TEVA - Catalyst Pharmaceuticals: A One-Hit Wonder With Upside
2023-04-17 15:42:50 ET
Summary
- Catalyst Pharmaceuticals, Inc. appears to be set up nicely for earnings and revenue growth with a possible expansion of its valuation ratios.
- Downside appears to be limited, as Catalyst Pharmaceuticals is currently valued in line with its profitable peers in the small-cap biotechnology space and revenues are not likely to contract.
- I recommend investors buy Catalyst Pharmaceuticals, Inc. stock at current market prices.
Welcome to the Wild West
Biotechnology companies are frequently amongst the daily top gainers and losers featured on Seeking Alpha's home page. As a conservative value investor, I am equally fascinated and horrified by the industry's volatility. The volatility of 191 actively traded small-cap biotechs covered by Seeking Alpha is illustrated in the table below.
Biotechnology Performance
Over the last five days, 101 gainers are up an average of 7% while 90 losers are down an average of 5%. Over the last five years, 27 gainers are up an average of 145% while 63 losers are down an average of 53%. Those readers who are paying the most attention have already noted that the total 5D count (191) is significantly greater than the total 5Y count (90).
In fact, the biotechnology industry can rightly be compared to the Wild West with perhaps greater risk and mortality among small-cap biotechs. Drug discovery and development is a risky undertaking that often takes 10–15 years with an average cost of $1–2 billion for each new drug ultimately approved for clinical use. It's a noteworthy achievement for a drug candidate to even reach phase I clinical trials. Even so, 90% of candidates that do reach phase I trials are not ultimately approved for clinical use. Lastly, according to a recent report , about 50% of drugs launched in the last 15 years underperformed analyst sales estimates by more than 20%.
Catalyst Pharmaceuticals Is a Rare Success Story
Catalyst Pharmaceuticals, Inc. ( CPRX ) was founded in 2002 and generated its first profits in 2019. The 10-year results are summarized below.
CPRX Earnings and Revenue
Over the last four years, EPS and revenue have averaged $0.53 and $144M, respectively. FY 23 earnings and revenue are expected to increase to $1.51 and $381M respectively.
CPRX Is a One-Hit Wonder - So Far
So far, FIRDAPSE is the only drug CPRX has successfully launched, and it accounts for 100% of CPRX earnings and revenue.
CPRX's One Hit - FIRDAPSE
FIRDAPSE is the only U.S. approved treatment for Lambert-Eaton Myasthenic Syndrome ((LEMS)), a rare neurologic disorder. FIRDAPSE was approved for clinical use by the FDA in November of 2018 and launched in the first quarter of 2019.
FIRDAPSE revenues are shielded by orphan drug designation through 2025 and intellectual property protection until 2037 with 6 patents listed in the FDA Orange Book .
Fair Value Estimate
Assuming the biotechnology industry as a whole is fairly valued, six biotechs with positive net income and six with growing revenue were selected for relative valuation based on average EV/Sales.
CPRX: Fair Value Estimate
In both cases; EV, Market Cap, and Share Price were estimated as follows:
- EV = Average Peer EV/Sales * Estimated FY 23 Revenue
- Market Cap = EV - Net Debt
- Estimated Share Price = Estimated Market Cap/Outstanding Shares.
With relation to profitable peers, CPRX fair value share price was estimated at $16.45 versus its current share price of $17.69.
However, the market values growth over profitability in the small-cap biotech space. With relation to growth peers, CPRX fair value share price was estimated at $101.11. Therefore, growth potential must be realized in order to generate upside.
Potential Growth to Drive Upside
According to consensus estimates, CPRX revenues are expected to grow 71% from $214M in FY 22 to $383M in FY 23. There are two drivers for revenue growth: unrealized market potential of FIRDAPSE and a portfolio expansion trademarked FYCOMPA.
FIRDAPSE - Unrealized Market Potential
While research indicates about 3,000 people are affected by LEMS, only 1600 have been diagnosed. Currently about 800 of those diagnosed are being treated with FIRDAPSE. The remaining 800 patients who have been diagnosed and the 1400 undiagnosed or misdiagnosed patients represent an unrealized market of about 2200 patients. This suggests a revenue potential 275% greater than current revenue.
FYCOMPA - Portfolio Expansion
In January of 2023, CPRX acquired the U.S. rights to FYCOMPA, an epilepsy treatment. CPRX expects to synergistically market FYCOMPA through existing relationships with neurology treatment providers. The potential market is relatively large with approximately 3.5 million patients in the U.S. suffering with active epilepsy. CPRX estimates FY 23 FYCOMPA revenue of $130M.
Potential Risks
The market is exceptionally fickle with relation to valuation in the small-cap biotechnology space. In order to realize any substantial upside, CPRX will have to be valued as growth stock. CPRX will not only have to report substantial revenue growth but also benefit from some positive sentiment in a notoriously volatile sub-sector.
However, CPRX downside does appear to be limited. As noted in the company's most recent investor presentation, most patients respond to and remain on FIRDAPSE. Lastly, the Teva Pharmaceuticals ( TEVA ) FDA application seeking approval to market a generic version of Firdapse does not appear to be an imminent threat. However, investors are advised to closely monitor that development.
Conclusions and Recommendations
Catalyst Pharmaceuticals, Inc. appears to be set up nicely for earnings and revenue growth with a possible expansion of its valuation ratios. Downside appears to be limited as CPRX is currently valued in line with its profitable peers in the small-cap biotechnology space and revenues are not likely to contract. I recommend investors buy Catalyst Pharmaceuticals, Inc. stock at current market prices.
Hush, the crowds calling my name, hits like hush bring me fame. How can I be just a one hit wonder? - Joseph Edgar Foreman.
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Catalyst Pharmaceuticals: A One-Hit Wonder With Upside