Analysts and investors are refocusing on the opportunity for Pain Therapeutics’ (NASDAQ:PTIE) lead drug candidate, Remoxy. Remoxy is an extended-release formulation of the widely used painkiller oxycodone, similar to blockbuster drug Oxycontin. However, Remoxy is also designed to reduce the risk of opioid abuse, a major public health problem. Analysts estimate that Remoxy has the potential to achieve annual sales in the billion-dollar range, as pain medications are the third largest category of drugs sold in the U.S. based on the number of prescriptions. Last year, there were 238 million prescriptions filled for opioid-based pain medicines like oxycodone in the U.S., according to IMS Health. However, Remoxy has been rejected twice for approval by the FDA. As a result, doubt over the drug getting to market has caused PTIE shares to trade at depressed levels, providing investors with an opportunity to take advantage of recent events that support the drug’s chances of commercialization.
Pain Therapeutics and its development and marketing partner King Pharmaceuticals received their first Complete Response Letter (CRL) from the FDA in December 2008. A CRL is essentially a rejection by the FDA, with information on what is needed to re-apply. Based on the CRL, PTIE and King were required to answer questions posed by the agency before an approval could be granted. PTIE and King responded to the FDA and resubmitted their New Drug Application (NDA) for the product in December 2010. While the FDA evaluated the application, mega drug company Pfizer, Inc. (NYSE:PFE), acquired King in March 2011. That June, a new CRL was issued, requiring more answers from the drug sponsors. Importantly, neither CRL required additional clinical trials to be conducted for the drug’s efficacy, safety, or its ability to reduce the chance of abuse. In fact, Phase III trials demonstrated that Remoxy provided round-the-clock pain relief, and in a separate study, the drug’s formulation resisted ‘dose-dumping’ (a quick and intense high that drug abusers seek by binge drinking and also taking narcotics). The key outstanding issues for approval, according to PTIE, center primarily on product manufacturing questions.
With Pfizer now in charge of addressing the FDA’s concerns, the chance for a Remoxy approval has risen significantly, given Pfizer’s vast resources and experience in drug development. In addition, PFE’s industry-leading marketing and sales resources also suggest that, if approved, Remoxy could become a blockbuster product in the pain treatment market. But the first question on investor’s minds is: How committed is Pfizer to the drug after two FDA rejections? To be sure, if Pfizer drops the project and returns Remoxy’s marketing rights to PTIE, investors will lose faith in the drug’s prospects and shares of PTIE will decline in suit. A partial offset to this risk is that about half of PTIE’s market value is in cash, meaning that PFE walking away from the deal could cause the shares to lose roughly 50% of their value. This overhang is well-known and already discounted into the stock, therefore, the first step to realizing a profit in PTIE is confirmation that Pfizer is fully committed to Remoxy’s approval and commercialization. PTIE shares look very attractive from a risk/reward standpoint, which we explain below.
Expect Pfizer To Meet With the FDA About Remoxy in October
Pfizer’s early and more recent actions demonstrate that the big pharma firm is dedicated to Remoxy’s success. For instance, despite the second FDA rejection shortly after Pfizer acquired King (and rights to Remoxy), there have been numerous opportunities for the pharmaceutical giant to abandon the project. Notably, Pfizer has merged with other major pharmaceutical companies – Wyeth most recently in 2009 – and has been focused on streamlining operations to lower operating costs. Many drug development projects have been cut over the years, yet Remoxy remains in Pfizer’s late-stage pipeline. In fact, on its earnings call following the FDA’s rejection of Remoxy in August 2011, Pfizer CEO Ian Reed stated that the company saw getting Remoxy to market as a when, not if question. While the companies have not specifically stated what the FDA required in its latest CRL, Pfizer initiated two clinical trials, one evaluating how Remoxy behaves in the body at different dosages and the other testing behavior of the drug in the body at different time intervals after a dose is taken. The resources devoted to these studies (seen onwww.clinicaltrials.gov as Trial NCT01552850 and Trial NCT01552863, respectively) certainly indicate Pfizer’s commitment to gaining approval of Remoxy. Based on earlier comments from PTIE that certain batches of Remoxy showed inconsistent drug release performance during in vitro (in the lab) tests, it appears that the Pfizer clinical trials seek to demonstrate the manufacturing consistency of Remoxy and how these data relate to the consistency of the drug in vivo (in patients).
The first trial, NCT01552850, completed in June, and results from the second trial are currently being evaluated by Pfizer. Pfizer is not expected to publicly release results from these studies, but on its most recent earnings call with investors, Pfizer’s President and General Manager of Specialty Care and Oncology, Geno Germano, said:
“We remain cautiously optimistic to be able to bring Remoxy to the marketplace. We have preliminary results from two bioavailability studies that are currently being analyzed along with data from experiments designed to optimize the formulation composition and our analytical methods for that product. And upon completion of those analyses we will determine the timing and the nature or our engagement with the FDA to address the complete response letter that we received in June last year and at this time we are certainly hoping to meet with the FDA in the fourth quarter of 2012.”
Importantly, Pfizer spent time talking about Remoxy on the conference call, and given that the new Remoxy studies have completed, those comments were likely made with much of the trial results in hand. Assuming that PFE requests to meet with the FDA in September (meetings are scheduled no more than 30 days following a request), Pfizer and the agency could discuss results and resubmission potential in October. Should the meeting go well and a path to re-filing Remoxy’s NDA is made clear, Pfizer and Pain Therapeutics are likely to announce the news, sending shares of PTIE higher.
Remoxy Fits Pfizer’s Long-Term Strategy
Strategically, Pfizer has sold, or is planning to sell, non-core businesses like its Consumer and Animal Health divisions to raise cash in order to return value to shareholders through stock buybacks and dividends. The company points to a focus on its “innovative core,” meaning pharmaceutical and biotechnology products. Pfizer wants to see Remoxy through to market as the product fits with its long-term strategy. Also highly important for Pfizer, Remoxy has new patents protecting the formulation from potential generic competition through 2025. Other barriers to entry exist, evidenced by the challenge to consistently manufacture the product, as well as the likelihood that the FDA could require would-be generic companies to run clinical trials and abuse potential studies, as was done with Remoxy. These barriers are extremely attractive to major pharmaceutical companies, which have seen their businesses topple due to generic competition.
Large Market Opportunity For Remoxy
If Pfizer’s NDA is approved this third time around, Remoxy will be entering a valuable marketplace. Analysts expect the opioid market to grow from $11 billion in 2011 to $15.3 billion by 2016. Remoxy’s closest competitor, Oxycontin (sold by Purdue Pharma), has worldwide sales of nearly $4 billion annually, and analysts anticipate Remoxy could grab significant share of Oxycontin’s market. With its tamper-resistant formulation, doctors’ familiarity with the active ingredient (oxycodone), and one of the world’s largest pharmaceutical companies backing the product, investors expect this drug to be a multi-billion dollar product once approved. The first $1 billion in Remoxy sales is worth $150 million in annual revenues to Pain Therapeutics. At typical small-tier pharma valuations (4x sales), these revenues would value PTIE at $600 million (plus cash), more than triple the stock’s current valuation. We note that the upside could be much larger if the drug can achieve more than $1 billion a year in sales (royalty to PTIE goes up from 15% to 20% for sales above $1 billion). As a result, Pfizer announcing that it believes the FDA has given it a clear path to re-file Remoxy in the U.S should unlock considerable value. In fact, a doubling of the price of PTIE on such news should not be a surprise.
Tamper-Resistance Addresses An Important Market Need
Back in 2008, when the original Remoxy NDA was filed, the FDA not only accepted the application, but granted the drug Priority Review. Priority Review means that the agency has agreed to an accelerated path for approval – review timeline of six months rather than ten – and indicates that the FDA is convinced that the drug offers a significant advance over existing products. As mentioned earlier, abuse-resistant technology provides a substantial barrier to entry for generic competition because of costs to develop adequate tamper-resistant formulations and the potential challenges of mass manufacturing such products. The FDA is increasing regulations governing controlled substances as evidenced by legislation like the Stop Tampering of Prescription Pills Act. It is likely that simple, cheap bioequivalence studies will be a thing of the past when generic producers seek to apply for formulations of opioid-containing medicines. In addition to the backing, and the barriers, provided by the FDA, doctors are also expected to favor Remoxy’s abuse-resistant qualities vs. market leading pain medicine, Oxycontin. Oxycontin has no tamper-resistance technology in its formulation, and became implicated as a key contributor to the rise of opioid abuse when in 2009, Rush Limbaugh turned himself in for addiction to the drug. According to the U.S. Centers for Disease Control and Prevention (CDC), there’s a strong correlation between rising prescription painkiller sales and rising deaths related to painkiller overdoses, which increased nearly 400% from 1999 to 2008. Attacking the stigma associated with writing a prescription for Oxycontin could be a key marketing tactic for Pfizer in its promotional campaign for Remoxy.
PTIE and Durect Positioned For Big Rewards Or Pfizer May Move Towards Acquisition
Built into its licensing arrangement with King Pharmaceuticals – the original Remoxy licensee – is a generous royalty agreement for Pain Therapeutics. The company is entitled to receive 15% of Remoxy’s first $1 billion in revenue annually, followed by 20% of all sales over $1 billion in a given year. Generous, in fact, only begins to describe the revenue opportunity for PTIE. In addition to the steep royalty to PTIE, Pfizer must also reimburse Pain Therapeutics for payments to Durect Corporation (NASDAQ:DRRX), the company that created the abuse-resistant technology behind Remoxy and licensed it to PTIE. The royalty to DRRX is between 6%-11%, depending on sales levels, meaning that Pfizer may have to pay up to 31% of sales in combined royalties to these smaller companies. If Remoxy becomes a blockbuster drug, it is highly unlikely that PFE will pay this freight, and more than likely will buy out both companies to keep all the profits. The sooner the better for Pfizer, as both PTIE and DRRX are likely to become more expensive as Remoxy approaches commercialization. Assuming Pfizer gets a favorable nod by the FDA for Remoxy’s filing and approval potential, the market may start to build in take-out premiums in both PTIE and DRRX’s share price.
The economics of Remoxy’s approval – strong royalties with little risk – provide significant upside for PTIE from current levels. Analyst price targets call for the stock to reach $10 over the next 12 months. Downside risk in PTIE is limited by its strong balance sheet; the company has approximately $94 million in cash and investments – half of PTIE’s market capitalization – and expects to use just $5 million to fund operations for the remainder of 2012 (company guidance is for cash use of <$10 million for full year 2012). Profiting from PTIE is a staged process, beginning with more certainty about Pfizer moving forward to resubmit Remoxy’s NDA. Pfizer’s actions thus far illustrate a strong commitment to Remoxy, and PTIE (and DRRX indirectly) shares are expected to begin reflecting the drug’s potential this fall as Pfizer’s meeting with the FDA approaches.
