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Why Prothena Is Overvalued

|Includes: Prothena Corp plc (PRTA)
Why Prothena ($PRTA) is Overvalued

Prothena ($PRTA) closed at $38.66 (+32.66%) on Friday on news that it's drug PRX002 was safe, without serious side effects, and that it reduced levels of a protein that is believed to be associated with Parkinson's disease. The drug was tested on 40 healthy volunteers.

As shown in the attached PDF that outlines the FDAs Drug approval process you can see that Prothena is in the very early stages of drug approval with its drug PRX002 as it is in the Phase 1 process (Step 3 on the chart out of 12). Inthis phase healthy volunteers are used to evaluate the safety of the drug. Now lets move on to Phase 2 (Step 4 out of 12) where 100's of patients are tested for effectiveness.

Attached is the FDAs outline of the process and results for Phases 2 & 3. On Page four it outlines the success rates of new drugs submitted. The success rates of new drugs during Phase 2 Trials, is only about 18% (from the years of 2008-2009). Than in Phase 3, the success rate is about 50% (from the years of 2007-2010). So that is a success rate of about 9% through Phase 2 & 3 trials.

You can read through the attached PDFs and see the reasons for successes and failures. I am going to say for this example that PRX002 makes it all the way through the rigorous testing of the FDA (again about only 9% of drugs make it out of Phase 2 & 3 Trials). We will give them the benefit of the doubt that everything goes perfect and that this drug hits the market.

Now lets do math on how much this potential drug, PRX002 could be worth. For this I am going to use the closest example that I have from another drug named Northera (which is owned by Lundbeck of Denmark). Northera is a drug approved to treat lightheadedness associated with the rare neurogenic orthostatic hypotension (NOH), a blood-pressure-lowering disorder tied to neurodegenerative ailments like Parkinson's disease. Granted PRX002 is designed to reduce levels of free serum alpha-synuclein. When that protein builds up in the brain, it is associated with Parkinson's disease and related conditions. So this drug is a little bit different as it deals with the progression of the disease rather than the symptoms. This is the closest example that we can tie to get a fair idea of what this drug could be worth.

Now, Northera was a drug developed by Chelsea Therapeutics, which was bought out by Lundbeck for $658 million dollars (a 29% premium of the stock price at that time). This is the first cause for concern for me as this drug was FDA approved and was only sold for $658 million to Lundbeck. As of Friday's session Prothena had a market cap of $1.06 billion dollars (37.9% higher than what was paid for Chelsea Therapeutics). That valuation does not make any sense to me, especially at this stage of development. So now lets look at how much the drug could potentially make using some basic math using Northera.

Northera's projected sales are about $300-$450 million dollars per year. The target was to have about 150,000 customers.

According to Yahoo! As of 2014 the largest average profit margin for major drug manufactures was 18.4% (which includes the likes of Pfizer, AstraZeneca, and Bristol-Myers Squib). The next round of drug manufactures drops to 12.2%.

Yet again, for this example we are going to give PRX002 the benefit of the doubt and give them the top end of the sales projection and top end of gross profit margin ($450 million per year and 18.4% gross margin).

So lets look at how much they would profit if everything went perfectly:

$450 million dollars in annual sales x 18.4% in gross margins = $82.8 Million dollars in profit.

Of that $82.8 Million dollars about 12.4% of that would be sold in the US (About 12.4% of Parkinson's patients reside in the US) = $10.26 million in sales.

· Prothena has an agreement with Roche that they receive 30% of the profits from US sales while Roche keeps 70% of the profit from US Sales.

· So of that $10.26 million dollars in sales Roche would keep $6.46 million dollars and Prothena would receive $3.80 million in sales.

Of that $82.8 million dollars in sales we have to take away $6.46 million that would go to Roche. $82.8 Million - $6.46 Million dollars that would goto Roche = $76.34 Million Dollars.

Now in a perfect world scenario where this drug gets all the way through the FDA process (remember only about 9% clear through Phase 2 & 3 of the trials) this drug roughly would give Prothena $76.34 Million in profit per year. This on a stock that now has a market cap of $1.06 Billion Dollars (13x the amount of earnings that would be generated by this drug). The P/E of Prothena would be 13.90 [ $38.66 (price per share) / $2.78 (earnings per share)]. This is the same valuation as Gilead Sciences ($GILD). A company that is well established and has drugs already on the market.

This is not even discussing the effectiveness of the drug as several researchers have noted that this drug may not even reach the area of the brain needed and are not even sure if Alpha-synuclein is the cause. Should it be the cause, Austrian biotech AFFiRiS is already in stages of developing a vaccine. So in this best case scenario does the risk justify the reward?

Read more about Alpha-Synuclein and AFFiRiS efforts here:https://www.michaeljfox.org/understanding-parkinsons/living-with-pd/topic.php?alpha-synuclein

Disclaimer: The views and opinions expressed in this article are those of the authors.

Resources Used:

FDA.gov (PDFs) -

http://www.fda.gov/downloads/Drugs/ResourcesForYou/Consumers/UCM284393.pdf

http://www.fda.gov/downloads/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER/UCM384753.pdf

Pharma Industry Profit - http://yourbusiness.azcentral.com/average-profit-margin-pharmaceuticals-20671.html

Northera Sales Projections and Lundbeck buyout of Chelsea Therapeutics - http://www.fiercebiotech.com/story/lundbeck-buying-chelsea-658m-just-case-clause/2014-05-08