Why The Market Will Love PROLOR's hGH-CTP Catalyst
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As major pharmaceutical producers near patent cliffs, healthcare investors should expect increased speculation surrounding generics and biotechnology. The global biosimilars market is forecasted to reach $4.8B by 2015 off of this trend, as well as through cost containment measures, a graying population, and favorable legislation. The world's largest producer of generics, Teva Pharmaceutical (NYSE: TEVA), recently gained approval from the FDA to market its version of Amgen's (NASDAQ: AMGN) infection-fighting neupogen. Like all biosimilars, Teva's version of neupogen is "in many ways a copy" of Amgen's neupogen. However, since the science is already there, the generic has the benefit of lower regulatory hurdles, which commonly means an "abbreviated pathway" to approval.
The Chairman of Teva, Billionaire Phillip Frost also chairs another Israeli-based biotech firm that is gearing up to release a game changing product. PROLOR Biotech (PBTH) is currently developing what will likely be the first long-acting version of human growth hormone hGH. Inadequate secretion of endogenous growth hormone is ultimately a $3B unmet need amongst children and adults. Commercially available hGH requires daily or, at best, weekly injections to return average IGF-1 levels to satisfactory levels. PROLOR's version, hGH-CTP, has shown efficacy in just two monthly injections.
The candidate is backed not only by aggressive IP protection that covers both composition and production but also by a solid pharmacokinetic profile, which results in ease in dosing. In fact, PROLOR owns rights to all but four proteins for CTP technology - a small peptide that is attached to a wide array of existing therapeutic proteins to extend life-span. Merck (NYSE: MRK) attached CTP to four endocrine proteins - LH, FSH, TSH, and hCG - already to much success. While Phase II results for hGH-CTP have been nothing short of phenomenal, the Phase III trial in adult models (expected to start by year's end) will really help close the value gap as approval becomes more and more of inevitability. A Phase II study on child growth hormone deficiency is ongoing.
The stock, which is currently trading at $4.88, recently received an "outperform" rating by Oppenheimer with a 12-18 month price target of $7. The firm finds that hGH-CTP "has the potential to take significant share in the hGH market". Specifically, the firm forecasts a 40% market share capture of the hGH market at a peak and parity pricing on a 2% CAGR for the $2.75B market.
The 39-patient Phase II study showed strong tolerability, safety, and no unexpected adverse events. It yet again demonstrated that the candidate could meet primary endpoints with just two monthly injections. The Phase III study will be initiated on 120 to 150 patients. Results for the Phase II study on children and the Phase III study on adults are due next year. As Oppenheimer rightfully noted, PROLOR's "best commercial strategy… is to partner hGH-CTP upon completion of the Phase III study". I believe that the Chairman and large shareholder of the company is likely to partner the business with his leading generic firm Teva Pharmaceutical. Doing so will introduce hGH-CTP to large patient populations at a low cost with minimal time delays. If this is the case, PROLOR is likely to receive a royalty of 30% or more. Competition, as Oppenheimer also seemed to acknowledge, is not so much of a concern, since new entrants of HGH biosimilars are unlikely to produce a dosing convenience advantage over hGH-CTP.
In just the United States alone, there are 6K new cases of growth hormone deficiency each year and a prevalence of 35K. According to Oppenheimer, annual cost of treatment ranges from $11K to $25K in children and $10K-$12.5K for adults. The market thus has strong inelastic demand that continues to grow unabated.
Aside from hGH-CTP, PROLOR also has several other value drivers. GLP-1 targets the Diabetes Type II $2B market that has seen increased demand from rising awareness of anti-obesity drugs. Lab results have shown a dramatically better weight-loss profile than current GLP-1 therapies and a potential to be injected just weekly. Peptide oxyntomodulin will benefit from the same tailwinds. Factor VIIa and Factor IX target the $2B hemophilia market and are currently in Phase I where the science is just starting to come out.
In regard to Factor VIIa-CTP, for example, preclinical data has shown a longer half-life of 5x and a 3.5x greater drug exposure than recombinant Factor VII. The result was a prolonged homeostatic effect in mice. Since biosimilars often tweak the original therapeutic (in PROLOR's case, by attaching CTP to it), animal models are considerably more reliable than what is the case for drugs that start from scratch. Ultimately, Factor VIIa-CTP could offer an attractive pricing against intravenous Factor VIIa NovoSeven through less frequent dosing and reduced bleeding. Results have been similarly favorable for Factor IX-CTP, which treats hemophilia B. To put into perspective the market value of Factor VIIa-CTP and Factor IX-CTP, consider that they are essentially long-acting versions of Novo-Nordisk's (NYSE: NVO) NovoSeven and Pfizer's (NYSE: PFE) BeneFIX, which generate $1.5B and $693M in sales, respectively.
Thus, even if Phase III results for hGH-CTP do not turn out to be as good as anticipated - which I do not expect to be the case given the scientific foundation and research to date - the firm still has multiple catalysts to appreciate off of. Roche earlier acquired Marcadia Biotech for an implied valuation of up to $537M for a diabetes drug with relatively infant science. PROLOR is currently worth only $310M - an unnecessary discount that is most likely arising from an irrational concern over pipeline disruptions. More trials that confirm the science yet again will unlock value creation through dissipating such hesitations. Subsequent articles on PROLOR will serve to keep you updated on pipeline developments and, in my view, the favorable risk/reward story.
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