Aralez Pharmaceuticals (ARLZ): Adrian Adams CEO Purchased 500,000 Shares Last Week: An Update And Interview
Special Situations, Long/Short Equity, Event driven investments, Biotech
Seeking Alpha Analyst Since 2010
Steven H. Goldman, biotech enthusiast. Steven is a commercial litigation lawyer, retired from active practice in January 2021, and was a founding member of the Toronto law firm of Goldman Hine LLP. He graduated with a B.A., President's Medal recipient (1976, Carleton University, Ottawa, Ontario) and J.D. (1980, Queen's University, Kingston, Ontario). He is also the President and CEO of Comstock Metals Ltd. (TSX.V: CSL.V) a mining exploration company with a gold deposit in Saskatchewan, Canada. Steven is a member of the board of directors and audit committee of Select Sands Corp. (TSX.Venture: SNS.V and OTCQX: SLSDF). He is an advisor to E3 Lithium Limited (TSX. Venture: ETL.V) (OTC: EEMMF), an emerging lithium developer and lithium extraction technology innovator based in Alberta, Canada. He is currently a member of the Law Society of Upper Canada, an Executive member of the Ontario Bar Association, Franchise Law Section as well as a member of the American Bar Association, Franchise Forum (Associate Member). Steven was President & CEO of Speedy AutoService and Minute Muffler from December 2007 to December 31, 2009 (with approximately 160 locations across Canada). He was also a former director of Tribute Pharmaceuticals for approximately 10 years where he served on the audit committee as well as the M&A committee.
Summary
After Aralez's Disappointing Q4 2016 Earnings Call on March 13th, Aralez's share price suffered a substantial setback.
On March 15th, Aralez's CEO A. Adams bought 500,000 shares of ARLZ in the open market for $1.23 million. The author's interview of Adams is included in this article.
Aralez will be announcing a plan to address various issues within the next few weeks.
Zontivity is being re-launched in June, 2017, has substantial potential upside.
Adrian Adams' long-standing business relationship with Deerfield will allow Aralez to acquire additional accretive "mutually agreeable" M&A deals.
Background:
Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ; TSX: ARZ.TO) is a specialty pharmaceutical company headquartered in Mississauga, Ontario, Canada; its US headquarters are located in Princeton, New Jersey; and its Irish headquarters are located in Dublin.
Aralez's March 13th earnings call was disappointing and the share price reflected the news. However, in my view the market has overreacted and while clearly there have been a few setbacks, these can be overcome by this company's management team.
Within a couple of days of the March 13th earnings call, insiders of Aralez went into the open market and bought shares. Aralez's CEO, Adrian Adams, in fact, personally went into the open market on Tuesday March 15th and bought an additional 500,000 common shares at a cost of over $1.2 million. Notice of Adams' 500,000 share purchase was filed on Friday March 17th, and a press release was issued before the market opened on Monday March 20th.
As well, on March 23, Aralez filed a report with the S.E.C. indicating that both Adrian Adams, CEO, and Andrew Koven, President, voluntarily agreed to forego certain bonus payments. A copy of that announcement and report can be found here. I believe that shows commitment by those leaders and reflects an indication that they are serious about turning things around.
I had the opportunity to interview Aralez's CEO on March 20th and have incorporated part of that interview into this article.
Summary
Note: Monetary figures are in US dollars unless otherwise specified.
· Shares outstanding: 65.4 million
· Trading symbols: [ARLZ] (Also ARZ.TO on the TSX)
· Share price at close on March 23, 2017: $2.22
· 52-week share price range: $2.05 to $6.80
· Market cap: $145 million at close of trading on March 23
· Unused line of credit (Deerfield) for mutually acceptable acquisitions: $250 million
· Cash: Approximately $65 million as of December 31, 2016
· Debt: $75 million Convertible Debenture @ 2.5% interest; $200 million temporary acquisition line @ 12.5% interest from Deerfield
· Effective tax rate (approximate): 17%
Before markets opened on Monday March 13, 2017, Aralez provided its 2016 year end and Q4 2016 results as well as its 2017 revenue guidance of $80 million to $100 million in net revenues, and projected adjusted EBITDA of between -$10 million and -$25 million. Both the Q4 2016 results and 2017 guidance were disappointing. Accompanying its earning conference call it also released its March 13, 2017 corporate presentation which can be accessed here and on the company's website under investor presentations. A copy of the March 13, 2017 earning call transcript found here also makes the March 13, 2017 slide presentation available.
At the close of business on March 17th, Adrian Adams,CEO, and other Aralez insiders filed Form-4's with the S.E.C., indicating that they had bought nearly 600,000 Aralez shares on the open market on March 15th.
The news of Adams' purchase of 500,000 ARLZ shares was set out in a company's press release issued Monday, March 20th before the markets opened on March 20th which caused ARLZ share price to jump by nearly 16%. A copy of the press release is found here which stated that the shares were purchased at an average price of $2.46 per share, for an aggregate purchase price of approximately $1,230,000. Following this transaction, Adams owns 3,569,230 shares (including 1,541,562 restricted stock units subject to vesting) of the Company's common stock, of which 1,500,000 were purchased by Adams on the open market and the remainder were granted to Adams under the Company's equity incentive plan. In addition, Adams holds 105,251 share options.
Quoting Adrian Adams, in part, from his March 20th press release,
"The purchase of these shares is a reflection of my confidence in the long-term value of Aralez and also represents my continued belief in the Company's evolving business model, products and growth prospects," said Adrian Adams, Chief Executive Officer of Aralez. "Over the past week, I have listened closely to the concerns voiced by a number of our significant shareholders. Aralez is committed to swiftly addressing these concerns, including the development of a plan to improve our cost structure and balance sheet, maximizing and preserving our cash, and opportunistically evaluating M&A or other opportunities that provide accretion and an enhanced platform for creating value. We have an unwavering commitment to our shareholders and remain focused on building long-term value and intend to communicate our planned next steps and actions within the next few weeks."
The following is a copy of part of my March 20th interview with Adrian Adams.
Questions by Steven Goldman with Answers provided by Adrian Adams, CEO, Aralez Pharmaceuticals
March 20, 2017 @ 3 p.m. EST
"Adrian, it was a pleasure speaking to you last Wednesday morning following Monday morning's earnings call. I know you've been busy fielding questions from many of Aralez' s shareholders. I have a number of questions for you that I plan to publish in an article on Seeking Alpha.
Question: As you see things developing at Aralez, in your opinion, has the market overreacted in selling off the stock to the current low levels?
Adams' Answer: Clearly, we're disappointed by the overall reaction by the market and obviously the impact on stock - but that said, we do think there has been a bit of an overreaction by the market. If one looks at where we are at this point in time, you may have seen that I have acquired half a million shares in the open market, and board members, management team have also been in the market - which reflects my view overall of the company's business.
I've spent a lot of time over the course of the last week listening to investors, some of which I met in person - listening to the concerns that they have, some of the reasons why they reacted in a certain way, and realizing too the concerns in relation to cost structure and balance sheet and preservation of cash etc. From our point of view, it's important to listen, whilst recognizing that we have a plan to develop - confident in that plan moving forward - an overall plan to address the aspects of concerns that shareholders have and anticipate feedback on that in the next number of weeks.
Question: Were there any points in the conference call on Monday morning which you think might have been misunderstood by investors which in turn caused them to act negatively?
Adams' Answer: I think there are occasions in earnings calls and releases where the absence of specific clarity leads investors to draw conclusions with which we don't agree. That is commonly the case and it's the responsibility of management to communicate and be clear. As we articulated on the call, there are a number of moving parts and we tried to build that into our guidance for 2017. We remain confident in our intellectual property portfolio for Vimovo.
We also are confident in our ability to manage the business. Aralez is committed to swiftly addressing shareholder concerns, including the development of a plan to improve our cost structure and balance sheet, maximizing and preserving our cash, and opportunistically evaluating M&A or other opportunities that provide accretion and an enhanced platform for long-term shareholder value.
Question: What would the projected 2017 revenues be for Aralez on a normalized basis, as if Aralez was receiving the gross sales from both Toprol and Zontivity?
Adams' Answer: We provided guidance on total net revenues. We don't break them down into individual product lines. As you well know, what we communicated is $80-$100 million net revenues, taking into account the cost of goods sold for Toprol-XL and Zontivity and their respective transition fees through the respective transition period. Those costs need to be taken out of the overall calculations as well.
I think people are being quite focused on Toprol-XL given the scale of the product and the importance of the product. What I thought might be useful is to give you a perspective from the last full year - 2015 - to give clarity on how to calculate things. Full year product net revenues in 2015 - was around $91 million - then deduct approximately $20 million for the cost of goods (as reported in our 8-K/A filing), and you arrive at approximately $70 million. In order to arrive at our net revenues during the transition period, you then need to deduct transition fees. Please also note our cost of goods sold will be higher reflecting a mark-up on supply to Aralez.
Question: Investors were looking at gross numbers when Aralez acquired Toprol. You had give top line numbers for 2015, and to-date numbers for up to September, 2016. So it looked like you were on a run rate in gross sales in a sort of a $110 million range in 2016 just for Toprol. That would be gross sale run rate for Astra Zeneca. That may have created a misunderstanding or confusion for some investors when you provided 2017 guidance.
Adams' Answer: And to be clear, moving towards the end of 2016, what we shared publicly is the net revenue for the combined Toprol-XL and authorized generic sales for 2014, 2015, and year to date of September 2016 as referenced in AstraZeneca's public disclosures. What I've tried to clarify is that there are certain other deductions that need to be taken into account, such cost of goods sold and transition fees etc, to determine the run rate for Aralez moving forward.
Question: What feedback is your salesforce getting from HCPs (physicians) and cardiologists regarding Yosprala?
Adams's Answer: As part of a new product launch, we always do qualitative and quantitative market research, and on a regular basis. From all the qualitative work we have done to date, the feedback remains very positive. Some of the more recent research that included outreach to 250 healthcare practitioners is encouraging. We look at the awareness of some of the key messages - what comes out pretty clear is the message that the sales force are getting: 1. added benefits of protection; 2. simplicity of combination; and 3. impact of that is improvement.
From our perspective, the feedback has been positive and reflects the fact that the sales force is doing the job in relation to communicating the benefits of the product.
Question: Why do you believe that the Yosprala commercial sales launch has been slower than expected?
Adams's Answer: If one looks at new product launches now, compared to 2, 3 or 4 years ago, new product launches always have ongoing business challenges. We have regularly given updates to how our evolving managed care position has grown over the course of time. Certainly, when we first launched the product, and as we progressed through 2016, we tried hard to remove restrictions in place in relation to prior authorization and blocks that were apparent when we first launched the product. As we have communicated, we've been pleased that when we moved through the early part of this year, we were able to have built up a pretty good position from a commercial perspective. We have a lot of work still to do to further build up our overall managed care position. We are pleased with what we have done commercially. It takes time for that national plans to cascade updates down to the local level. We are focused on building our Medicare Part D coverage. While we have made some progress in managed care, we do believe that has been a key influence in relation to the slow start.
As we mentioned on our call, we currently have commitment in terms of Medicare Part D coverage to be around 39%. As we progress between now and the end of the year, we believe that will steadily increase. We'll update on a quarterly basis.
...
During your earnings call last Monday, you stated that Toprol sales revenues in Q4 2016 were lower than expected and would be lower in 2017 (which was a risk that you made clear when you acquired the drug in October) because of competition and price erosion.
Question: Given that the 9-month transition agreement with Astra Zeneca which should end in or about July, 2017, when do you expect that Aralez will be able to transition Toprol over to Aralez and begin recording sales on a gross basis?
Adams' Answer: You are correct. The current transition agreement ends in July of this year. We have a very good relationship with Astra Zeneca and we'll continue utilizing the transition services for as long as necessary. So, we'll have some ongoing discussions with them as to whether or not the agreement will end in July or whether it will be prolonged further. We'll obviously communicate that at the appropriate time.
Question: My understanding from reading the Symphony weekly prescriptions of Toprol since October, 2016 is that the number of prescriptions of Toprol XL and its authorized generic have remained stable or have been increasing slightly since October 2016. Is that correct?
Adams' Answer: I think you're correct- when one looks at the databases, overall prescription volume does remain stable.
Question: What are Aralez' s forecasted sales (on a gross basis) of Toprol for 2017?
Adams' Answer: We don't break these numbers out and we haven't provided any gross sales. If one looks broadly I think, history from AstraZeneca, one can look at the overall prescription base and give a model on that, but from our perspective, we won't publicly disclose anything related to gross sales. It's all about net product revenues.
Question: Does Aralez anticipate that the net contribution from Toprol-XL sales in 2017 will be sufficient to service the $175 million debt taken on to acquire the drug from Astra Zeneca?
Adams' Answer: Yes we do. As we commented on the call; we reiterate that we believe that from a capital point of view, we have sufficient capital to continue selling Yosprala and obviously to continue the re-launch of Zontivity. We believe we have sufficient capital to run the business and continue through 2017 without needing to raise additional capital.
We will continue to run the business with strong financial discipline, but we do not need to raise additional capital at this time.
...
Question: What are your views on the future of Toprol-XL and its authorized generic in Aralez' s hands?
We remain positive on the prospects of the product. There have been some recent challenges, but on a going forward basis, we still expect the acquisition to be revenue-generating. Those are the key elements forming strategic rationale for the acquisition in the first place, so that still holds true.
Part of this is making sure that we continue to have a smooth transition of Toprol-XL and authorized generic from AZ. It's a good transaction. If one looks at some of the challenges we have, the overall value is still less than last year, but the value is still good.
Question: On September 7, 2016, Aralez announced the acquisition from Merck of the US and Canadian rights to Zontivity with a $25 million upfront payment, some additional milestone payments and an ongoing royalty to be paid as well. You have now announced Aralez plans to re-launch Zontivity in the US in June, 2017.
Zontivity is a cardiac drug that seems to be to be a near-perfect fit with Yosprala, as it is prescribed with aspirin and/or clopidogrel.
Under the terms of the Transition Services Agreement, Merck will continue to distribute Zontivity on behalf of Aralez for up to 12 months while the product rights, packaging and labeling and other responsibilities are transferred to Aralez Pharmaceuticals Trading DAC.
Question: When will the Merck transition agreement relating to Zontivity likely be formally transferred over to Aralez?
Adams' Answer: Our relationship with Merck is very good and constructive. The transition period commenced in September, 2016 and extends for up to one year. We'd like to execute the transfer as soon as possible and we're online to do that. Has to happen within a one-year period.
Question: Can you re-launch Zontivity while the transition agreement with Merck is still in effect?
Adams' Answer: Absolutely.
Question: Zontivity had a successful Phase 3 clinical trial (TRA-2P) with over 26,000 patients, and ended up with FDA approval including patients with PAD (peripheral arterial disease) without a history of stroke or transient ischemic attack (TIA). Zontivity has a composition patent to 2024 and a potential patent extension to 2027. On October 4, 2016, (less than a month after Aralez announced the acquisition of Zontivity), AstraZeneca plc announced its top-line results from its EUCLID clinical Phase 3 study (13,885 patients from 28 nations) failed to meet its preliminary endpoints for the treatment of patients with PAD.
Did AstraZeneca's Brilinta EUCLID clinical trial failure for the treatment of PAD leave Aralez' s Zontivity as the only branded and actively marketed antiplatelet therapy in the US indicated for patients with PAD?
Adams' Answer: That is kind of interesting. The answer is yes.
Obviously when we were closing the transaction with Merck we were aware that if one looks at comparative labels of Zontivity, Brilinta and Effient, Zontivity is the only drug of these with an approved label including patients with PAD. We knew Astra Zeneca had the ongoing clinical trial with Brilinta for the treatment of patients with PAD. A week after we closed the transaction with Merck to acquire Zontivity, Astra Zeneca announced the negative results of its Brilinta trial for the treatment of patients with PAD. From our perspective, that was a positive surprise, so it leaves us in the position indeed where we are the only promoted branded product that includes patients with PAD in the antiplatelet market.
Question: Once you re-launch Zontivity in June, 2017 in the U.S., does Aralez anticipate that the Zontivity re-launch will also improve Yosprala sales?
Adams' Answer: We believe it will. One of the key drivers for our high levels of interest in Zontivity was that it was a near-perfect fit with Yosprala. The target HCP audience is exactly the same; The Cardiologist community. We are excited about the potential of Zontivity and believe that the strong science based detail, could resonate well among cardiologists and could be beneficial for further introducing Yosprala into the conversation. This will lead to discussions with cardiologists and private care physicians for both Zontivity and Yosprala.
Approximately 70% of patients who have MI or strokes usually have aspirin prescribed to them. Often, dual antiplatelet therapy is prescribed due to residual risk. You could foresee situations where potentially both Zontivity and Yosprala products could be prescribed at the same time.
Question: Based upon Aralez' slide presentation which accompanied your earnings call last Monday, you had a slide (page 9) dealing with Zontivity' s market opportunity. The slide indicates that there are 9.8 million patients in the U.S. with PAD. What does Aralez currently forecast the market opportunity for Zontivity, and what do you anticipate peak sales to be?
Adams' Answer: Obviously we have our own internal forecast that are always being updated based on onward market research and environment, but we haven't provided any specific product guidance at this point in time for Zontivity.
Question: Will you at some point this year provide sales guidance for Zontivity?
Adams' Answer: As a matter of course, we don't intend to break down specific product guidance. We will be talking on an ongoing basis if one looks at the overall prevalence of PAD and MI - we will be talking broadly about where it fits in with those particular aspects. But very broad terms - flavor for overall market size and then we'll comment within that.
Question: In my own analysis relating to Zontivity, I have calculated estimated peak sales penetration conservatively at between 2% and 5% of the entire U.S. market (9.8 million U.S. patients) for the treatment of PAD. Is that a reasonable assumption or would you use other assumptions?
Adams' Answer: We are working on analysis which is ongoing as we speak. We don't have a specific analysis right now. We don't want to get too specific apart from saying all the qualitative research that we have done (and also quantitative) has pointed to a product [Zontivity] that has a use in patients with a history of MI and patients with PAD without a history of stroke or TIA. We see this as a nice opportunity.
With the profiling work, we have been doing for Zontivity, developing our key messages for the re-launch, it's ongoing modeling that we have put in place to assess the overall market. But no specifics yet to share.
Question: Zontivity currently sells at pharmacies for just over $10 per pill, or approximately $300 for a 30-pill container. Has Aralez decided to change the selling price of Zontivity by the time you re-launch in June, 2017, and if so, what are those plans?
Adams' Answer: That is one of the considerations that we have to make. There are number of considerations - led to different prices and clearly what is the overall managed current position with the different products. If one looks for Zontivity, it is a priced at a 15% discount to Brilinta and 45% discount to Effient.
If we can develop positioning of Zontivity as a product in treatment of patients with a history of MI or/ patients with PAD without a history of stroke or TIA, then clearly we can offer that. We see that any product, like Zontivity, with a use in multiple areas with a price differential - that will protect the product.
Question: In creating my own model for valuing Zontivity, I assumed a compliance rate of between 50% to 70%. Are you able to tell me what the average compliance rate is or is expected to be for those patients being prescribed Zontivity?
Adams' Answer: That range based on our research seems reasonable. We do think that if one looks at the level aspects of PAD and MI, it may well be that compliance rates are at the higher end of the range.
Question: Based upon the current selling price for Zontivity (after deducting 30% gross to net, and taking into account 50% to 70% compliance rates), my analysis is that Zontivity could generate sales net revenues to ARLZ in a range from $1,277 to $1,788 per annum per patient. Is this a reasonable assumption?
Adams's Answer: That sounds reasonable based on the numbers that we have developed.
Question: Since acquiring Zontivity last September, 2016 (even though still being marketed by Merck), what feedback are you getting from your HCPs and Cardiologists regarding Zontivity (including its indication in patients with PAD)?
Adams' Answer: Merck stopped promoting Zontivity as of September, 2016. Very recently, we started distributing samples for Zontivity. Obviously, we have an opportunity to re-position the product. Currently, the overall level of awareness of Zontivity in general practitioners and cardiologists is relatively low. If one looks at the cardiologist community, we are spending time with key opinion leaders. Merck had mentioned that they had not spent enough time on developing those relationships.
There seems to be a high level of interest in Zontivity by cardiologists. More specifically there appears to be a high level of interest in Zontivity in the treatment in patients with a history of MI and patients with PAD without a history of stroke or TIA. We wanted to have a timeline until June, 2017 to prepare for the re-launch of Zontivity. We have done a lot of positioning work to help us crystallize Zontivity's value and to drive the matter forward. We see Zontivity as a potential diamond in the rough.
If anything, market events and our research make us feel even better about Zontivity than before we acquired the drug.
Question: Deerfield is by far Aralez' s biggest creditor and largest stakeholder in Aralez, being owed $200 million on its acquisition line, $75 million in a convertible, as well as providing Aralez with a $250 million acquisition line to be used for "mutually acceptable" acquisitions. How supportive is Deerfield at this time?
Adams's Answer: This is a good question. Since we formed Aralez in the early part of last year, Deerfield has been joined to us at the hip, particularly in the areas of business development, product acquisition, and company acquisition. They have been very supportive in that journey. Based on our recent interactions with them, we have received continued assurance from them. We believe that we have their continued support and we're very pleased with that.
Deerfield has worked with me in all 4 of my previous public companies and as a result they have a very strong interest here. They know what we can do. They're a partner that is obviously very focused on short, medium, and long term goals and returns.
Question: Given current market challenges, how confident are you that Deerfield's $250 million acquisition line is still available to you, and are you actively looking for potential acquisitions with Deerfield's blessing?
Adams' Answer: Obviously, we can't speak specifically on their behalf, but they've always made it clear and have made continuous assurances to us that they are and will be supportive of the right deal. There are market aspects which points to the fact that you always have to be nimble, opportunistic, flexible as to what makes the right deal. We believe that they would be supportive of the right deal. I think with any deal that we do, we would have discussions with them and they would do all their own research. We have no reason to believe that they wouldn't be supportive of anything else if it's the right deal.
Question: Given the guidance figures you gave last Monday morning, how likely is it that Aralez is going to have to raise additional funds before the end of 2017?
Adams' Answer: We have communicated and still communicate the fact that we believe we have sufficient capital to sell Yosprala, to continue all promotional aspects behind our products, to re-launch Zontivity, and broadly speaking, we have enough capital to run the business through 2017, in addition to making interest payments. We will have a strong eye on financial discipline within the organization. We continue to assess our capital structure as we seek to maximize our financial flexibility.
Question: You discussed your continued efforts to assess strategic business and development and M&A opportunities that generate near term revenues, and potentially to expand into new therapeutic platforms to drive organic growth. Are you seeing any reasonable potential M&A opportunities?
Adams' Answer: As you well know, I think 2016 was probably one of the most tumultuous year's for specialty Pharma. We think there is a broader landscape of opportunities that remains pretty robust. From our perspective, part of our operations involves the ability to assess M&A opportunities. We are continuing to assess deals as we speak.
As you may have heard me reference before, you have to kiss an awful lot of frogs before you get a prince - that's the nature of business development. Have good discipline but always look at what's in the field, regardless of size.
Question: How likely will we see one or more acquisitions before the end of 2017?
Adams' Answer: I think we'll certainly - would like to exit 2017 having completed at least one deal. There are absolutely a number of different influences for that happening, some of which are within our control and some of which are not. From that point of view, we would be delighted if we executed 2017 well on the commercial, financial, and business development and licensing perspectives.
But it has to be the right deal - for both our business, and in resonating with shareholders.
Question: What other therapeutic areas are you considering for future M&A?
Adrian Adams: We are certainly continuing to look for M & A opportunities. We would like to continue building our CV and pain areas but we also have a strong interest in adding one, if not two, new specialty areas over the next 1-2 years. There are a number of areas that we are interested in. We have an opportunistic approach and are prepared to be nimble.
Question: With your past history of successfully building pharmaceuticals companies, are there any opportunities which you see now which may be invisible to investors which could turn Aralez around quickly?
Adams' Answer: To me there is a broad landscape of opportunities that we can look at. For example, if one looks at the result of the turmoil within the industry in 2016, there are a number of private companies looking to go public who may be wondering whether they want the risk associated with going public, and are considering whether it's best to do a deal with a Pharmaceutical company that is already a public company. There are opportunities with Pharma companies whose assets were not launched well or they are on the verge of commercialization. I don't think there are many specialty pharma companies not impacted by the stock market 52-week numbers. So everyone is looking for what opportunities are best.
Great opportunities and rewards often come out of situations of risk and uncertainty. As well, there are certain deals or transactions which might be less attractive to some large pharmaceutical companies that could be very attractive to us and move our needle.
Question: What do you think Aralez will look like next year or next couple of years?
Adams' Answer: One of the things I mention is that we intend to build a platform to allow the company to build shareholder value in the short, medium and long term. Being a good leader of any organization requires many different characteristics. One is to make sure that you remain focused on delivering and executing, and to remain aligned with shareholders.
We'll always have challenges that come up from time to time. Our job is to make sure we remain focused on the most important thing: creating shareholder value.
Question: Thank you Adrian for taking the time to answer my questions.
END OF INTERVIEW
Aralez's Plan to be Communicated in a Few Weeks
As Adrian Adams stated in his March 20th press release, in response to listening to shareholder concerns, "Aralez is committed to swiftly addressing these concerns, including the development of a plan to improve our cost structure and balance sheet, maximizing and preserving our cash, and opportunistically evaluating M&A or other opportunities that provide accretion and an enhanced platform for creating value. We have an unwavering commitment to our shareholders and remain focused on building long-term value and intend to communicate our planned next steps and actions within the next few weeks."
We look forward to hearing the details of hearing Adam's plans for the next steps. Given his track record, I have no doubt he will likely develop a plan that will have the backing of key stakeholders and will build shareholder value.
While Yosprala's launch has been slower than expected, it appears that Zontivity may turn out to be a surprisingly valuable asset. I wrote about the potential Zontivity opportunity in my November 14, 2016 article about Aralez found here.
In my November 14, 2016 analysis, I used many of the same assumptions that I asked Adams about during my March 20th, 2017 interview above. Actually, Adams confirms that a lot of my assumptions used in my November 14th article are correct.
What I wrote, in part, in my November 14, 2016 article about Aralez's potential opportunity in Zontivity was:
"...Currently, ZontivityTM sells for just over $10 per pill, or just over $300 for a 30 pill container. While the final selling price of Zontivity by Aralez has not been determined, I assume it will be no less than $10 per day on a WAC basis before taking into account a gross to net adjustment of an estimated 30%. Assuming a $10 per day sale price, and a 50% to 70% compliance rate, that would generate sales revenues to Aralez ranging from $1,277 to $1,788 per annum per patient. Based upon 425,000 US patients with PAD (representing 5% market penetration of 8.5 million US PAD patients) that would represent a potential peak sales in the US of between $542 million to $760 million.
While Aralez has simply guided to re-launching in 2017, I expect that it will do so by mid-2017, which will give it approximately 10 months from the date of acquisition to do the necessary market and pricing research, prepare the necessary sales materials and train its sales force, to execute a superb re-launch of ZontivityTM. I also anticipate that it will be able to effect the transition of Zontivity to its own team by that time as well.
So far the market has not understood the value of the Zontivity opportunity. When I raised this point with Adrian Adams on November 10, he seemed almost pleased that the market was underestimating what Aralez just bought.
Again, Adams likes to under-promise and over-deliver.
In fact, none of the current analysts covering Aralez seem to attribute much value to Zontivity apart from the current minor trajectory of sales started by Merck (on track for an estimated $5 million in sales in 2016), which never promoted PAD.
The only comment made by Adrian Adams during the 2016 earnings call which even hinted at Zontivity's potential was in answer given to a question posed by Bloom Burton analyst Dr. David Martin about Adams's thoughts on Zontivity's peak sales potential (still available on Aralez's website), Adams first tells David Martin that Aralez would share such guidance early next year but, "Suffice to say from that asset Zontivity that we acquired for $25 million, we believe even in the event that one was able to grow it to $50, $60, $70 or a $100 million, it will be a very nice proposition ..."
As my writing on Aralez to date has shown, one can't always predict the future or be overly optimistic. Based upon only 2% market penetration and using the low end of net annual revenues of $1,277 per patients annual revenues from Zontivity could be in excess of $200 million per annum. Using a more optimistic 5% market penetration, revenues are calculated to range from $542 million to $760 million in annual sales based upon the assumptions I have made above. We'll have a better idea of Zontivity's potential within a year. However, I just wanted to illustrate that Zontivity could have very significant potential for Aralez and there is certainly promise of Zontivity turning into a reasonably valuable asset. Time will tell of course.
I assume that Adams will be careful before providing Aralez's guidance on Zontivity's potential sales until after the re-launch has been in effect for a few quarters and the sales trend and physician acceptance has been established.
Analysts covering ARLZ have lowered their target share price following the March 13th earnings call into the $5.00 to $6.00 range. However, in light of the current $2.23 share price, that would still provide a nice return for new ARLZ shareholders. For long term shareholders who may have acquired ARLZ shares at higher prices, we are looking forward to regaining share price values. There are also both Call and Put options (both short term and LEAPS) available for those wishing to leverage or hedge their investments in ARLZ.
Risks
ARLZ remains a speculative investment. There are various risks to consider, including but not limited to, risks relating to the Yosprala and Zontivity launches, patent challenges and litigation, competition, pricing pressures, potential balance sheet issues, liquidity and dilution risks, F/X issues relating to Canadian and other foreign currency generated sales, and other general market investment risks. For further details as to the Company's potential risks, please refer to the 10-K filings made by ARLZ with the S.E.C.
Disclosure: I am/we are long ARLZ.
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.
Additional disclosure: I was a former director of Tribute Pharmaceuticals until it merged with Pozen on February 5, 2016 to form Aralez.
Analyst's Disclosure: I am/we are long ARLZ.
I was a former director of Tribute Pharmaceuticals until February 5, 2016 when it merged with Pozen to form Aralez.
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