Note: Bondo119's write up of FURX from last June does a good job covering the set up of the spin-off and the currently marketed drugs.
Furiex offers downside protection and exposure to a plentiful basket of options with a number of binary outcomes over the next 2 years. Most value investors would look at the R&D burn of the company, and run the other way as typical biotech R&D accrues the upside to management and the downside to shareholders. It is quite true the $9 of cash per share on the balance sheet will be spent, and that Furiex is not a typical net-net. However, the present value of royalties on currently marketed drugs in already approved geographies provide similar downside protection. Investors are paying almost nothing for potentially explosive upside.
Furiex is a pharmaceutical development company spun off from Pharmaceutical Product Development (PPDI) in May 2010 and exhibited all the signals a careful follower of such transactions desires:
A 12 to 1 spin ratio (FURX representing a tiny slice of the parent)
A parent shareholder base that pressured management to spin off its drug development operations as they only wanted exposure to the contract research business
A large stock incentive package to new management of FURX including 839,642 options granted immediately following the spin with a strike price of $9.11; the CEO/Founder/COB owns 634,000 shares outright excluding options.
Currently marketed drugs in current geographies NESINA (alogliptin) was launched in Japan for the treatment of type 2 diabetes in June of 2010. The drug is marketed, manufactured and sold by Takeda while Furiex earns a 3.5% to 8% royalty. Patent protection runs through 2027. Based on an average of sales expectations in Japan from Barclays, Deutsche Bank, Citi, and Nomura, NESINA in Japan is worth $9.27 per share to Furiex. That assumes a 10% discount rate and the lowest royalty rate possible of 3.5%.
Priligy (dapoxetine) launched over the past couple of years across various countries in Europe, Asia Pacific and Latin America for treatment of premature ejaculation. The drug is marketed, manufactured and sold by Johnson & Johnson (JNJ, or more specifically, its Janssen-Cilag subsidiary) while Furiex earns a 10% to 20% royalty. Combined patent protection on the molecule or method of use expires in 2022. Based on an average of sales expectations in approved countries from Goldman and Piper Jaffray, Priligy's active markets are worth $4.96 per share to Furiex. That assumes a 10% discount rate and the lowest royalty rate possible of 10%.
Reasonable people can debate the estimates and discount rates, but on the preceding math, I have calculated $14.23 of current net present value.
Upside optionality from NESINA and Priligy Takeda had submitted an NDA for NESINA in the US, which unfortunately coincided with controversy surrounding another diabetes drug, Avandia, and its potential cardiovascular safety issues. Rather than approve NESINA in the US, the FDA required an additional cardiovascular safety study and will examine the interim data that could lead to quicker approval. Furiex hopes to have approval in 2012. Diabetes drugs are potential blockbusters, and, for comparison, consider Merck's Januvia, with $2.25bn in annual sales. Furiex bears none of the costs related to NESINA and stands to benefit from 7-12% royalties in the US, 3.5-8% royalties in Europe and $7.62 per share of incremental NESINA-related milestones. Additionally, Furiex could start to earn higher than the minimum royalty rate in Japan. I do not calculate the upside of positive catalysts for NESINA to avoid false precision; however I believe them to be large.
Priligy is a tougher nut to crack. The FDA gave a non-approvable letter to JNJ in 2005 and to Furiex's knowledge, the FDA did not point to any specific problems. However, it coincided with concerns of "suicidal ideation" surrounding all drugs SSRI-based, which is Priligy's mechanism. JNJ is running multiple large-scale clinical trials and expects to return to the FDA within the next year or two. The probability of US approval is unknowable. What is clear is the potential of a premature ejaculation drug in the Viagra/Cialis/Levitra-loving US. Like NESINA, Furiex bears none of the costs related to Priligy and stands to benefit from 10%-20% royalties in the US and $6.35 per share of incremental Priligy related milestones. Additionally, Fuirex could start to earn higher than the minimum royalty rate in currently marketed countries. Again, I do not calculate the upside, but it could be large and long-lasting.
Upside optionality from the pipeline Earlier in the write-up, I mentioned that Furiex has $9 of net cash per share on its balance sheet. Since everything I have described until now requires absolutely no investment, and currently marketed drugs in currently approved geographies provide $14.23 per share of value, a reasonable investor could make the case that the company should dividend all the cash or, if one ascribes any positive probability to approvals of Priligy or Nesina, buy back as much stock as possible. I do not think this suggestion regarding capital allocation is a bad idea at all; however, it is not management's plan. In fact, the company was spun with such a large cash balance to fully fund the exploration of 3 molecules, 2 of which have collaboration agreements with Johnson & Johnson. While the probability of success in spending the cash on development is unknowable, the agreements with JNJ provide some parameters for the economics of success. Further, the company needs no additional cash to meet its endpoints. Shareholders are rolling the dice on the following molecules, but neither are they paying for the options at current prices.
JNJ development option 1: Mu Delta. Mu Delta is a compound for the treatment of diarrhea-predominant irritable bowel syndrome (IBS-d). Furiex is tasked with running a Phase II trial, after which JNJ has a call option. If exercised, Furiex could earn up to $16.10 per share in regulatory and sales milestones. If the drug is ultimately approved, Furiex is also entitled to a mid-single digit to low-double digit royalty. The trials will be completed this year (2011) and the patents run through 2027.
JNJ development option 2: Fluoroquinolone. Fluoroquinolone is a compound for the treatment of MRSA-related problems including community-acquired bacterial pneumonia (CABP) and acute bacterial skin and skin structure infections (ABSSSI). Like Mu Delta, Furiex is tasked with running a Phase II trial, after which JNJ has a call option. If exercised, Furiex could earn up to $16.10 per share in regulatory and sales milestones. If the drug is ultimately approved, Furiex is also entitled to a mid-single digit to low-double digit royalty. The trials will be completed this year (2011) and the patents run through 2027. In conjunction with its September earnings release, Furiex released positive data from its Phase II ABSSSI trial.
Novel Statin PPD 10558. Furiex licensed PPD 10558 from Ranbaxy. Phase I is complete and Phase II is being designed, although management has indicated the project could be aborted if they cannot come up with a feasible trial. Consequently, it is Furiex's lowest priority. Approximately $30 million has been spent on this particular compound to date (not by Furiex), and if Furiex moves forward, they would not do it without a Phase III partner.
In summary, Furiex is a downside-protected collection of options with medium-term catalysts. Investors can purchase these options at little cost based upon expected royalties from currently marketed drugs in currently approved geographies.
NESINA approval in the US
Priligy approval in the US
JNJ exercises Mu Delta option
JNJ exercises Fluoroquinolone option
Increases in sales and royalty rates for NESINA and Priligy in Japan and Europe respectively