CPRX - Catalyst Pharmaceuticals: Agamree Approval Selloff A Long-Term Buying Opportunity

2023-10-31 16:13:22 ET

Summary

• Staring Catalyst Pharmaceuticals, Inc. coverage with a Buy rating with a 2-5-year target of $40 based on discounted cash flow valuation, offering 3x upside potential.
• The company has two FDA-approved products, Firdapse and Fycompa, with 92% annual revenue growth.
• The company recently received FDA approval for Agamree, an anti-inflammatory medication for the treatment of Duchenne's muscular dystrophy, with a potential for peak $1 billion/year in U.S. sales.

Investment Thesis

Rating Catalyst Pharmaceuticals, Inc. (CPRX) Buy with 2-5 year target of $40 (3x upside) based on the discounted cash flow ("DCF") valuation method. Steroids are used in 70% of patients with Duchenne's muscular dystrophy, DMD, a debilitating neuromuscular disease, which is a 2 billion/year market and is expected to reach billion/year by 2030. Agamree could reach a peak U.S. sales of $1 billion per year and gain >50% market share in treating DMD due to its advantage over currently used steroids, like no harmful effect on growth and bone mineral density.

Key points

Catalyst Pharmaceuticals was founded in 2002 and is based on Coral Gables, Florida. The company has two FDA approved products. Firdapse is the brand name for amifampridine (3-4-DAP), which acts on the voltage-gated channel in the muscles and was FDA approved in 2018 to treat Lambert Eaton syndrome, LEMS. LEMS is a neuromuscular disease causing weakness of muscles, which affects 5600 people in the U.S., and another 1000 new cases are diagnosed every year. The therapy has Breakthrough therapy designation from the FDA and is recommended as a first line therapy to treat moderate or severe weakness in LEMS.

Firdapse revenue is growing steadily and grew 27% year-over-year in the most recent quarter. The company has treated 1100 patients so far. Patents extend till 2036.

The company licensed Fycompa (perampanel), a anti-seizure medication from Eisai last year. The therapy showed 72% reduction in seizures when used as an adjunctive therapy in focal-onset seizures. The therapy is catching traction and the 2023 revenue estimate of the company is $130M vs. 0 for 2022. Patents extend till 2026.

Last week, the company got FDA approval for Agamree (vamorolone), an anti-inflammatory medication used in the treatment of DMD. DMD is a debilitating neuromuscular disease that affects 66,000 children in the U.S. and causes progressive muscle weakness. DMD is a $2 billion/year market, expected to reach $27 billion/year by 2030. Steroids are currently used as anti-inflammatory agents in DMD in 70% cases, however have a lot of side effects. Agamree has the competitive advantage over steroids since it showed similar anti-inflammatory efficacy to prednisone but does not have the negative effect on the growth or bone mineral density (which causes osteoporosis or brittle bones).

Catalyst Pharma licensed this drug from Santhera Pharmaceuticals, and holds the commercial rights in North America in exchange for milestone payments and royalties on sales. The U.S. launch is expected in Q1, 2024. The company already has established sales infrastructure from marketing Firdapse to neuromuscular specialists, so we expect the uptake to be fast.

The CEO was ex-CEO of Royce Laboratories and ex-Vice Chairman/Director of the National Association of Pharmaceutical Manufacturers. Chief Commercial Officer was ex-VP of Business Development at Paragon Biosciences, and ex-Senior Director of Rare Disease Marketing at Marathon Pharmaceuticals (maker of Deflazcort, a competing steroid in DMD). His expertise will be help in the effective marketing of the currently approved 3 drugs in the company's portfolio.

Financials and Valuation

The company has cash reserves of $153M, expected enough till 2025. There is no long-term debt.

Revenue growth (from Firdapse and Fycompa) was 92% year-over-year in the most recent quarter. The company's estimate for 2023 revenue is $380M-$390M.

Valuation:

My revenue estimates are given in the table below:

The DCF model can be accessed here , where one can adjust the assumptions and inputs, and derive his own estimates. The annual prices are derived from comparison with the comparables in the pharma industry. Pharmegellen guide for biotech/pharma valuation was used as a reference for the modeling.

Using the DCF method, my estimate for the fair value of the stock is $40/share.

I also used the exit multiple method for the terminal value estimate, and calculated the fair value for equity= $41/share.

The current stock price is $12/share, thus suggesting enough margin of safety in this investment.

In conclusion, I consider the current dip in the stock price (as a sell-the-news reaction to FDA approval of Agamree) as a good buying opportunity in the stock with 3x upside within the next 2-3 years timeframe. I bought the stock last week.

Rating Buy with a price target of 40/share (3x upside).

Disclaimer:

Risks in this investment include lack of traction in gaining market share, which may cause the stock price to fall. I am confident in the management's experience that they will be able to execute effectively.

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