June 16, 2010 - 12:14pm EST by
2010 2011
Price: 9.05 EPS $0.00 $0.00
Shares Out. (in M): 10 P/E 0.0x 0.0x
Market Cap (in $M): 90 P/FCF 0.0x 0.0x
Net Debt (in $M): -100 EBIT 0 0
TEV ($): -10 TEV/EBIT 0.0x 0.0x

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  • Spin-Off
  • Pharmaceuticals
  • Discount to NAV
  • Discount to Liquidation Value
  • Royalties


Furiex Pharmaceuticals(FURX) is a recent spin-off from PPDI.  Although FURX will likely burn cash for at least the next couple of years, they have royalty rights on two drugs that have recently hit the market; these royalty rights could be worth $40mm+ annually, compared to FURX's current cap of about $90mm and it's current EV of negative $10mm. 

PPDI decided to spin-off FURX because of the fact that it would be burning cash(and diluting PPDI's earnings).  In fact, the spin is seen as a double bonus for PPDI, because not only do they get rid of FURX's losses, but they have also entered into a contract with FURX where FURX will likely spend about $40mm/yr for PPDI's services.  So it's going from a dilutive subsidiary, to an accretive customer.  This seems to be at the request of some of PPDI's larger shareholders; indicating that they do not have an interest in holding onto FURX.

As for the dynamics of the spin, they were very favorable.  First, the ratio was 12:1.  Second, PPDI's market cap is $3.15bn currently, compared to a sub-$100mm market cap for FURX.  Accordingly, an investor who owned PPDI pre-spin has an inconsequential amount of FURX: if you owned $100 of PPDI pre-spin you now have about $2.70 in FURX and $97.30 of PPDI.  Third, as indicated above, it seems that PPDI's shareholder base doesn't have much interest in holding onto FURX.

FURX has two important drugs that it owns royalty rights to.  The first is Priligy, which is being marketed by a subsidiary of Johnson & Johnson.  Priligy is used to treat premature ejaculation in men; the drug has not been approved in the U.S., but has been approved in several European countries.  FURX can receive up to $50mm in sales-based milestones from Priligy(the agreements are redacted so I don't know what level of sales triggers the milestones), but more importantly, FURX is entitled to royalties in the low teens to the low twenties on sales of Priligy(again the exact amounts are redacted in the agreements, but the royalty rate increases as sales increase.) 

Priligy sales are just getting underway, so there isn't any totally reliable figure to give as to how much it will sell.  I'll note that Goldman is modeling the following non-US sales of Priligy into its model for JNJ:

2009A: 39mm
2010E: 86mm
2011E: 129mm
2012E: 155mm
2013E: 183mm
2014E: 205mm
2015E: 221mm

Depending on the specific royalty rate, it seems like in a couple years Priligy could be producing a $20mm+/yr royalty stream to FURX and that number could grow to $30mm+. 

The second drug is alogliptin, which has just received regulatory and pricing approval in Japan and is being marketed by Takeda under the trade name NESINA.  FURX is entitled to a $7.5mm milestone payment from Takeda in connection with the final pricing approval(which just happened recently and as a result the $7.5mm isn't reflected on the pro-forma balance sheet).  Alogliptin is used to treat Type 2 diabetes. 

On this drug, FURX is entitled to receive up to $33mm in sales-based milestones(again the specifics are redacted), and will receive royalties in the mid single digits to the low teens(specifics redacted).  Goldman is modeling the following for worldwide NESINA sales:

2011E: 16.5mm
2012E: 54mm
2013E: 121mm
2014E: 222mm
2015E: 352mm
2016E: 401mm
2017E: 453mm

So the ramp here seems to be longer, but again, it seems like NESINA can potentially offer royalties to FURX of $15mm-$20mm+/yr.

However, FURX doesn't plan on milking these royalties(at least not right now).  Specifically, they have three drugs that they are developing, and estimate they will incur $80mm-$100mm in expenses related to these products over the next 2-3 years.  I won't get into these developmental drugs, other than to point you to the most recent registration statement which contains more information about each. 

The end result is that FURX is going to be burning cash over the next few years, as they spend on developing the drugs in their pipeline and while Priligy and NESINA are still ramping up.  But, the losses will be damped by the royalties and milestones that will come in, and even if you adjust for future cash burn you are buying it for a pretty modest adjusted EV in comparison to the potential royalty streams that they will be getting in a few years. 

There have been a few other comparable spin-offs in the last couple years: MYRX, CPEX, and FACT.  FACT has been bought out, CPEX has been getting bids.  Both were outstanding performers if you bought them right after the spin-off.  MYRX has not been as successful, although I would note that MYRX didn't have anything past Phase II when it was spun-off, while FURX has royalties on two drugs that are actually on the market.  CPEX, which had a healthy royalty stream coming in, but which was initially spending on developing new drugs could be an especially good analogy(and it has been written up here if you want background).  The big risk, and the difference from CPEX, is that the Testim royalty stream was already established, while Priligy and NESINA are just being launched so it is harder to predict ultimate sales levels.  But all in all, if things work out then I think the performance on this one can be similarly good.  And the downside risk probably isn't too severe; even if they burn through all their cash over the next few years(without any of the pipeline drugs working out), then they can just shut down R&D at that point and milk the royalties.  Even in that type of scenario I don't think you would lose very much and it still might be undervalued.


End of spin-related selling.
Ramp up of Priligy and NESINA sales.
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