|Shares Out. (in M):||43||P/E||0.0x||0.0x|
|Market Cap (in $M):||362||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-96||EBIT||0||0|
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For more extensive background on Remxoy, please reference coda516's writeup of Durect (Durect licensed the drug delivery technology behind Remoxy to PTIE in 2002 and earns a 5-11% royalty on Remoxy vs. PTIE 15-20% royalty). To make a long story short, Remoxy is the third entrant in a new class of tamper / abuse resistant opioids. Illegal diversion of opioids and other drugs is a huge problem in the US. Oxy, or Hillbilly heroine as it is known, is the most popular target for addicts because it is a 12 hour, controlled release formulation with a huge drug load. The FDA estimates that in 2008 there were approximately 500k non-medical users of Oxycontin. The big headline risk for the FDA is the suburban teenager that overdoses on Oxy and dies which seems to happen a couple of times every year. In the context of today's risk averse FDA, which will pull a drug for even the slightest sniff of a safety concern, it is rather puzzling that a drug that has directly contributed to so many deaths has not been pulled (a lot of that has to do with the strong patient advocacy groups, especially in cancer, that lobby for unrestricted usage). The active ingredient in Remoxy is oxycodone (the same as Purdue's Oxycontin) but the surrounding pill / matrix is different. Unlike Oxycontin which is a hard tablet, Remxoy contains a suspension of oxycodone in a high viscosity fluid matrix . It is this fluid matrix that resists common methods of chemical and mechanical extraction.
There's one other unique detail about the long acting oxycodone market that deserves mentioning: there has never been a generic long acting oxycodone and probably will never be one. Oxycontin was scheduled to go off patent in 2013; however in a stroke of brilliance / good fortune Purdue was able to withdraw its Oxycontin NDA when they released their new tamper / abuse resistant formulation. The implication is that generics cannot reference the old Oxy NDA for approval for an ANDA making it impossible to file a generic under current FDA protocol. Even assuming they would approve a generic to the new Oxy, the FDA has yet to decide how to establish "tamper equivalence" since the key properties of the new Oxy are not demonstrated in standard bio-equivalence testing. That is to say, this is never going to be a "quick and dirty" generic play and the barriers to entry will be much higher than is seen in typical markets.
In the best case we see sales ramping to $1billion by 2014 and growing by 3% afterwards until 2021 and we give Remoxy the same 5x multiple on year 10 royalties to derive our terminal value. Discounting the cash flows at 10% and adding $2/share for cash gives us a NPV of $37 for the equity. It's important to note that this calculation assumes 40% peak market share and no growth in the overall market but it's possible to envision scenarios where PFE supplants Purdue and even garners the majority of the market in which case PTIE would be worth much more, well north of $40/share. If you don't think PFE can get Remoxy to over $1billion in sales, it doesn't hurt to mention that PFE's other pain franchises Celebrex and Lyrica generated $2.3billion and $3 billion of sales in 2010, respectively.
PTIE's deal with King / PFE technically includes 3 other opioids worth up to $105mm in development milestones but we are giving them no value at this point. In addition PTIE has 2 early stage drug candidates, one in metastatic melanoma and another in hemophilia, but CEO Remi Barbier refuses to spend on them and is looking to license them out so the upside is incremental with no additional costs.
Although this is not the basis for our thesis, we all know PFE has a mountain of cash earning next to nothing and there is no place they could get leverage like buying out PTIE's royalty stream assuming the product achieves commercial success but obviously this doesn't have to happen to make PTIE a home run.
While we wait for events to play out, we especially like the fact, due to the CEO's 14% ownership interest, that PTIE is one of the most shareholder friendly companies we have ever invested in: they are incredibly tight with their cash burning less than $10 mm a year and they moved their head quarters to Texas to avoid state sales taxes. Given the high probability of approval (this is after all a drug that the FDA wants on the market) and the high probability of commercial success, we think the the current valuation of PTIE offers a margin of safety relative to its explosive upside
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