- CTIC announced its 2Q 2022 results on 8 August. With booked revenues coming in at $12.3 million for the quarter, revenues were above Street expectations.
- In my view, the 26% share price decline since the results is a reaction to BVF Partners (a major equity holder of the company) selling shares.
- I view this decline as a major buying opportunity. I believe the market totally ignored the $8.2 million in accounts receivables reported by the company.
- The CFO’s repeated statements that CTIC has sufficient cash to meet its financial obligations through 2023 is a major clue that further dilution is not likely.
- I am maintaining my target price of $17. I will continue to hold CTIC until a buyout or my target is achieved in the next 1.5 to 3.5 years.
Background
As an update to my previous article on CTI BioPharma (CTIC), where I recommended this stock as a "Strong Buy" and a $17 price target, CTIC’s first complete quarter of sales in its history was greeted with enthusiasm by Wall Street analysts. Most analysts reiterated their “Buy” ratings and maintained or revised their price targets higher.
While the launch of VONJO (CTIC's only approved drug for the treatment of adults with intermediate or high-risk post-polycythemia vera or post-essential thrombocythemia) was viewed as being successful by the street (and management), the $12.3 million in net sales reported by the company was only in line with Inrebic ( BMY ) sales in the first quarter after its launch in 4Q 2019.
To a certain extent, traders were taking profits and viewed the $12.3 million revenue figure with disappointment, punishing the stock by -22.9% at one point on Tuesday, 9th April 2022, before the stock recovered to close -11.8% on that day. Since then, however, CTIC has lost about 26% of its value from its highs of $7.56 prior to the earnings release, coming back to about the level where I recommended the stock back on May 04, 2022.
Another factor impacting the price dynamic was the fact that BVF Partners sold 8.5 million shares in the company on August 9, 2022 (according to BVF Partners' Form 4 filing ). The market took this as a major equity holder selling stock and perhaps losing some faith in the growth prospects of the company.
Why I am maintaining my DCF Valuation
In my view, the market completely ignored the $8.2 million in Accounts Receivables reported by the company in 2Q.2022 ( see pp. 4 of CTIC's 2Q.2022 10Q Filing ). If we add this to the top line reported revenue figure, VONJO sales for the quarter would have been $20.5 million – or 70% higher than Inrebic sales at the same stage of Inrebic’s commercial launch.
VONJO is off to a great start and confirms for me that VONJO is highly differentiated from Incyte Corporation's ( INCY ) JAKAFI. As I stated in my previous article , my own interviews with hematologists indicated that they have been waiting for VONJO to come to market for the 7,000 patients in the United States that suffer from severe thrombocytopenia (i.e., blood platelet counts under 50 x10^9 /L).
Management’s repeated comments that there is a 60 / 40 split in hospital / community prescribers is also very bullish, as cancer drugs normally get acceptance in the hospital setting before a slow ramp up into the community setting. That is not the case for VONJO.
While we may never know how many patient lives are impacted by CTIC (unless the company reveals it – which their CEO has refused to do in the past), we can model and benchmark this additional sales information to inform our unit economics going forward. At a wholesale price of $19,500, the $20.5 million in sales represents 350 prescriptions per month ($20.5 million / $19,500 / 3) in the quarter. It will be useful for us to track this number in order to understand CTIC’s market share gain over time. At 350 prescriptions (assuming 1 prescription per patient), CTIC’s market share of the 7,000 patients in the United States that suffer from severe thrombocytopenia now stands at 5%. Again, that is an excellent start.
My expectation in my previous DCF model was a quick ramp-up to 1,750 patients, or a 25% market share by the end of 2022 (due to the unmet medical need). That is likely not going to happen. At a run rate of 350 patients per quarter, we are looking at 1,050 patients by the end of 2022 (a 15% market share). I do, however, think that in 2023, and beyond, VONJO is more than capable of taking a 30% market share in 2023, and a 50% market share in 2024, as CTIC continues to educate specialists on further positive trial data.
See my slightly revised unit economics figures below:
Table 1: CTIC’s Unit Economics
Unit Economics | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 |
Old Model (May 2022) | 1,750 | 2,333 | 3,500 | 3605 | 3,713 | 3,825 |
Old Model Revs ($ million) | $209.6 | $387.5 | $604.6 | $647.6 | $693.7 | $743.1 |
New Model(August 2022) | 1,050 | 2,333 | 3,500 | 3,605 | 3,713 | 3,825 |
New Model Revs ($ million) | $125.8 | same | same | same | same | same |
Maintaining my Cost Forecast for CTIC
While CTIC missed the street expectations on the bottom line by a penny , I was actually quite encouraged by management’s cost control. Total operating and non-operating expenses came in at $34.983 million, much lower than my run rate calculations of $53 million in my DCF model that you can see in my previous article . The $18 million difference was due partially to the fact that CTIC has not yet paid the $10.3 million owed to Takeda, opting instead to drag out this payment until March 15, 2023; and the $25 million payment to S*BIO + low single-digit royalties to S*BIO that continues to show in CTIC’s books under Intangible Assets, but will at some point move to the income statement.
I am, therefore, maintaining my conservative cost forecasts for CTIC.
BVF Sale was 18.8% of their overall holdings and likely motivated by fund dynamics
The elephant in the room, of course, is the stock sale by BVF on August 9. While the retail comment boards were full of criticism about the BVF Partners’ stock sale, according to BVF’ Form 13F and Form 13D filings and CTIC's Form 8K filing, it looks like BVF sold 8.5 million shares out of its total holdings of 45.3 million shares of CTIC, or 18.8% of its holdings.
I agree with retail traders that the sale of this 18.8% ownership could have been handled better by market makers, for example, through more dark pool transactions over time rather than through lit markets. The fact, however, remains: BVF continues to hold 80% of its equity in CTIC and any ‘short’ that says that institutions have lost confidence is incorrect. In fact, the BVF sale could be part of housecleaning before a buyout, in my view.
Management Continues to give bullish signals
I continue to view this beat down of the share price as a buying opportunity for new, long-term and patient investors.
Comments by their CFO that “as management, we believe that we have sufficient cash to meet our financial obligations through 2023 and beyond, subject to us meeting our sales forecast” are a major clue that CTIC management sees itself as turning profitable in at least the next six quarters.
At expense levels of $53 million per quarter (which includes one-time payments to Takeda, S*BIO and royalty payments to DRI) and a cash cushion of $95.870 million (see pp. 4 of CTIC's 10Q ), and taking into account the worst-case scenario of cash of only $10 million by the end of 2023 (which is part of CTIC’s debt covenant), this statement by the CFO implies an internal sales forecast by CTIC of at least $232.1 million over the next six quarters [My calculation is as follows: $53 million * 6 quarters subtract cash of $95.870 add minimum cash requirement of $10 million].
At the very least, the CFO’s statement implies no further dilution for shareholders, in my view.
My DCF Model and $17 price target remains unchanged
The 1,050 expected scripts by the end of 2022 (as opposed to 1,750 in my previous DCF model) is a rounding error in terms of the overall potential of CTIC. My DCF model now shows me a $16.65 price target and I will continue to remain invested in the next 1.5 - 3.5 years. In my view, VONJO has already demonstrated that it would be a great add-on to a big pharma company. The BVF sale may be housekeeping in preparation for a possible buy-out or simply a fund taking cash off the table to show returns to investors.
For further details see:
CTI BioPharma: Reiterating Target Price Of $17 After Successful VONJO Launch