Elle Investments Research Report: PBYI
Company: Puma Biotechnology, Inc.
Analysis Date: 5/22/19
Analysis Price: $15.60
Price Target (PT): $26.27
PBYI: 1-Year Stock Chart
Source: Seeking Alpha
After seeing strong Nerlynx US sales growth during 4Q18, PBYI dropped about 30% on 1Q19 results. Due primarily to the large number of discontinuations, Nerlynx net sales came in at only $46M, representing a decline of 25% sequentially (with the number of bottles sold declining 20% sequentially).
Severe diarrhea was a known side effect during the clinical trials. Management’s market research indicates that while most physicians are co-prescribing an anti-diarrheal, many patients are not even filling their prescription (high rates of non-compliance were also seen during the clinical trials). While continuing to emphasize the need for both prescribing and taking an anti-diarrheal continues to be a priority, the high rate of discontinuations (and management’s lowered 2019 net sales guidance) brings previous peak sales estimates of $1B+ into question.
However, given the large sell-off post-1Q19 results, even with much lower peak sales estimates in the $500M+ range, there is still a lot of upside from the current price.
PBYI: Nerlynx Quarterly US Net Revenues, 3Q17 – 1Q19
Source: PBYI 1Q19 earnings slides
LIQUIDITY POSITION: Good
As of March 31, 2019, PBYI had $150M in cash, cash equivalents, and marketable securities. Adding in the $60M they received upfront from Pierre Fabre in early April brings total cash to $210M. Given the new lower 2019 net sales guidance of $230M, the quarterly cash burn will be about $35M for the remainder of the year (not including any license revenues or potential regulatory or commercial milestones). While the lower sales guidance has changed the cash runway a bit, we still see the risk of dilution as being somewhat low.
COMMERCIAL PROSPECTS: Good
PBYI: Drug Development Pipeline
Source: PBYI website
At the moment, Nerlynx is approved as an extended adjuvant monotherapy for HER2+ breast cancer (post-Herceptin). Given the large number of discontinuations that we saw from the 1Q19 results, previous peak sales estimates for Nerlynx need to be revised downwards. Below you can see our calculations for the addressable market size in the US and EU for this currently-approved indication, as well as the addressable market size for both third- and fourth-line HER2+ metastatic breast cancer (MBC) treatment in the US.
PBYI: US/EU HER2+ Post-Herceptin Early-Stage Breast Cancer Market Size
PBYI: US Third-Line HER2+ MBC Market Size
PBYI: US Fourth-Line HER2+ MBC Market Size
We then make some reasonable assumptions to compute our PT for PBYI:
· A midpoint market share of 15%
· A gross-to-net reduction of 13% (updated 2019 guidance)
· A 14% royalty on global net sales to be paid to Pfizer (amended agreement calls for a fixed rate from low-to-mid teens)
· A 25% EU royalty to be paid to PBYI from Pierre Fabre
· $180M to be paid to Pfizer for Nerlynx regulatory and commercialization milestones
· $345M to be paid to PBYI from Pierre Fabre for regulatory and commercialization milestones in the EU
· 0% tax rate
· Target forward P/E ratio of 5x
Using these assumptions, we get expected net revenues of $545M. It’s worth pointing out that this is much lower than previous peak sales estimates (for all indications) of $1B-$2B+. But given that through April, management guided for annual net sales of $230M, we think the lower end of our net sales probability distribution of $170M seems conservative enough.
Including the $345M in potential regulatory and commercial milestones from Pierre Fabre and subtracting the $180M estimated payment to Pfizer, we arrive at a PT of $26.27/share. An expanded market size upon additional approvals in other variants of breast cancer (and solid tumors) would unlock further value, as would a royalty rate from Pierre Fabre that is higher than the 25% that we assume (remember that the licensing deal called for “significant” double-digit royalties up to 40%). Also, the upside might be even more should SGA costs eventually come down once the salesforce is reduced after the initial roll-out. And RD costs, which are going towards investigating other indications, might eventually decline. (Since total assets are somewhat higher than total liabilities, we exclude these from the calculation for simplicity.)
PBYI: Nerlynx Peak Sales Estimates ($M)
Sources: Elle Investments, PBYI filings
PBYI: Peak Year Price Target Estimate ($M)
Sources: Elle Investments, PBYI filings
After 1Q19 results, the possibility of Nerlynx reaching blockbuster status is looking less likely. Still, even with considerably lower peak sales estimates, the 50% sell-off post earnings offers 68% upside to our new lower PT of $26.27/share. Additionally, if more patients adhere to taking an anti-diarrheal to mitigate the severe diarrhea that Nerlynx causes, the upside would be considerably more.
HER2+: human epidermal growth factor receptor 2 positive
HR+: hormone receptor positive
MBC: metastatic breast cancer
Note: Additional commentary from Elle Investments can also be found at http://elle-investments.com. We welcome your feedback. Additionally, we are thinking of launching a subscription service that would offer early access to our research, along with some other features that investors might find useful (i.e. general portfolio management strategies, live blog updates highlighting our reaction to breaking news, etc.). If you would be interested in subscribing to such a service, please let us know.
Published By: Elle Investments Research Team
Phone: (914) 715-8066
Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.