PRTA - Prothena: Upcoming Alzheimer's Data Could Solidify Its Position In The Market

2023-12-12 05:00:00 ET

Summary

• Prothena’s PRX012, targeting Alzheimer's, shows promise in Phase 1, potentially advancing Alzheimer’s treatment with subcutaneous administration.
• Strong Q3 earnings with revenue surge to $84.9M; however, increased operating expenses highlight escalating R&D costs.
• Market sentiment is mixed: high institutional ownership versus significant short interest and underperformance relative to market indices.
• Investment recommendation: Speculative "Buy", contingent on positive PRX012 trial results and Prothena’s sustained financial health.

At a Glance

In my previous piece , I delved into Prothena Corporation's ( PRTA ) varied biotech offerings, notably its hopeful treatments like birtamimab for AL amyloidosis and PRX005 for Alzheimer's. Key to its strategy are solid financials and crucial partnerships. Recently, Prothena's PRX012 has made headway, nearing the end of a Phase 1 trial for Alzheimer's, focusing on safety and reducing amyloid beta plaques – a potential game-changer for both Prothena and Alzheimer's therapy. Financially, the company's revenue boost and strong liquid assets speak to its immediate stability. Yet, its market performance is lukewarm, marred by high short interest and unpredictable growth forecasts, painting Prothena as a high-risk investment. This mixed market view, with significant institutional ownership yet negative stock trends, hinges on the trial outcomes, poised to potentially redefine Prothena's stock value.

Prothena's PRX012: Pioneering Alzheimer's Fight with a Subcutaneous Edge

Prothena's PRX012, an investigational anti-amyloid beta antibody therapy, is in the midst of a Phase 1 clinical trial , presenting a pivotal moment in Alzheimer's disease [AD] treatment. This trial, involving healthy volunteers and AD patients, is structured as a randomized, double-blind, placebo-controlled study. It primarily assesses safety, tolerability, immunogenicity, and pharmacokinetics of PRX012????.

For some background: In September 2022, Prothena's market valuation surged by approximately $1 billion, a direct response to Eisai's positive phase 3 results for Leqembi (lecanemab), which successfully met its primary goal in curbing cognitive and functional deterioration. This significant market reaction underscores the critical role this asset plays in Prothena's portfolio.

PRX012 and Eisai's Leqembi share a common therapeutic target: amyloid beta, a protein linked to the pathogenesis of AD. Leqembi, a humanized monoclonal antibody, has shown efficacy in reducing amyloid beta plaques in the brain, which is associated with slowing the progression of AD symptoms. Like Leqembi, PRX012 is designed to bind and neutralize toxic forms of amyloid beta, potentially preventing neurodegeneration????.

However, PRX012 may differentiate itself in several ways:

• Mode of Administration: PRX012 is designed for subcutaneous delivery, potentially offering more convenient administration and better patient compliance compared to intravenous infusions like Leqembi.

• Pharmacokinetics and Dosage Efficiency: Preclinical studies suggest that PRX012 may be effective at lower doses and achieve less variability in brain antibody concentrations, an advantage over first-generation antibodies like Leqembi.

• Safety and Tolerability Profile: The ongoing Phase 1 trial's results regarding PRX012's safety and side effect profile will be crucial in distinguishing it from Leqembi.

Investors and analysts should look for specific trial outcomes such as the safety profile, tolerability, the drug's immunogenic response, and how it is processed in the body. These results will be key in determining PRX012's potential to advance to later-stage trials and its positioning in the AD treatment landscape.

Prothena's experience in protein dysregulation, coupled with regulatory insights from previous anti-amyloid beta therapies, may enhance PRX012's development. The drug's Fast Track designation by the FDA underscores its potential therapeutic importance in AD treatment????.

Topline data expected by the end of 2023 will be pivotal. Success indicators include a favorable safety profile, effective immunogenic response with minimal side effects, and evidence of amyloid beta plaque reduction. These outcomes will significantly impact Prothena's market position and the future of PRX012 as an AD treatment.

Q3 Earnings

Looking at Prothena's most recent earnings report , the third quarter of 2023 shows a remarkable surge in revenue to $84.9M from $1.5M Y/Y, largely driven by increased collaboration revenue. Operating expenses rose to $74.6M from $51.8M, reflecting heightened research and development costs. Notably, the company shifted from a net loss of $45.8M in 2022 to a net gain of $21.9M in 2023. Share dilution is evident, with basic and diluted shares used for computation increasing from approximately 47M to over 53M and 58M, respectively.

Financial Health

Turning to Prothena's balance sheet , their liquid assets, which include cash and cash equivalents of $670.9M, form the bulk of their current assets. The current ratio, calculated as current assets divided by current liabilities, is approximately 12.95 ($690.6M / $53.37M), indicating a strong short-term financial position. Moreover, when analyzing the company's total assets of $746.9M against total liabilities of $129.7M, it's evident that they maintain a healthy asset-to-liability ratio.

Prothena's net cash used in operating activities for the nine-month period ending September 30, 2023, was $82.9M, averaging about $9.2M per month. Based on historical data, the 'cash runway' extends approximately 73 months. It's important to note that these values and estimates, based on past data, may not fully predict future performance.

Given their substantial cash reserves and current burn rate, the odds of Prothena requiring additional financing within the next twelve months seem low. The company's short-term financial health is robust due to a strong current ratio and significant liquid assets. However, long-term financial health should be monitored, especially in the context of ongoing research and development expenses and potential shifts in the biotechnology market.

Market Sentiment

According to Seeking Alpha data, Prothena's market capitalization of $1.94B, alongside high institutional ownership of 99.09%, suggests strong market confidence. However, the stock's underperformance relative to SPY across all timeframes (3M: -31.39%, 6M: -48.42%, 9M: -31.58%, 1Y: -39.02% vs. SPY's positive gains) indicates negative momentum. Analysts project a significant revenue jump in 2025 ($168.01M, +203.25% YoY), but a concerning decline in 2024 ($55.40M, -37.94% YoY) reflects uneven growth prospects that hinge on milestone payments.

Short interest is substantial at 15.64%, with 6.19M shares short, potentially signaling investor skepticism or speculative interest. Institutional ownership dynamics show more positions increased (105 holders, 3.26M shares) than decreased (83 holders, 1.81M shares), with significant holdings by Ecor1 Capital, Fmr, and Price T Rowe, but also notable sold-out positions (32 holders, 641.469 shares). Insider activity is predominantly selling, with net negative activity over 3 and 12 months (35,000 and 459,167 shares sold, respectively), which could be seen as a lack of insider confidence.

Overall, Prothena's market sentiment is qualified as "Fragile" due to the mixed signals from institutional and insider activities, alongside challenging stock momentum and variable growth projections.

My Analysis & Recommendation

Wrapping up, Prothena is at a crucial point with its PRX012 therapy, aiming to tackle AD. We're eagerly awaiting the Phase 1 trial results by year's end, which could be a catalyst for both Prothena and the AD treatment landscape. The key things to watch for are the treatment's safety, side effect profile, and its effectiveness in reducing amyloid beta plaques. Positive results here could really boost Prothena's standing in the market and set up a new course for PRX012.

Financially speaking, Prothena's in a pretty solid place for the short term. They've got enough cash on hand and seem unlikely to need more funding soon. But, as an investor, it's smart to keep an eye on their long-term financial health, especially with the ups and downs of R&D costs and growth projections.

There's a strong belief in Prothena's potential, shown by the high institutional ownership and their recent revenue bump. But, the stock isn't performing as well as other market indices, and there's a fair bit of skepticism, shown by the significant short interest. This mixed market sentiment, along with the critical nature of the upcoming trial results, paints Prothena as a speculative "Buy."

Investors should watch the trial results closely, stay updated on Prothena's financial health, and keep tabs on the broader market. Diversifying within the biotech sector and considering strategies like stop-loss orders could help manage the risks. If PRX012 nails it in the trials, not only could it revolutionize AD treatment, but it could also significantly raise Prothena's market value, making it an intriguing, though speculative, investment pick.

Risks to Thesis

In reassessing my "Buy" recommendation for Prothena, several overlooked risks warrant attention. The biotechnology sector, particularly for companies like Prothena focusing on diseases like Alzheimer's, is fraught with high clinical trial failure rates. The historical track record of AD drug development is marked by notable failures, which raises the question of whether I've overestimated PRX012's chances of success based on early-phase trials. This optimism bias could skew the investment thesis.

Moreover, I may have underemphasized the regulatory challenges. Even with promising clinical data, FDA approval is not guaranteed, and any regulatory setbacks could significantly impact the stock price. The market's tepid response, despite strong institutional backing, suggests that I might have overlooked the market's risk assessment of Prothena's pipeline and overestimated the immediate market impact of current clinical trials.

Also, I might have underestimated the impact of broader market trends on Prothena. In a volatile market, even strong biotech companies can see significant stock fluctuations unrelated to their own performance. This sector-specific volatility risk, combined with Prothena's specific challenges, suggests a more cautious investment approach may be warranted than my initial "Buy" recommendation.

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