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Elle Investments Research Report: PBYI

Company: Puma Biotechnology, Inc.

Symbol: PBYI

Date of analysis: 4/9/19

Price at analysis date: $34.64

Price floor: $36.16

Lower end of PT range: $44.41

Read our article on Seeking Alpha seekingalpha.com/article/4254027

PBYI: 1-Month Stock Chart, 3/21-4/20

Source: Seeking Alpha

INVESTMENT THESIS: PBYI dropped about 8% when the EU/Africa licensing deal with Pierre Fabre was announced for potential blockbuster candidate Nerlynx, which is currently approved in the US and EU for HER2+ breast cancer treatment (post-Herceptin).

The reason for the drop is likely because investors wanted an immediate buyout. But the risk/reward profile is favorable, given that the current stock price is fully supported from reasonable Nerlynx sales estimates in the US and EU alone for just the currently approved indication.

The downside seems limited given the excellent cash position and growing US sales. Any future realized milestones (up to $345M from the EU/Africa deal) or expanded approvals in other variants of breast cancer would unlock additional value and are not priced in.

Source: PBYI 4Q18 earnings slides

LIQUIDITY POSITION: Excellent

As of December 31, 2018, PBYI had $165M in cash and cash equivalents. Adding in the $60M they got upfront from Pierre Fabre on April 1 brings total liquidity to $225M. The adjusted net loss for 4Q18 was only -$12M, so while management wouldn’t commit to saying on the 4Q18 earnings call that they would be profitable for 2019, it’s clear they are on their way to break-even. Liquidity is not a concern at this point, so the risk of dilution is very low.

COMMERCIAL PROSPECTS: Excellent

Source: PBYI website

At the moment, Nerlynx is approved as an extended adjuvant monotherapy for HER2+ breast cancer (post-Herceptin). Below you can see our calculations for the addressable market size in the US and EU for just this indication. We then make some very reasonable assumptions to compute our “price floor” based on just this indication in these two territories:

A midpoint market share of 20%

A gross-to-net reduction of 9% (2019 guidance)

A 14% royalty on net sales to be paid to Pfizer (amended agreement calls for a fixed rate from low-to-mid teens)

A 16% EU royalty to be paid to PBYI from Pierre Fabre (licensing deal calls for “significant” double-digit royalties)

$180M to be paid to Pfizer for Nerlynx regulatory and commercialization milestones

Using these assumptions and a target P/E of 5x, we get expected net revenues of $690M, and a “price floor” of $36.16/share, representing 4% upside to the current price of $34.64/share. For reference, 2019 US net sales guidance at the midpoint is $268M, which represents +33% growth over 2018 net sales of $201M. We think these assumptions are reasonable given that peak sales estimates for all indications are from $1B-$2B+.

Including the $345M in potential regulatory and commercial milestones from Pierre Fabre, we arrive at $44.41/share, which represents the lower end of our PT range. An expanded market size upon additional approvals in other variants of breast cancer would unlock further value, as would a royalty rate from Pierre Fabre that is less conservative than the 16% that we assume (remember that the licensing deal called for “significant” double-digit royalties). (Since total assets are somewhat higher than total liabilities, we exclude these from the calculation for simplicity.)

PBYI: US/EU HER2+ Post-Herceptin Early-Stage Breast Cancer Market Size

© 2019 Elle Investments. All rights reserved.

Sources: 1) Wikipedia, 2) Wikipedia, 3) Motley Fool, 4) GoodRx, 5) FiercePharma

PBYI: Nerlynx Net Sales Estimates For HER2+ Breast Cancer Treatment (Post-Herceptin) In The US And EU ($M)

© 2019 Elle Investments. All rights reserved.

CONCLUSION: The downside is limited. The cash position is excellent and they are moving towards profitability, so the risk of dilution is very small. The current price is fully supported from reasonable net sales assumptions in the US and EU territories for just the currently approved indication. The lower end of our PT range, $44.41/share, represents 28% upside from the current price. Any amount received from a label expansion would unlock further value. The market did not like the EU/Africa licensing deal, but based on the fundamentals of the stock, this is a very favorable risk/reward bet.

Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamentals Analysis, is sized as part of a large quantitative portfolio. The commentary presented here is for research purposes 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 article submission. Elle Investments will enter/exit positions without notice.