CPRX - Catalyst Pharmaceuticals: Cheap For A Reason

2023-07-03 06:49:30 ET

Summary

• We check in on Catalyst Pharmaceuticals today as a lot has happened around the company since we last looked at it last summer.
• These include a major addition to the company's pipeline, challenges on the patent litigation front, and impressive organic sales growth from its primary drug asset.
• An updated investment analysis around Catalyst Pharmaceuticals follows in the paragraphs below.

If someone tries to steal your watch, by all means fight them off. If someone sues you for your watch, hand it over and be glad you got away so lightly ." - John Mortimer

Today, we put Catalyst Pharmaceuticals ( CPRX ) back in the spotlight for the first time since last summer. The shares trade roughly at the same levels when that piece came out in August, although they are down significantly where they started the year. However, the company reported better than expected first quarter results in May, reaffirmed full year revenue guidance and acquired the North American right to a new compound in June.

In addition, the company made a major acquisition late last year and now faces challenges on the patent litigation front. Therefore, it seems a good time to circle back on this small biopharma name.

Company Overview:

Catalyst Pharmaceuticals is headquartered about an hour north of me (3 hours during rush hour on I-95) in Coral Gables, FL. The company is focused on developing products to treat rare debilitating, chronic neuromuscular, and neurological diseases.

The company's primary earner is a product called FIRDAPSE. These amifampridine phosphate tablets are approved to treat Lambert-Eaton myasthenic syndrome or LEMS, an affliction that affects some 3,000 individuals in the United States.

Late in 2022, Catalyst acquired the U.S. rights to a compound called an epilepsy drug FYCOMPA from Eisai Co., Ltd. ( OTCPK:ESALY ) . Catalyst paid Eisai $160 million upfront and Eisai is also eligible for future milestones and royalties. As part of this deal, Catalyst Pharmaceuticals also got the right a period to review and negotiate the acquisition of another rare epilepsy asset in Eisai's pipeline. FYCOMPA is the first and only approved AMPA receptor antagonist or inhibitor. These receptors enable fast excitatory synaptic transmission throughout the central nervous system. FYCOMPA is an AMPA receptor antagonist can reverse these effects and improve seizure control.

The timing of this agreement was fortuitous as five weeks later giant generic drug maker Teva Pharmaceutical ( TEVA ) submitted an application to the FDA seeking approval to make and sell a generic version of FIRDAPSE alleging three of the patents around this compound are invalid. This caused a significant sell-off in the stock as the news hit the wires. Catalyst has filed a stay that precludes the FDA from approving Teva's application ' until May 2026 or entry of judgment holding the patents invalid or unenforceable, whichever happens first .' Management believes FIRDAPSE has strong patent protection.

First Quarter Results:

The company reported its first quarter numbers on May 10th. Catalyst Pharmaceuticals had non-GAAP profits of 41 cents, a full dime a share over the consensus. On a GAAP basis, earnings were 26 cents a share for the quarter, an improvement of 117% from 1Q2022. Revenues nearly doubled in the quarter on a year-over-year basis to $85.4 million, nearly $4 million over expectations. It is important to note that recently acquired FYCOMPA generated $27.8 million of overall revenues in the quarter. Organic revenue growth of 34% on a year-over-year basis was supplied by FIRDAPSE which made of the rest of overall sales.

Management affirm FY2023 sales guidance calling for between $375 million to $385 million for this fiscal year, in line with the consensus. Leadership also sees Catalyst Pharmaceuticals producing between $195 million to $205 million during this fiscal year.

The company also expects a registrational study in Japan will be completed by the end of this year. This will allow the company's marketing partner there DyDo Pharma to file a NDA in the second quarter of next year to have the product approved in Japan. It is estimated that there are about 1,200 to 1,300 LEMS patients in Japan. Management also projects it will file a sNDA this quarter with the FDA seeking to increase the maximum dose for FIRDAPSE to 100mg from 80mg currently.

Analyst Commentary & Balance Sheet:

Since first quarter numbers posted, four analyst firms including Cantor Fitzgerald and Piper Sandler have reiterated Buy ratings on the stock. Price targets proffered are in a narrow range from $24 to $25 a share. Roth MKM maintained its Hold rating and $15 price target on CPRX

Just under 10% of the company's outstanding float is currently held short. Several insiders have been frequent sellers of the stock here in 2023. So far they have sold approximately $5 million collectively worth of the equity this year. The company ended the first quarter with just under $150 million of cash and marketable securities on its balance sheet against no long-term debt.

On June 20th, Catalyst Pharmaceuticals acquired the North American rights for vamorolone. This compound has a PDUFA date in late October to be approved for the rare neuromuscular disorder Duchenne Muscular Dystrophy or DMD. For these rights, Catalyst paid S anthera Pharmaceuticals Holding (SPHDF) $75 million upfront as well as a $15 million equity investment in Santhera. Catalyst is also on the hook for potential future regulatory and milestone payments as future royalties of any commercialized sales. This deal will draw down the company's cash balances.

Verdict:

The current analyst firm consensus has Catalyst Pharmaceuticals making a $1.76 a share in profit as revenues surge over 75% to $380 million in FY2023. They see sales growth in the high teens in FY2024 and earnings just north of two bucks a share.

This leaves the stock selling for 7.6 times forward earnings and just under 3.8 times forward revenues. This would be cheap if not for the litigation unknowns around FIRDAPSE. This is likely to continue to be a significant headwind for Catalyst until resolved. The matter has most likely made Catalyst Pharmaceuticals an unlikely buyout target as was rumored late last year before Teva muddled the waters.

This litigation is likely to remain an overhang on the stock until resolved. There are both bullish and bearish takes on how this challenge is likely to come out. Interestingly, this issue was not brought up during the company's first quarter conference call nor can I find any updates on this matter at the moment. The insider selling so far in 2023 is somewhat discouraging in light of this unknown. The approval of vamorolone in October would be a solid milestone but a positive resolution around FIRDAPSE would be the bigger potential event.

Until the matter with Teva Pharmaceuticals is settled, CPRX is likely to remain cheap for a reason. I intend to hold my ' watch item ' stake in the stock within covered call positions until more clarity around this litigation is provided.

Litigation: A machine which you go into as a pig and come out of as a sausage ." - Ambrose Bierce

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