), from the mouth to anus. Most commonly, however, it effects the area between the end of the small bowel through the beginning of the colon.

Note: Many people confuse IBD with IBS (Irritable Bowel Syndrome), but they are different. IBD causes inflammation and damage to the intestines, whereas IBS does not. Additionally, having IBS has not shown to increase the risk of colon cancer or other gastrointestinal diseases. IBS is only considered a functional disorder, meaning that the function of the bowels is disturbed.

The goal of IBD treatment is to reduce the inflammation that will then trigger symptoms. In a best case scenario, treatment would not only lead to symptom relief, but also to a long-term remission and reduced risk of complications. There is no cure for IBD. Researchers continue to actively explore new approaches to treating IBD.

Speaking of new approaches, PRX-106 will represent a novel mode of administering a recombinant anti-TNF protein.

Just how big is the potential market for IBD? In the US alone, over 1.6 million people have IBD with as many as 70,000 new cases being diagnosed each year. Worldwide, it's believed 5 million people suffer from the disease. In America alone, it's estimated that the annual direct cost for all patients with IBD to be between $11BIL and $28BIL... this based on figures from US insurance claims data and MarketScan database data.

PLX expects to initiate a proof of concept (POC) study in early 2016. Then, after reviewing the POC data, PLX intends to collaborate with a well-suited partner for further development.

PRX-110 (AIR DNase) - for the treatment of Cystic Fibrosis:

PRX-110 (AIR DNase) is PLX's inhaled, chemically-modified, plant-cell expressed form of recombinant human deoxyribonuclease 1 (DNase 1) for the treatment of Cystic Fibrosis (or, CF).

AIR DNase was developed as a strategy to control the amount and thickness of mucus in CF patients in order to improve their lung function and reduce the susceptibility to recurrent respiratory tract infections.

What is Cystic Fibrosis? CF is an inherited disease that affects the exocrine glands. The exocrine glands are responsible for secreting substances onto the body surfaces both internally and externally. Examples of these secretions include: sweat, tears, digestive juices, and mucus. The primary organs affected by CF are the lungs and GI tract. The most characteristic symptom is the excessive production of a thick, sticky mucus in the airways.

Normal mucus is a good thing. It forms a gel-like barrier that helps protect cells lining internal body surfaces and resembles a slippery, watery substance. In the lungs, it will transport dust and other particles out of the airways to help prevent infection. However, in people with CF, the chemical properties of mucus are altered which causes the mucus to becoming thick, sticky, and excessive. As a result, ducts and airways become obstructed creating an environment in which bacteria start to thrive. In response, the body sends white blood cells into the lungs to fight the infection. Unfortunately, when the white cells die they release their genetic material, sticky DNA, into the mucus... which then adds to the already excessive stickiness of the mucus.

To dislodge the mucus, CF patients cough frequently and require time-consuming daily chest and back clapping and body positioning routines to drain their lung secretions. Over time, the constant infection and inflammation of the airways resulting from CF will gradually damage the lungs and cause respiratory failure, which is the leading cause of death among CF patients. The average life-span of people suffering from CF is around 37.4 years and 70,000 people world-wide suffer from the disease.

In 1989, the genetic defect responsible for CF was discovered to exist in a single gene. That gene was then named the Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) gene. Since the date of its discovery, there have been nearly 500 different mutations of this gene found in CF sufferers from around the globe.

Since the identification of the CFTR gene, there has been a rapid increase in scientists understanding of the disease. However, there still remains no cure. Some of the procedures, devices, and drugs currently used to help treat CF patients with lung function include:

  1. Lung Transplant
  2. The Oscillating Device - utilizes a chest vest and handheld respiratory apparatus that allows patients to loosen the mucus that clogs their airways via vibration. Up to 3x more effective and less time consuming than traditional chest and back clapping.
  3. Bronchodilators - a substance that dilates the bronchi and bronchioles, decreasing resistance in the respiratory airway.
  4. Ibuprofen - demonstrated to help preserve lung function, but most effective in patients under the age of 13.
  5. Antibiotics - traditionally given orally (if available) or intravenously. A newer method of delivery via aerosol has shown to have less side effects than the intravenous method.
  6. CFTR Modulators - first approved in 2012, this class of drugs modify the CFTR mutation by increasing the function of the chloride channel, enhancing ion and water movement across cell membranes.
  7. DNase - see below...

First, some definitions and their abbreviations are required:

Deoxyribonuclease (DNase, for short) - is any enzyme that catalyzes hydrolytic cleavage of phosphodiester linkages in the DNA backbone, thus degrading DNA. Some DNases' cleave (or, cut) only at the ends of the DNA molecules while others may cleave anywhere along the chain. Some cleave only double-stranded DNA, while others specifically target single-stranded DNA, and still others will cleave both. Some are fairly indiscriminate about the DNA sequence they cut, while others are very sequence-specific.

Recombinant Human Deoxyribonuclease (also referred to as: rhDNase, rhDNase 1, or simply DNase 1) - A nuclease that cleaves DNA preferentially at phosphodiester linkages adjacent to a pyrimidine nucleotide, yielding a 5'-phosphate-terminated polynucleotides with free hydroxyl group on position 3', on average producing tetranucleotides. DNase 1 acts upon single-stranding DNA, double-stranded DNA, and chromatin.

Thus, the cutting of DNA by DNase or DNase 1 helps reduce the stickiness of mucus.

Dornase Alfa (Pulmozyme) - A highly purified synthetic version of DNase 1 developed by Genentech (now a division of Roche) that became the first new product in 30 years developed specifically to treat CF. Pulmozyme was approved by the FDA on Dec 30, 1993.

While there are now a variety of different medications approved to treat CF in more general terms, Pulmozyme remains the only FDA approved drug designed to treat CF by mucus alteration. Pulmozyme is expected to finish 2015 with around $645MIL in sales. Sales are expected to rise to $712MIL by 2019.

Enter PRX-110...

As mentioned at the beginning of this section, PRX-110 (AIR DNase) is PLX's synthetic version of DNase 1... a version that utilizes plant cells. As a point of reference, Pulmozyme's protein therapeutic agent utilizes chinese hamster ovary (or, CHO) cells.

So, how did Protalix's PRX-110 fair in the recently completed clinical trial? AIR DNase showed substantial enzymatic activity in the lungs. When compared to Pulmozyme, AIR DNase demonstrated improved enzyme kinetics, improved ex vivo efficacy, improved disease parameters, and less sensitivity to inhibition by actin.

What is actin? Actin is a globular multi-function protein that forms microfilaments. It participates in many important cellular processes, including muscle contraction, cell motility, cell division and cytokinesis, vesicle and organelle movement, cell signaling, and the establishment and maintenance of cell junctions and cell shape.

In CF sufferers, actin and DNA that originate from inflammatory cells contribute to the thickness of airway secretions. Additionally, the actin can also bind to the DNA-rich fibers and inhibit the enzymatic activity of DNase and DNase 1. In other words, actin works against the beneficial effects of DNase, DNase 1, and thus Dornase Alpha (Pulmozyme) as well as AIR DNase.

But just how much better at resisting the negative effects of actin was PLX's AIR DNase vs Roche's Pulmozyme? Following treatment with AIR DNase, actin demonstrated only 15% resistance (inhibition). Resistance after treatment with Pulmozyme was still between 85-100%.

Additionally, treatment with AIR DNase yielded a 70% reduction in the viscosity (thickness) of sputum vs only a 30% reduction after treatment with Pulmozyme.

Commenting on the above results, Dr. Yoseph Shaaltiel, Ph.D, Executive Vice President, Research and Development, Protalix said:

We are very optimistic about the results thus far.... We believe that AIR DNase has the potential to address some of the significant unmet medical needs of the cystic fibrosis community.

See PLX's corporate presentation regarding AIR DNase, dated 06/17/15. It's the same presentation given by the company at the 38th European Cystic Fibrosis Conference five days earlier. Also note how the presentation shows AIR DNase demonstrating even better results than PRX-110. Though PLX generally mentions the two interchangeably in PR releases, I believe the true equation is this: PRX-110 + an actin inhibitor = AIR DNase.

PLX is believed* to have initiated a phase I clinical trial in healthy volunteers during Dec of 2015 that is expected to be completed in Feb of 2016. Afterwards, a proof of concept study will follow with results expected in first half of 2016. After reviewing the data, PLX intends to collaborate with a well-suited partner for further development. (*based on Nov 12th update to ClinicalTrials.gov)

PRX-112 - for the treatment of Gaucher Disease:

With PRX-112, PLX is revisiting Gaucher Disease.

What is Gaucher Disease? Gaucher Disease is an inherited condition whose sufferers have a deficiency of the enzyme glucocerebrosidase (or, GCD). GCD breaks down the fat molecule known as glucocerebroside (also known as glucosylceramide). When GCD enzymes are insufficient, glucocerebroside starts to accumulate in the spleen, liver, and bone marrow causing organ enlargement, bone disease, anemia, and excessive bleeding and bruising.

There are three classes of the disease with Type I being most prevalent. What generally separates Types II and III from Type I is that these sufferers will also get an accumulation of glucocerebroside in the brain which can lead to pathological changes in the central nervous system. Type I accounts for over 90% of the diagnoses.

Gaucher Disease affects 1 in every 40,000-60,000 people and is the most common condition in a family of diseases known as lysosomal storage disorders.

Unlike ELELYSO/UPLYSO, which deliver Taliglucerase Alfa intravenously, PRX-112 will be administered orally. Additionally, PLX is the exclusive owner of all rights to the technology deployed in the creation of this method of delivery.

PRX-112 is a plant-cell expressed form of human GCD that is naturally encapsulated within carrot cells that have been genetically engineered to express the GCD enzyme. With PRX-112, the plant cell itself becomes the delivery vehicle. Plant cells have the unique attribute of a cellulose cell wall which makes them resistant to enzyme degradation when passing through the digestive tract.

Currently, there are two approved orally administered drugs to treat Type I Gaucher Disease and both are in tablet form:

  1. Miglustat (Zavesca) - Manufactured by Actelion (OTC:ALIOF). FDA approved in 2003. Patent protection ended in 2013. Sales were$108MIL in 2014. Sales are currently down 12.3% in 2015. Limited in scope, only approved for patients with mild to moderate symptoms who cannot be treated with ERT.
  2. Eliglustat (Cerdelga) - Developed by Genzyme, a division of SNY. FDA approved on Aug 19, 2014 as a first line treatment. Sales through 3Q 2015 were $48.4MIL (reflecting 1.0 Euro to 1.1 Dollar exchange rate). Sales projected to reach $316MIL by 2019.

Note that the only similarities between PRX-112 and Cerdelga is that they are both orally administered. Whereas PRX-112 is a recombinant form of the GCD enzyme, Cerdelga is a small-molecule. Small molecules help regulate biological processes. As a point of reference, most drugs produced are small molecules.

Cerdelga is small molecule inhibitor of the enzyme glucosylceramide synthase which produces glucocerebrosides. With the strategy being, if the fat isn't produced in the first place, it won't need to be broken down.

PLX believes that their oral delivery of GCD presents a number of advantages. Namely that it could change the treatment paradigm for Gaucher patients by being able to deliver ERT (the standard of care for Gaucher patients) by a route preferable to intravenous delivery. Let's also not forget that the current annual market for intravenously administered ERT treatment is over $1.1BIL.

The pharmacokinetic (or, PK) studies that followed phase I trials of PLX-112 revealed that active GCD enzymes were detected in patients blood circulation. C max analysis showed an average increase of over 100% in enzymatic activity from base line, with the increase ranging from approximately 50% to 350%. Additionally, PRX-112 demonstrated a pattern of continuous enzyme presence of approximately 30 hours after administration. With a daily oral administration of PRX-112, PLX expects to achieve a steady state level of active GCD enzyme in the blood circulation of patients similar to the physiological state found in healthy individuals.

PLX began enrolling patients into its phase II trial for PRX-112 during June of 2104 with expectations the trial would end by 3Q 2014. That being said, I've not been able to locate any more information regarding this trial. Regardless, PLX had stated 2015 would be a year where they'd focus their efforts on a new formulation before proceeding to more advanced clinical trials. I'd suspect we'll get a follow up at some point during 2016... and perhaps a better tasting PRX-112. Ha.

Financials:

Before I delve too much into this, let me say that I typically do not buy into small biotechs for "earnings" because they typically don't have any... or at least not enough to be profitable (yet). With these companies, it's always about the future. That being said, lets take a look at PLX's earnings per their 10-Q for period ending 09/30/15 (with all figures based on the 9 month time period):

Net cash used in operations was $20.4MIL, down 16.5% . Revenues were $12.5MIL, up 8%. Cost of revenues were $6.8MIL, down 9%. Research and Development (R&D) cost were $14.6MIL, down 14.6%. Net loss was $14.9MIL, or (.16)/share vs (.23)/share. Going forward, the company expects R&D expenses to remain their primary expense.

My 11 Signs of an Ideal Small-Cap Bio-Tech Investment:

Here's the ideal situation I like to see in small bio-tech stocks before investing:

  1. A patent protected platform. PLX = check!
  2. An FDA approved drug built off said platform. PLX = check!
  3. A years-long sell off following 1st FDA approval. PLX = check!
  4. Robust pipeline filled w/potential superior drugs. PLX = check!
  5. Superior management. PLX = check!
  6. Large market cap companies as partners. PLX = check!
  7. Small chance of near-term share dilution. PLX = check!
  8. High institutional ownership. PLX = working on it!
  9. Low level of short interest. PLX = check!
  10. No pending litigation. PLX = check!
  11. Ability to secure loans at reasonable rates from reputable institutions (ie: no crazy convertible debt securities with wonky make-whole provisions financed by third tier financiers who are likely to short the stock into oblivion afterwards). PLX = check!

Now let's look at the above in more detail.

1. A patent protected platform: Per PLX's 10-K for period ending 12/31/14 (pages 17-18), PLX currently holds licensing rights to 64 patents and 95 pending patents related to their ProCellEx protein expression system. These patents expire at various stages between 2016 and 2035. More specifically, those closest to expiration will represent a loss of 2 patents in 2016, 13 in 2017, and then nothing else lost until 2024.

2. An FDA approved drug built off said platform: ELELYSO/UPLYSO. FDA approved after hours on May 01, 2012.

3. A dramatic, years-long sell off after FDA approval: PLX closed at $7.01/share on May 02, 2012. Current price: $1.02. Stock is down (85.4%) since obtaining first FDA approval.

4. Robust Pipeline filled w/potential superior drugs:

  • PRX-102 for Fabry Disease - phase II complete, two phase III trials to commence early 2016. Drug is demonstrating it's superior to the lone FDA approved drug currently available for treatment, Fabrazyme. Should be up for FDA approval no later than sometime in 2017.
  • PRX-106 for IBD and/or NASH - preclinical studies and phase I complete, proof of concept study to be completed in early 2016. Preclinical data showing drug causes inducement of regulatory T-cells, alleviates liver damage, reduces liver fat, improves liver biopsies, exerts a profound anti-inflammatory effect, does not suppress the immune system, and is safe and well tolerated. There are no approved drugs to treat NASH and researchers are actively exploring new approaches to treating IBD.
  • PRX-110 for Cystic Fibrosis - currently initiating a phase I trial that's expected to be complete by end of 1Q'16. Afterwards, a proof of concept study will be conducting with results expected by end of 2Q'16. Drug is demonstrating it's superior to the lone FDA approved drug designed to alter mucus, Pulmozyme.
  • PRX-112 for Gaucher Disease - phase I complete with phase II initiated mid 2014 (but not sure if was ever completed) before company decided to spend 2015 improving its formulation. First drug ever designed to administer ERT treatment orally.

5. Superior Management: Mr. Moshe Manor recently came out of retirement to join PLX as their new President and CEO after spending 28 years at pharmaceutical giant TEVA. A complete line-up of PLX's management team can be found here.

6. Large market cap companies as partners: PFE and Fiocruz are PLX's current partners.

  • PFE has a current market cap of $199BIL. On Oct 13, 2015, it was announced that PFE had taken a 6% equity stake in PLX in exchange for $10MIL. Average cost to PFE = $1.77/share. Additionally, the 5,649,079 shares purchased by PFE contain lock up periods that expire after 90-days and 180-days.
  • Fiocruz is an arm of the Brazilian Ministry of Health.
  • PLX intends to bring onboard additional well-capitalized partners in 2016 for further development of PRX-106 and PRX-110.

7. Small chance of near-term share dilution: With the recently reworked ELEYSO deal, combined with PFE's subsequent investment in PLX, combined with cash PLX already had in reserves, PLX is currently sitting on a $80MIL cash pile. Even prior to receiving the recent $36MIL cash infusion from PFE, PLX believed they had enough cash to maintain their currently planned development activities and corresponding expenditures for at least 12 months. If PLX's current burn rate were to stay constant, this $80MIL would be enough to keep the lights on for another 32 months, or through Aug 2018.

(Per company's 10-Q for 9 months ended Sept 30, 2015, net cash used in operating activities was $20,427,000. $20,427,000/9 = $2,269,667 per month burn rate. $80,000,000/$2,269,667 = 35.24 months. Round down to 35 months - 3 months since deal = 32 months remaining, or Aug 2018)

8. High Institutional Ownership: Currently, PLX institutional ownership shows to sit at 31.55%. However, this information might now be dated as there has been some recent activity on this front. Camber Capital Management LLC, a 10% owner of PLX, bought an additional 4 million shares @ $1.00 on Oct 19, 2015. This occurred just one week after PFE took its 6% ownership position.

9. Low level of short interest: Current short-interest sits below 2% with just over 1.5 million shares short. The most recent update from Dec 15, 2015 shows this is a slight uptick from the previous Nov 30 reading... but there is nothing to see here. The Nov 30 reading was the lowest in at least a year, and the Dec 15 reading was the 2nd lowest.

10. No pending litigation: None. Per the companies 10-Q for period ending 09/30/15 (p 18).

11. Ability to secure loans at reasonable rates from reputable institutions (ie: no crazy convertible debt securities with wonky make-whole provisions financed by third tier financiers who are likely to short the stock into oblivion afterwards):

To me, one of the absolute single greatest identifiers as to the quality of a company, and a tell-tale sign of a company's true risk, is identified by one figure: the rate at which the company can borrow money. PLX is nearly 2.5 years into a 5 year loan from the Bank of New York Mellon Trust Company at the unheard rate (for small caps or mid-caps anyway) of (drumroll please) only 4.5%!

Does this loan have any conversion feature? Yes, but it's not some wonky death-knell conversion rate. In fact, it's the opposite of that. The initial conversion rate is 173.6593 shares per $1000 face value of the loan, which equates to being beneficial for creditor to convert the loan into shares only if PLX is trading at $5.76/share or higher. The maximum conversion rate (baring some extra-ordinary event such a buyout, stock-split, spin-off, dividend, etc) is 211.8644 per $1000 face value, thus becoming beneficial to convert only if stock is trading above $4.72/share. If share dilution ever comes account of the conversion of this loan, it will increase the outstanding share count by approx 11.9MIL to 14.6MIL shares. Considering we'd have over a 3-bagger by then, I could care less.

The loan amount is for $69MIL and is due Sept 15, 2018. Baring any unforeseen circumstances, PRX-102 should be FDA approved well in advance of this loan coming due. Additionally, this loan might simply be re-financed and extended before the due date. Otherwise, PLX recently filed a new shelf offering giving it permission to sell up to $100MIL worth of shares at it's discretion. So, lots of flexibility here to address the loan going forward. As a point of reference, it took the company 5 years to start drawing down on it's previous $150MIL shelf offering from 01/10/11.

Now let's look at a comparison: DYAX. In 2011, DYAX was able to borrow $60MIL not due until 2018... but at a rate 2.66x higher than PLX, or 12%. This loan allowed DYAX to refinance at a lower rate after their creditor (LFRP Investors, an affiliate of Cowen Healthcare Royalty Management) realized that DYAX's Phage Display Technology platform was exceeding expectations. (Note: the old link I'd saved from Market Watch with this "exceeding expectations" comment is now a dead link... so you'll just have to take my word for it).

Now let's look at another comparison: Western Union (WU). In 2012, WU was able to sell $500MIL worth of unsecured 5-year notes that paid only 2.875% interest. Why do I remember this? Because this told me that WU was not in any sort of financial distress coming out of The Great Recession. Seeing the stock then downgraded to "sell" by Goldman Sachs one month later told me the "gig was up" and I immediately went into $10 call LEAPS that didn't expire for 2 years. Six months later I was up nearly 100%.

The point I'm trying to make is this: WU has a current market cap of $90BIL, and that's 90x larger than PLX's current market cap. Despite this, PLX was able to borrow money at an interest rate only 1.625 points higher than WU. Let that fact sink in for a moment... then let it help you determine the real risk of owning PLX.

In addition to the above, PLX also has a $4.3MIL non-interest bearing promissory note due in Oct 2020. This is owed to PFE and represents PLX's share of the accumulated losses under the original ELELYSO/UPLYSO agreement prior to the Amended Pfizer Agreement. As a reminder, PFE will now incur 100% of these expenses going forward, with the exception of Brazil. Also note how the material definitive agreement from which this note originated also includes a few extra features:

  • A non-competition covenant which limits PLX's right to commercialize any drug for the treatment of Gaucher Disease (with the exception of PRX-112) for a specified period of time.
  • It also commits PLX to supplying PFE with the drug substance for the production of ELELYSO for a minimum of 10 years, with PFE able to extend this for another 5 years.

To me, it doesn't seem PFE has any fear of PLX going out of business. 0% loans, 10-15 year supply agreements, and 6% owner.

Additional Value Metrics:

In addition to all that has been discussed thus far, lets look at some other reasons why I think we are at the perfect place at the perfect time in regards to an investment in PLX:

1. In regards to small-cap biotechs, almost as bad as being completely wrong is being way too early with your timing. And I'm not just talking about being months too early, I'm talking about investing years and sometimes decades too early. Throughout my 27 years of investing, I've witnessed many people commit this financial sin.

Investing in a small biotechs that have no drugs already approved by the FDA is akin to investing in a high-wire troupe that performs nightly with no safety net... because eventually your luck will run out. You also run the risk that the company has a Laurel and Hardy management team that won't be exposed until they finally come before the FDA for the first time. Why? Because even if they think they've got a superior drug, the FDA might not like their endpoints, or might not like their facilities, or might want them to conduct more test. Until the company has actually "been there, done that", there are additional risk involved and sometimes these additional risk can add years to the approval process.

Now let's assume the above company, at some point, clears the FDA hurdle and gains approval. Being that they are new at this, they still might not have all their i's dotted and t's crossed. How about the sales force? Do they even have one? If not, do they have a partner eager to help? What about insurance coverage? It's unlikely patients are going to be willing to pay 100% of the drug cost. Post-FDA approval, there's a whole new host of issues that will have to be addressed. So often, what happens next is a years long sell-off as investors grow impatient with the pace of progress and decide to exit their positions. Reality, it seems, always rolls along at a slower pace than euphoria.

Now a few years beyond gaining their first FDA approval, the company is starting to get traction, the bugs have been worked out, sales are increasing at a modest pace, and the company's pipeline has continued to mature. But where are the investors? They have left the company for dead at the exact moment they should actually be investing into it.

22 years after being founded, 10 years after going public, 3.5 years after gaining their first FDA approval, this is exactly where PLX finds itself today.

The company that started with a vision in 1993 is finally bearing fruit, it pipeline maturing, its platform giving off multiple indications that it has the ability to produce best-in-class drugs (... and all at a cost roughly 25% cheaper than traditional manufacturers). All this plus the strongest, most seasoned management team in the company's history. All this and with a market cap sitting near all-time lows and bordering on the absurd. And where are the investors? No doubt out chasing dreams and the next sure thing.

Now lets take a look at a couple of charts for DYAX and PLX that will help give you an idea of where I think we might be. Considering DYAX bottomed out only after selling off 74% subsequent to gaining their first FDA approval, I'm hoping we're now in similar situation with PLX being down as much as 89% following their first FDA approval. Surely it can't get worse, right? While anything is possible, I'm predicting the worst is now behind us and PLX will soon never look back.

DYAX chart since IPO

PLX chart since market debut

2. Management has incentive to see that stock price increases significantly from current price.

  • Per the Employment Agreement signed by Mr Moshe Manor on Sept 28, 2014, he is entitled to options allowing him to purchase 900,000 shares of common stock. The options are exercisable at a price of $2.37/share (the closing price of PLX the day before the date of grant). Each quarter over a period of 4 years, 52,250 of these shares become vested (or, 52,250 x 4quarters x 4years = 900,000). The options expire in 10 years. The vesting of these options become accelerated in full if a Corporate Transaction or Change In Control of the company takes place.
  • On Mar 23, 2015, PLX approved the grant of a 10-yr option to purchase 1,909,000 shares of common stock to its officers and other employees with an exercise price of $1.72/share (the closing price of PLX the day before the date of grant). The options vest over a four year period, the first vesting date occurring 1-year from the date of grant whereas 25% become vested. The remaining 75% vest in 12 equal quarterly increments over the remaining 3 years. Here is Mr. Moshe Manor's portion: 250,000 options. This information can be found in the 10-Q for period ending 09/30/15 (p 8).

3. In 2013, SNY spent $80MIL expanding their Fabrazyme production facilities to treat Fabry in hopes of preventing future supply issues going forward. (Remember, this was also a stated concern of the FDA in their meeting minutes with PLX upon the successful completion of their phase I/II trial of PRX-102 for Fabry).

Do you understand what we have here? SNY just spent 80% of the entire market value of PLX... just to expand a facility... that will be used to produce a drug likely to be inferior to PRX-102. Let that sink in for a moment and then let it help you determine if PLX might be undervalued at its current market cap of only $100MIL.

Meanwhile, guess who else is expanding their facilities: PLX! Per the 5th bullet point listed under "Third Quarter and Recent Clinical and Corporate Highlights":

The Company is currently producing Fabry drug substance for its planned phase III trial as part of the process of converting its current approved manufacturing facility to an approved multi product facility, thereby introducing potentially significant operational savings.

4. Should you buy PLX for its platform alone? That's a question Motley Fool proposed over two years ago when PLX had a market cap 5x its current level. And who doesn't love old articles? So, here's the link.

Surely there is value in a platform system that indicates it can produce best-in-class drugs at manufacturing cost typically 25% below it's competitors, right? I mean, the owner of the platform could produce a superior drug and charge extra for the superiority, or charge the same but with better profit margins, or simply annihilate the competition with a double whammy: offer a better drug and a better price. You telling me the insurance companies wouldn't like that feature? It's all possible... with ProCellEx.

5. Current Facts and the Pipeline Potential:

  • UPLYSO - The deal with Fiocruz in Brazil has been a big disappointment thus far. Actually the deal is fine, it's Fiocruz not holding up their agreed upon portion of the deal that has been the headache. That being said, I believe PLX's current market value more than fully reflects this disappointment. Let's also not forget that sales to Fiocruz are continuing to increase, just not at the barn-burner pace that was once hoped for and expected. If the deal with Fiocruz is ever completed as it's drawn up, it would bring in excess of $270MIL to PLX, or 2.7x their current market value. If Fiocruz only meets 37% of their stated obligation, then it would bring in $100MIL, PLX's current market value. Let that sink in. However, the fact that Brazil appears to be heading for its worst recession since 1901 is certainly not helping matters. But I'm not buying PLX for the Brazil deal. No one should be buying PLX for the Brazil deal.
  • PRX-102 - We are likely less than 12 months away from phase III completion, 18-20 months away from drug approval, and just a bit more than 24 months away from being able to "officially" announce that PRX-102 is the new "best-in-class" drug for treating Fabry Disease. The market for this drug is over $1.04BIL annually and growing at a rapid clip.
  • PRX-106 - Another drug demonstrating superior traits in clinical trials. Markets for IBD and NASH (and the down-line health issues that result from having these diseases) represent a market in the tens of billions. PLX intends to collaborate with a well-suited partner for further development.
  • PRX-110 - Another drug demonstrating best-in-class characteristics. It's only competitor in treating CF via mucus alteration was projected to have $645MIL in sales for 2015.
  • PRX-112 - Will offer a unique and novel way to administer ERT. Patients will be able to drink their medicine instead of having to be hooked up intravenously. The intravenous ERT market for Gaucher's is $1.1BIL annually. PLX intends to collaborate with a well-suited partner for further development.

Finding a Future Value:

Scenario 1: Conservative:

Assumes the current stock price and market value of PLX is justified and correctly valued. This will be our basis.

  • 2015 market cap ends year at $100MIL

I believe PRX-102 will be approved by the FDA sometime in 2017. If this does indeed happen, then the ProCellEx platform will be 2-for-2 in bringing drugs to market, 2 attempts, 2 FDA approvals. With the enhanced track record, the market should begin to more fairly value the platform. So let's add an additional $50MIL in value based on the platform alone.

  • 2017 market cap = $150MIL (100+50)

Five years after approval, let's assume PRX-102 has obtained 20% of the global market share for treating Fabry. We'll also assume that the market for these drugs has slowed to a 5% annual growth rate (vs the current 10% growth rate). This brings the Fabry market size to $1.39BIL ($1.04BIL x 5% compounded growth x 6 years) and brings PRX-102's portion to $278MIL ($1.39BIL x .20). We'll further assume that PLX ends up in a deal similar to the 60/40 split arrangement they had with PFE. This brings PLX's portion of the annual revenue down to $111.2MIL ($278BIL x .40). With biotechs typically sporting market caps 5-10 times annual revenue, and using the most conservative 5x figure, PRX-102 should add an additional $556MIL ($111.2BIL x 5) to PLX's market cap.

By 2022, drugs PRX-106, PRX-110, and PRX-112 will all be much further down the development pipeline and possibly facing their own FDA approvals. The market should be assigning more value by then to reflect the maturity of the pipeline. Additionally, PLX should have even more drugs under development. Let's be conservative and say all these drugs combined, that they add just $100MIL in value to PLX's market cap in 2022.

  • 2022 market cap = $806MIL (150+556+100)

But let's not get too excited, because now I'm now to project that PLX has doubled their share count by this time.

  • 2022 share price = $806MIL / 200MIL shares = $4.03

Scenario 2: Reasonable:

Takes into consideration the following: the full 52wk-range of the stock ($0.74 to $2.40), the fact that the stock is down approx 50% in six months on no substantial news, and the fact that tax loss selling tends to exaggerate moves to the downside at year end. This scenario assumes the 2015 year-end market value was undervalued by 25%.

  • 2015 true value at year end = $125MIL (100+25)

Just as before, I'll assume that PRX-102 will be approved by the FDA sometime in 2017. However, I'll also assume that ProCellEx, now being 2-for-2 in bringing drugs to market, will be more fully appreciated. In fact, here's an SA article from 2012 that quoted an analyst stating he thought PLX's platform alone was worth $150MIL. Let's assume that he and the author from Motley Fool were more right than wrong. Let's add $100MIL extra for the greater appreciation of the platform.

  • 2017 market cap = $225MIL (125+100)

Five years after approval, lets assume PRX-102 has now captured 25% of the global market for treating Fabry. We'll also assume that the market for these drugs has grown an at average annual rate of 7.5% (instead of the 10% rate currently being experienced). This brings the Fabry market size to $1.6BIL and brings PRX-102's portion to $400MIL. Again, we'll assume an eventual 60/40 split on revenues with a larger partner which will bring PLX's portion to $160MIL. With biotechs typically sporting a market cap 5-10 times annual revenues, lets go with a more reasonable 7x figure this time. This would add $1.12BIL to PLX's market cap sometime in 2022.

Additionally, let's assume PLX experiences a greater appreciation for its drug pipeline (which had been valued very conservatively in our first estimate) and assign it a value of $150MIL in 2022.

  • 2022 market cap = $1.495BIL (225+1120+150)

As before, let's again assume that the amount of outstanding shares has doubled by year end 2022.

  • 2022 share price = $1.1495BIL / 200MIL shares = $7.47

Scenario 3: Aggressive:

Let's start with the same assumption as our previous example.

  • 2015 true value at year end = $125MIL (same as before)

Just as before, we'll assume PRX-102 is approved by the FDA in 2017. However, not only is ProCellEx now 2-for-2, but it has just produced a drug deemed best-in-class, and by some considerable margin. Now the market really starts to appreciate the capabilities of the ProCellEx platform and its ability to produce drugs with exceptional profiles. Not only this, but the market also comes around to finally appreciating the entire simplicity and cost savings of this unique system. The market values the platform at $250MIL.

  • 2017 market cap = $375MIL (125+250)

Five years after approval, lets assume that PRX-102 has now captured 33.3% of the market. Let's also assume that the market for Fabry drugs has continued to grow annually at its current 10% clip. This brings the market size to $1.84BIL and brings PRX-102's portion to $613MIL. Again, we partner up and take only 40% of this figure, so PLX's share is $245.2MIL. With biotechs typically sporting market caps 5-10x annual revenue, let's go with a more aggressive 8.5x figure for this aggressive estimate. This would add $2.084BIL to PLX's market cap sometime in 2022.

Additionally, lets assume the PLX pipeline of drugs are continuing to demonstrate the same exceptional profiles in phase III and/or IV as they were in the phase I/II clinical trials way back in 2015. Toss in the fact that PRX-102 was deemed best-in-class and it leads to lots of excitement surrounding the next wave of possibilities. The market values the pipeline at $300MIL.

  • 2022 market cap = $2.509BIL (125+2084+300)

As before, let's again assume that the amount of outstanding shares has doubled by year end 2022.

  • 2022 share price = $2.509BIL / 200MIL shares = $12.54

Conclusion:

In the above three scenarios I attempt to find a potential future value for Protalix that is largely based on the prospects for PRX-102. I believe the ramp up in price for PLX will be substantial as this drug gains approval and matures. However, it is those other drugs in the pipeline that we never assign more than $300MIL to in our above examples that could add the rocket fuel.

So, have I found my next 20-bagger? Yea, I think so... in due time. Give me through 2025 to see it through. But if it performs anything like DYAX, then I will be wrong again... and it will happen much sooner.

My DYAX Documents

Disclosure: I am/we are long PLX.

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