Titan Pharmaceuticals: How Did It Get Here and Where Is It Going?
Titan Pharmaceuticals (Symbol: TTNP.OB) is an Over-The-Counter security with a market capitalization of about $118 million and is currently seeking to be relisted on the American Stock Exchange. The stock has 59.25 million shares outstanding, a 3 month average daily volume of 129,776 shares, and a 52 week price range between $0.87 and $2.00 (reached at the end of day yesterday). As of December 31, 2010 the company operated with 8 full-time and 3 part-time employees.
Titan has two main prospects; a royalty agreement with Novartis (Symbol: NVS) for the antipsychotic drug Fanapt, used in the treatment of schizophrenia, and a novel, proprietary, drug administration technology currently in its second Phase III study called Probuphine.
Titan’s current and potential income portfolio is diversified enough to establish sustainability for this company to grow organically. Titan established a new 52 week high yesterday, trading on volume that exceeded 150% of its 3 month average, which suggests that the word is getting around about Titan’s potential. The significance of yesterday's stock price, as previously noted, is that the $2.00 end of day close is the last piece of the puzzle needed to be relisted on the American Stock Exchange (as long as the stock price can tread water above this $2 threshold for a prolonged period of time). In addition, 13% of the common shares outstanding are currently owned by institutional investors, an amount that will most likely increase with AMEX compliance. Titan’s stock price has increased exactly 10,000% since January 2009, however this is hardly the spot for investors to cash out and take profits. Based on the discounted outlook of Fanapt sales and the fact that Titan has yet to announce the results of their second Phase III Trial for Probuphine, Titan’s stock price may still have a considerable amount of leg left for this run.
GlaxoSmithKline, Celgene, Novartis, Sanofi-Aventis, Bristol-Myers Squibb, Merck, and Johnson and Johnson, to name a few large pharmaceutical companies that will be facing expiring patent protection for numerous drugs and applications. Each of these large pharmaceutical companies currently has anywhere between $1 to $19 billion worth of cash on their balances sheets sitting idle, or is it? Large amounts of liquid financial instruments enhance the short term prospects of a company to take advantage of favorable economic events and conditions. Due to the nature of the pharmaceutical industry, and the limited patent protection granted to proprietary drugs before they go generic, large pharmaceutical companies no longer rely heavily on internal development of drugs to guide their future business. What entices me the most about Titan is how well positioned it is for a hostile takeover, Titan has a small float, only 8 full time employees, a rather sound but small balance sheet, and an appealing amount of historical net operating losses on their books. I believe sometime between the announcement of the second Phase III Results and the discussions with the FDA about commercialization, will catapult the stock price as the merger and acquisition rumor mill takes over.
Titan’s story is a rather remarkable one. The company was on the verge of bankruptcy only a couple of years ago. During March 2009, when the Dow bottomed out at around $6,500, capital was taken out of the riskiest parts of the market, especially the biotech industry. Many of today’s prominent feel good stories had traded for pennies on the dollar during December of 2008 to April 2009. For example, during this 5 month period, Vanda Pharmaceuticals (Symbol: VNDA, traded around $0.50 during December 2008 yet reached approximately $16 during August of 2009), Jazz Pharmaceuticals (Symbol: JAZZ, traded around $0.55 during April 2009 and reached approximately $34 in April 2011), Human Genome Sciences (Symbol: HGSI, traded around $0.50 during March 2009 and reached approximately $33 in March 2010), Dendreon Corporation (Symbol: DNDN, traded around $2.60 during March 2009 and reached approximately $44 in May 2010), and Titan (which traded around a mere $0.02 in January 2009 reached approximately $2.40 in November 2009). These companies all had their drug pipelines significantly devalued, and in some respects totally disregarded during the subprime credit crisis.
Titan’s management team is not only very committed, but firmly believes in the prospects of its’ products; Marc Rubin who serves as the Executive Chairman, and Sunil Bhonsle, who serves as the President, returned to their working positions within the company following the December 2008 cost reduction plan to trim employee costs. As a testament to management’s dedication to the company, the 2009 compensation packages for both Rubin and Bhonsle were $1.2 million and $1 million respectively, of which more than 50% were based on stock awarded to them in their agreed upon severance packages. During 2010, however, Rubin did not receive a base salary, instead he was awarded $152,982 worth of stock, while Bhonsle received a base salary of $277,473 with no options or stock awarded to him. Although upper management possess a rather large amount of stock options, it is important to note that the majority of these options that expire within the next 3 ½ years, currently have exercise prices that exceed yesterday's 52 week high, with some priced in the double digits.
Titan currently has set its sights on being relisted on the American Stock Exchange (AMEX), and has filed the necessary paperwork to do so. Titan has satisfied the majority of the requirements to be relisted, namely: a market capitalization of $50 million, a public float valued at a minimum of $15 million, and distribution requirements of the shares owned by the public. The only obstacle that Titan faces towards being relisted is the $2 minimum stock price, however, with the results of the second phase III trial for Probuphine set to be announced towards the end of this second quarter, this requirement should be satisfied.
Titan’s revenues during the past 5 years have been approximately $32,000 (all licensing revenue in 2006), $24,000 (all licensing revenue in 2007), $73,000 (all licensing revenue in 2008), $79,000 (all licensing revenue in 2009), and $10,093,000 (consisting of grant revenue of $7,557,000, royalty revenue of $2,512,000, and licensing revenue of $24,000 in 2010). Although the company continues to operate with a net loss per share, it has trimmed that margin from a $0.42 loss per share in 2006 to a $0.09 operating loss in 2010. Titan currently has cumulative federal net operating losses of $226.4 million (state amount is $138.8 million) and tax credit carry forward of $7 million (state amount is $6.5 million), which have the potential to offset future positive net income. Titan also has a current ratio of .87 and various financing means to ensure sustainability for the next 12 months. One of the financing options entered into with Deerfield Management, provided Titan with a $20 million loan that Titan will repay with an interest rate of 8.5%. The significance of this transaction is that part of the $20 million loan includes a royalty agreement with Deerfield, for which Deerfield will receive 6 year warrants to purchase up to 6 million shares of common stock exercisable at $1.57. Furthermore, Titan has agreed to forfeit 30% of their royalty stream that they will receive from Novartis on Fanapt, in exchange for Deerfield providing a one-time payment of $3 million to Titan, which is included as part of the $20 million loan. While these terms seem extremely beneficial to Deerfield, Titan does have a repurchase agreement to regain the 30% royalty rights that they authorized to Deerfield in exchange for a $40 million payment. I believe that given the resources available to Novartis with its marketing and manufacturing capacity, Titan will come to regret this agreement, and eventually will most likely pick up the repurchase agreement towards the tail end of Fanapt’s exclusive patent protection window, as Fanapt royalties increase.
Fanapt is a drug co-developed by Vanda Pharmaceuticals and Novartis. It received approval from the Food and Drug Administration (FDA) on May 6, 2009, to help treat individuals diagnosed with schizophrenia. Titan had originally licensed Iloperidone (Fanapt’s initial name during development) from Sanolfi-Aventis in 1997. When it recognized that the various developmental trials would incur costs that were too high over too long a time period. Titan thus agreed to sublicense it to Vanda Pharmaceuticals in exchange for the rights to a portion of potential net sales that would result from successful commercialization. The terms of the sublicense entitles Titan to an 8% royalty of annual worldwide sales up to $200 million, and an additional 2% on sales exceeding $200 million. To help with the commercialization of Fanapt, Novartis amended its sublicense agreement with Vanda and acquired rights to market and distribute Fanapt in Canada and the United States in exchange for an upfront cash payment of $200 million and the potential to receive an additional $265 million based on sales of the drug, Vanda currently holds rest of world (ROW) rights to market and distribute Fanapt in countries not covered by the amended sublicense agreement. In addition, Novartis agreed to further develop Fanapt in clinical trials using an injectible depot formulation. Fanapt is currently only available in Canada and the United States, however whatever happens with ROW rights and the injectable depot formulation will only enhance the revenue stream to Titan.
Based on these future milestones, if we revisit the royalty stream that Titan forfeited to Deerfield, the decision by Titan management raises some eyebrows. Under Titan’s royalty agreement with Deerfield, Titan will provide Deerfield with 30% of the 8% net aggregate royalty stream on Fanapt sales until December 31, 2019. Using the 2010 royalty amount that Titan received during 2010 as a basis ($2.5 million on sales of $31.4 million), and factoring in 0% growth during the exclusive period of patent protection for Fanapt until November 2016, the present value of the royalty stream that Deerfield will receive can be estimated to be $4.1 million (without incorporating a discounted cash flow model). This royalty stream is extremely conservative since it does not incorporate any script growth by doctors, and essentially flat lines the revenue recognized for the next 5 plus years, and furthermore, ignores any royalty income generated from November 2016 to December 31, 2019.
According to an October 3, 2010 article published in The New York Times entitled Antipsychotic Drugs – Side Effects May Include Lawsuits, these drugs produced the greatest amount of revenues ($14.6 billion in 2009) as compared to any other class of pharmaceuticals in America, “Today, more than a half-million youths take antipsychotic drugs, and fully one-quarter of nursing-home residents have used them [antipsychotics].” Therefore, partnering Fanapt with a major pharmaceutical company such as Novartis, which has a market capitalization of approximately $120 billion, can benefit from large scale marketing, production, and sales force that can help Fanapt penetrate the antipsychotic market. If for some reason the resources that Novartis brings to the table do not produce some sort of significant market penetration, then it is rather conservative to assume year over year growth of 10% until patent protection expires (November 2016), which would bring the value of the royalty stream that would be received by Deerfield at $5,840,000. However, the amount of cumulative sales for Fanapt required over the next five and a half years for it to be worth Titan to pay the $40 million repurchase agreement fee would need to exceed $1.7 billion ($1.7 billion*8%*30%=$40 million). This simple assessment demonstrates that Titan is discounting future sales of Fanapt. However, if this actually were the case and we continue to assume 0% growth until November 2016, Novartis would generate revenues of only $173 million (before expenses), and would be taking quite a loss for shelling out to Vanda $200 million for the sublicense agreement back in October 2009.
Now Propuphine is quite another story. Probuphine is Titan’s main attempt to study the delivery of a proven drug called buprenorphine, in Titan’s proprietary intravenous administration method called ProNeura, which was acquired from the Massachusetts Institute of Technology (MIT) in October of 1995. ProNeura is currently in a second Phase III Trial (modeled with the same guidelines after the first Phase III Trial) that is seeking to support previous findings, which will conclude at some point in the late 2nd quarter of 2011. This second Phase III Trial, was not only fully enrolled 3 months ahead of schedule, but also caught the eye of the National Institutes of Health (NIH), which provided Titan with a federal grant of $7.6 million. This will end up covering approximately half of the second Phase III costs. Of particular interest to the NIH, must have been the high percentage of patient re-enrollment into the additional trials which studied the prolonged effects of the treatment. At the heart of the trial is not just the effectiveness of buprenorphine, an already FDA approved detoxification agent that’s marketed towards opiod dependent individuals, but rather the way the drug is administered in an alternative long-term replacement therapy.
The study was designed to cater to a population that suffered from an addiction so severe that more times than not, the outcome is relapse. Conventional treatment methods are limited in terms of patient reliance and patient compliance throughout a long-term program. Typical treatments call for the patient to administer a pill or inject the formulation into their blood stream, without physician supervision, to help the patient counteract their dependency, just as a nicotine patch administers a level of nicotine to the bloodstream of a cigarette smoker trying to quit. However, a nicotine patch is an external delivery method which requires the cooperation of the individual participant to remember to change his or her patch.
Titan has described the ProNeura system in their 2010 annual report as follows:
Our continuous drug delivery system consists of a small, solid rod made from a mixture of ethylene-vinyl acetate (“EVA”) and a drug substance. The resulting procedure is a solid matrix that is placed subcutaneously, normally in the upper arm in a simple office procedure, and is removed in a similar manner at the end of the treatment period. The drug substance is released slowly, at continuous levels, through the process of diffusion.
The ProNeura system is unique in that it provides a continuous and level delivery dosage with no required action from the target individual (oral forms of buprenorphine that have a delayed release already exist in tablet form, but lack the ability to monitor whether the oral dosage has been consumed or not). Although similar to a saline intravenous (IV) bag that delivers a continuous and even supply of saline, the ProNeura system requires no external components.
Titan recognizes other forms of delivery methods in its annual report that could compete against the ProNeura system, “intramuscular injections, buccal [cheek] delivery and intranasally delivered.” One interesting competitor Alkermes, Inc. last year received FDA approval for an injectible dose of naltrexone, a drug similar to buprenorphine. Another competing product form of buprenorphine is called Suboxone , which is manufactured and sold by the pharmaceutical giant Reckitt Benckiser. According to the 2010 Reckitt Benckiser annual report, sales of Suboxone grew 24% to £737 million, roughly $1.2 billion using the spot rate on 12/31/2010. Suboxone is a tablet that is administered orally, and per the relapse rates for orally administered buprenorphine, doctors that prescribe Suboxone may start to prescribe the ProNeura system instead.
ProNeura appears to have a considerable amount of potential, and the probability that this technology is approved by the FDA remains likely. The only main issues I see facing the approval of the ProNeura system (assuming the second Phase III Trial supports the results of the first Phase III Trial) are a patent infringement lawsuit that comes out of left field at some point down the road, concerns over infection at the incision site during the implant procedure, the long-term effects of the ethylene-vinyl acetate (NYSE:EVA) on the body, and/or the FDA requiring additional testing.
If approved, there are numerous other drug substances that the ProNeura system may be applied to. Although the opioid dependency market is not extremely large, other markets such as antipsychotics, share similar difficulties regarding patient compliance and patient reliance and are much more lucrative, such as the previously noted antipsychotic market.
Disclosure: I am long both TTNP.OB and VNDA. In addition, Titan is neither an audit or tax client of my firm.