(source : Pharming ; NB: since end of 2014, status of Ruconest in prophylaxis of HAE should also display "clinical phase" instead of pre-clinical)
A turning point in Pharming's history
A look at Pharming's long-term chart clearly shows that, with more than 25 years of existence, the company has gone through rough patches in its history. Established as an independent company in 1995, Pharming went public in 1998 at a price of 30 florins (EUR 13.61) per share. In the early 2000's, Pharming was a flourishing company which had signed important deals to co-develop drugs for HAE with Baxter (NYSE:BAX) and Pompe disease with Genzyme, among others.
However, with heavy operational expenses and not enough revenues, Pharming was on the brink of bankruptcy and had to gain protection from its creditors until the end of 2002. This was the first major blow in the company's development plans, as Pharming had no other choice than to sell its stake in its recombinant Pompe disease treatment to Genzyme -- a drug that Genzyme took all the way to commercialization and that became the blockbuster Cerezyme.
In the following years, Pharming chose to concentrate on its HAE asset, taking it through clinical trials in Europe on its own and partnering with a US company (Santarus, later bought by Salix) to get FDA approval. Unfortunately, the need for financing conducted Pharming to very heavy stock dilution -- in 2008, the company had approximately 100 million shares and this number had shot up to 900 million by 2012. To this date and following a 1:10 reverse split, Pharming has approximately 400 million shares on the market.
This excruciating ordeal for historical shareholders should now be a thing of the past though, as Pharming's CEO, Sijmen de Vries, declared in a September 2014 interview (in Dutch) that "a capital increase to survive is not needed" anymore. Therefore, after years of research and equity burning, normalization might have finally come for Pharming as 2014 should be the first in a series of cash flow positive years for the company, owing to significant milestones received from its partners and expected recurring profits from US and European sales of Ruconest.
Key events and milestones
Ruconest's first sales numbers in the US are obviously one of the main potential catalysts for 2015. One should not expect to see significant numbers from 2014 sales however, as the product was only sold for two months in Q4-2014 (from November) and more than a few months' time should be expected to see sales take off.
On the clinical front, results from Ruconest's current phase 2 trial for HAE prophylactic treatment are expected in 4Q-2015 or early 2016. Before the end of 2015, Pharming and Salix are also expected to announce the launch of a phase 2 clinical trial for Ruconest in acute pancreatitis treatment.
With no specific schedule, news of market extensions and/or clinical progress could be announced through one of Pharming's partners outside of Europe, such as market authorization for Ruconest in Turkey or in South-Asia as well as clinical progress from SIPI's China developments.
Potential risks and financials
With only one product commercialized, Pharming's mid-term future strongly depends on Ruconest sales picking up in the US and in Europe. If sales are deemed disappointing by investors, Pharming's market cap could stagnate or decline over the next months and years.
Like many developing-stage biotechs, Pharming's current market cap partially depends on valuations attributed to early or mid-stage assets in ongoing clinical trials. Should any clinical trial fail to reach its endpoints, Pharming's valuation could be negatively affected. However, I estimate that Pharming's current valuation is mainly based on its marketed product Ruconest, thus limiting exposure to potential clinical failures at the current market cap.
With EUR 23.8 million in cash at the end of Q3-2014, excluding a $20 million milestone received in Q4-2014 from its partner Salix, Pharming's cash reserves should be sufficient to fund commercial and R&D activities for several years (FY 2013 operating costs were app. EUR 13 million and total net loss was app. EUR 15 million) -- at least 2 to 3 years at current cash burn and not accounting for any increase in revenues.
Conclusion and valuation model
My valuation model is based on 2020 projected sales of Ruconest in two already approved markets (HAE attack treatment in Europe and in the US) and assumes conservative probability of success for Ruconest's extension in HAE prophylaxis in the US (75% despite proven efficacy in a previous study).
Ruconest's market share in the US for HAE attacks is estimated to reach 25% by 2020 -- due to competitive advantages listed above -- and European sales are estimated to grow at an annual rate of 25% owing to opening of new markets and direct commercialization efforts by Pharming -- 2020 sales of $10 million compared to $3.4 million in 2014 with a mean royalty rate of 35% coming from direct sales and SOBI distribution depending on market.
Ruconest in HAE prophylaxis treatment in the US -- expected to reach market around 2019 at current trial pace -- is estimated to grab around 20% of market share by 2020 as competition is limited to Cinryze only. The total size of the HAE prophylaxis market is based on $400 million FY 2013 sales of Cinryze -- although it is estimated that only a portion of HAE patients are currently treated and this market could be growing further in the coming years.
According to this risk-adjusted NPV valuation model and considering 2020 royalty revenues (EU + US) of $51.50 million, I estimate the current fair value of Pharming to be at approximately $300 million (or app. $0.720 per share). This represents a 70% upside on the share price at time of writing (app. $0.420 or EUR 0.370).
As of now, valuations for Ruconest's additional indications (outside of HAE prophylaxis) are not specifically forecast as Pharming has yet to prove significant clinical efficacy and define further strategic options. However, potential for these promising developing assets is included in a 20x multiple of 2020 net profits in the company's valuation model.
See Table 2 below for summary of my valuation model's main assumptions (rNPV at 12.5% discount).
- Table 2: summary of rNVP valuation model of Pharming
(click to enlarge)