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Omthera Acquisition Highlights Upside Potential Of Pivotal Therapeutics

|Includes: Pivotal Therapeutics Inc (PVTTF)

A recent deal in the pharmaceutical sector has shone a light on the fact that Pivotal Therapeutics (CNSX:PVO) (OTCQX:PVTTF) is undervalued, with investors seeing potential for the stock to be valued at up to $500 million, compared to its current market cap of just over $11 million.

Earlier this week, Omthera Pharmaceuticals' (NASDAQ:OMTH) market value nearly doubled in the wake of UK-basedAstraZeneca (NYSE:AZN) agreeing to acquire the company for $12.70 per share, an 88 per cent premium to Omthera's closing price the last trading day before the deal was announced. In addition to the cash offer, Omthera shareholders will also get a conditional $4.70 per share if the company reaches certain milestones, pushing the total value of the deal to up to $443 million.

Both Omthera and Pivotal are in the business of Omega-3 therapies, which are widely known to boost overall cardiac health. Omthera's Epanova, a therapy designed to help regulate lipoprotein abnormalities, still needs regulatory approvals, while Pivotal's Vascazen Omega-3 FDA regulated medical food product, which avoided the lengthy FDA pre-approval process that is required with drugs, is already available with a prescription in all major pharmacies throughout the U.S.

"The Omthera buy is rather interesting as it puts a value on an early-stage Omega 3 company of up to $450 million for a drug that is not yet on the market," says Navroze Alphonse, the portfolio managing partner of Crossover Healthcare Fund, a major shareholder in Pivotal Therapeutics with a 15 per cent holding.

He says that this shows just how undervalued Pivotal is, drawing on some comparisons in the field. Indeed, Amarin(NASDAQ:AMRN), which has its Vascepa Omega 3 drug on the market, is valued at almost $1 billion, while Omthera, which has the yet-to-be approved prescription-grade fish oil Epanova, is valued at nearly $450 million with earn-outs following the AstraZenecaacquisition. Neptune Technologies & Bioressources (NASDAQ:NEPT), which has its Krill oil, which Alphonse concedes is slightly different, is valued at roughly $168 million.

Meanwhile, Pivotal Therapeutics, whose Omega 3 medical food product Vascazen was second to market behindGlaxoSmithKline's Lovaza, is valued at a mere $11.12 million. Currently, the company's sales reps are focused on marketing the product on the eastern seaboard in the U.S., which it says contains the highest prevalence of cardiovascular disease-related illness in the nation.

"Out of all of these, Pivotal is most interesting to me as it has a slightly different approach to Omega 3 therapies in that its medical food product treats a deficiency, which addresses a much larger market," says Alphonse.

"The product is already regulated by the FDA and available on the market as a medical food so it could also easily be combined in theory with statins drugs from a larger pharma company, which one would assume is one of the things Astra wants to do with Omthera, and this could give a lot more value to Pivotal," he adds, attributing the undervaluation of the Canadian company partly to the medical food product category being new in the field of cardiovascular therapies.

"Ultimately, there is no reason why Pivotal over time should not be valued in the $400 to $500 million range due to the strength of its unique formulation and that its medical food product addresses a much bigger market by treating an Omega 3 deficiency rather than a specific area of cardiovascular disease.

"This is what the cardiologists in our network want to see."

The company's product, Vascazen, is an FDA-regulated medical food product developed to lower cardiovascular health risks in Omega-3 deficient cardiac patients, including high triglycerides, or fatty substances in the blood that are associated with coronary disease.

The 90 percent-pure product, which was introduced in the U.S. in November 2011, provides those suffering from heart disease with levels of the most important Omega-3 fatty acids in fish oil - EPA and DHA - that the company says are ideal, and cannot be achieved just through simple changes in diet alone.

Pivotal earlier this month revealed that results from a clinical trial showed that its Vascazen product was highly effective in correcting an Omega-3 deficiency. Indeed, after eight weeks of treatment, the company said a "statistically significant" increase of 121 per cent in the Omega-Score and 112 per cent in the Omega-Index - both diagnostic tests that measure circulating blood levels of Omega-3 in individuals - was seen in the Vascazen-treated subjects. Pivotal also said that the trial showed that secondary goals, such as a 48 per cent triglyceride reduction, exceeded company expectations, and levels of HDL - known as the "good cholesterol" - actually increased.

The main aim of the trial was to show that cardiovascular disease patients are nutritionally deficient in Omega-3 fatty acids, and through treatment with Vascazen, such deficiency can be corrected - resulting in improved patient lipid profiles, and ultimately reducing risk factors of heart disease.

As the goal of the study has been met, the company is kicking into high gear as it looks to advance the commercialization of its product with a full-scale launch in the U.S. Just this week, it reported that first quarter sales jumped to $73,642 from $3,322 a year earlier, leaving it with vast potential for upward growth.

Analyst Juan Noble of Taglich Brothers recently wrote in a research report that he predicts that by 2017, Pivotal's revenue should ramp up to around $61 million, with the company anticipated to be cash flow positive by late this year.

Its stock is currently trading on the CNSX and the OTCQX at 14 cents, with almost 80 million shares issued and outstanding, giving it a market cap of $11.12 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.