TEVJF - Catalyst Pharmaceuticals: Stable Upside Potential Amid Patent Infringement Concerns

Summary

• Catalyst's rights acquisition of FYCOMPA is a significant step towards controlling the epilepsy treatment market share.
• The company's cash balance of $256 million is enough to fund its CapEx in 2023.
• Teva's notice seeking to manufacture a generic version of FIRDAPSE poses a risk towards product pricing of the drug.

Catalysts Pharmaceuticals, Inc. ( CPRX ) reported product revenue of $57.24 million in Q3 2022, beating Wall Street estimates by $3.55 million. The company's earnings per share ((EPS)) of $0.20 beat estimates by $0.01. CPRX's share price has grown 192.28% (YoY) with the stock trading 29.8% below the 52-week high of $22.11.

Thesis

Catalyst completed its U.S. rights acquisition to FYCOMPA from Eisai, a move expected to increase the company’s presence in the US neurology market while also expanding the company’s revenue. CPRX is also growing its flagship product, FIRDAPSE, a prescription drug used for the treatment of Lambert-Eaton myasthenic syndrome (LEMS) in people aged 6 years and above. However, the company is facing a pricing quagmire as well as generic competition for its FIRDAPSE drug.

Catalyst achieved record net revenue in Q3 2022 at $57.2 million denoting a 59.3% (YoY) increase from $36 million realized in Q3 2021. The company raised its full-year guidance to $205 million- 210 million after its net income grew 120% to $22.7 million. Additionally, Catalyst’s cash level rose 46.51% (YoY) to $256.1 million from $174.8 million realized in 2021. This cash position is enough to finance the company’s CapEx considering it only used $5.6 million in financing its CapEx in the nine months ending on September 30, 2022.

The company’s main revenue source FIRDAPSE recorded significant organic growth. It was approved in 2018 by the U.S. FDA for the treatment of adults diagnosed with LEMS.

At the onset, Catalyst’s revenue has been on an upward trajectory since the FY ending in December 2018. It grew from a net loss of $19.4 million to a gross profit of $144.2 million TTM as of September 30, 2022. The company has indicated that it will be committed to improving its portfolio with innovative drugs that address unmet patient needs with FIRDAPSE and FYCOMPA falling in this category.

U.S. rights acquisition to FYCOMPA

Catalyst announced that it had completed the acquisition of the U.S. rights to FYCOMPA on January 25, 2023. This move is seen as a complementary growth driver for the commercial-stage biopharmaceutical company not only within the neuroscience industry but more specifically in the treatment of rare epileptic diseases. FYCOMPA, a prescription medicine works in three distinct ways. It can be used alone in the treatment of epilepsy patients aged 4 years old and above. It can be used with other medicines to treat patients with partial-onset seizures or POS with/ without secondarily generalized seizures. It can also be used (alongside other medicines) in the treatment of epilepsy patients aged 12 years and older with generalized tonic-clonic seizures.

The U.S. FDA approved FYCOMPA (perampanel) on July 26, 2017, for the monotherapy treatment of partial-onset seizures or POS. FYCOMPA's net revenue for FY 2022 according to Catalyst was $136 million with the gross profit margins expected to be similar to FIRDAPSE. Catalyst paid a total sum of $160 million in cash to Eisai in this deal with the company assuring investors that the payment did not affect the guidance of $205 million to $210 million expected for the Fiscal Year. Catalyst will also pay Eisai future royalties and milestone payments with the deal inclusive of a transition-services agreement in the short term and a supply agreement in the long term. This deal, not only means an expanded portfolio for Catalyst but also a novel revenue stream for the company.

Eisai has been involved in other deals such as the $40 million acquisition of exclusive rights for E7777 from Dr. Reddy’s (RDS) by Citius Pharmaceuticals ( CTXR ). Apart from the $40 million paid to Dr. Reddy's, CTXR was required to pay $6 million to Eisai if E7777 was approved by the FDA. In December 2022, reports surfaced that the FDA had accepted a biologics license application for E7777 also known as denileukin diftitox or Ontak for the treatment of patients with recurrent cutaneous T-cell lymphoma (CTCL). The BLA approval means that Citius has the right to bring E7777 into interstate commerce within the U.S.

Epilepsy affects about 1.2% of the American population which may translate to about 3.4 million people. It is estimated that more than 65 million people around the world have this neurological disorder. Further, medics believe that about 1 in every 26 people globally develop epileptic signs at a certain time in their lives.

FYCOMPA's oral suspension which was approved by the FDA in 2016 after its Type 1 molecular entity was approved in 2012 costs $1,583.73 for 340 milliliters (ml). More specifically, a 0.5 mg/ ml of FYCOMPA oral suspension costs about $1,584 (when a patient is supplied with 340 ml of the drug). Under this consideration and with about 3.4 million patients suffering from epilepsy- in the US alone, it means Catalyst will have the chance to rake in approximately $5.4 billion in revenue.

FIRDAPSE

After Firdapse (amifampridine) was approved by the FDA on November 18, 2018 (for the treatment of adults), Catalyst Pharmaceuticals announced that the FDA had approved the supplemental new drug application ((SNDA)) to expand the 10 mg tablet treatment to patients aged 6 years and above for LEMS treatment. This approval formed the highlight of Q3 2022 considering Catalyst’s revenue had grown 7.72% (QoQ).

A 10 mg oral Firdapse costs about $27,639 for 120 tablets exclusive of insurance plans. The drug is used to treat the autoimmune disorder LEMA that affects about 2.8 million people worldwide with at least 400 people diagnosed in the US alone.

While the market is not as substantial as Fycompa, it is still significant considering Catalyst’s revenue adjustments after it began commercialization.

Risk to Consider

Despite declaring Firdapse as the only approved treatment for adult patients with LEMS in the U.S., Catalyst announced that it had received a Notice Letter from Teva Pharmaceutical ( TEVA ) on potential competition. Teva in the Notice to Catalyst stated that it submitted an Abbreviated New Drug Application (ANDA) to the FDA desiring authorization to manufacture and commercialize a generic version of Firdapse in the U.S.

Teva is known for manufacturing, marketing, and commercializing generic medicine with about 550 prescription products in its pipeline and a market share of 10.3%. Generic drug manufacturers are known for delivering high turnover despite low-profit margins. With this strategy, we expect Teva to try to reduce the price of Firdapse if the FDA approves the generic version of the drug. This situation will lower the price of Firdapse and decrease the drug’s overall potential. However, Catalyst indicated that it was pursuing a patent infringement lawsuit that would stay the FDA's approval until May 2026 or seeking its invalidation altogether.

Bottom Line

Catalyst Pharmaceuticals is a buy at this point with the stock trading just 28.9% below the 52-week high of $22.1. It has a stable upside potential of more than 50% after it added FYCOMPA as a strategic growth driver, diving into the neuroscience market share. The company is strengthening and diversifying revenue and cash flow generation by growing organic revenue from FIRDAPSE. These two acquisitions are expected to be accretive to Catalyst's EBITDA and EPS in 2023, especially in the commercialization of neurology. While Teva's notice to manufacture a generic version of Firdapse poses a major risk, it will still give Catalyst time to strengthen its product market considering it is the only manufacturer of the drug in the U.S. The company also has a stable cash position to fund its operations and Capex over the next 12 months giving room for growth.

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