Pharming Group: Amid Current Bidding War For Salix, Everything Seems Fine For Ruconest And U.S. Sales
Mar. 13, 2015 10:49 AM ET | About: Pharming Group NV (PHGUF), Includes: ENDP, SHPG, SLXP, VRX
Disclosure: The author is long PHGUF. (More...)
Summary
Ruconest, Pharming’s HAE drug partnered with Salix, has recorded its first US sales in November 2014 and they might turn out far stronger than expected.
Despite concerns about Ruconest's future arising from Salix’s announced acquisition by Valeant, and now Endo’s counteroffer, everything seems to be going fine and Ruconest will continue to be effectively sold.
Ahead of Q1-2015 results, I believe there is significant short-term upside potential not yet taken into account.
Pharming Group (OTC:PHGUF) - listed on Euronext Amsterdam - is a little known Dutch specialized biotech developing a promising technology platform addressing many potential indications in lucrative orphan drug markets - see my complete investment thesis here.
Pharming's main value-driver to date is Ruconest, a recombinant treatment for acute Hereditary Angioedema ('HAE') attacks that was approved by the FDA in July 2014 - a $400 million annual market in the US only with very few competition. Ruconest is also currently being tested in a Phase 2b trial in the US for preventive (prophylactic) treatment of HAE, another $400 million market with only one approved competitor to-date (Shire's (NASDAQ:SHPG) drug Cinryze). In both indications, Ruconest is partnered with Salix (NASDAQ:SLXP) for co-development and marketing in North America and Pharming just reported on its first quarter of sales.
In light of recent events ("bidding war") regarding Salix's acquisition - with a proposed offer by Valeant (NYSE:VRX) followed by a counteroffer made by Endo International (NASDAQ:ENDP) - Pharming's stock volatility has been somewhat exacerbated due to uncertainties about Ruconest's future in the US.
So let's take a closer look at what is actually going on with Ruconest, and what difference Salix's acquisition would make in one case or the other.
First of all, when Valeant was still the only bidder in the place, it confirmed that it had "no plans to reduce Salix's specialty sales forces or hospital, key account and field reimbursement teams." It means that Ruconest's sales team would remain in place. Although Salix had no prior experience in selling HAE drugs, when it acquired Santarus in 2013 and added Ruconest to its pipeline, it has showed continuous interest in the product - completing ongoing trials, starting new extension trials on prophylactic treatment and confirming interest in developing Ruconest for other indications such as acute pancreatitis. Now that the drug is approved and commercialized, Salix has been putting efforts in recruiting competent sales reps that have been selling HAE drugs and know how to quickly develop Ruconest based on its competitive advantages.
So, with Valeant agreeing to keep those teams in place, there would be no drastic change about Ruconest marketing and sales ramp up.
What about Endo? If Salix's board decides to go with Endo's offer, it would in fact be more of a merger than an acquisition, as both companies have similar market caps - and according to the terms of the offer, Salix's shareholders would own 40% of the combined company. Therefore, it seems reasonable to assume that such a combined entity would not have fundamentally different priorities than those of Salix today.
So, if nothing would really change for Ruconest and Pharming's deal, how is the current state of affairs then?
For the first partial quarter on the market (November 2014 to end of the year), Pharming reported about EUR 0.3 million in Ruconest royalties - along with the company's first operating benefit of EUR 2.9 million for the full year. Since Pharming is entitled to 30% of Salix's net sales that would mean that initial sales of Ruconest were a little under $1 million in two months. With a reimbursed price of around $5,000 per vial, that represents around 200 vials sold.
As it was confirmed by Sijmen de Vries, Pharming's CEO, in the FY2014 conference call on March 5 that as a commercial offer, the first two doses of Ruconest were provided free of charge to every new patient, that would mean that actual product use would have been far greater that those 200 vials… In fact, if we estimate that Ruconest's target patients have on average 6 to 11 HAE attacks per year, that would mean a significant proportion of treated patients would not have been billed during those first two months - as under 84kg patients can be treated with only one vial (a significant dosing advantage for Ruconest) and most patients would have experienced one or two attacks at most. Only around 25% of HAE patients experience a significantly greater number of attacks (more than 24 per year) and those would have already used a larger number of Ruconest vials, mostly accounting for the $1 million sales in the period.
Therefore, I believe that Ruconest sales are indeed experiencing a very strong start, although the effect of those sales would only be fully reflected in Q1-2015 results (set to April 30). With this assumption, I anticipate that a quick revaluation of Pharming could be happening when results are published - while current so-called "uncertainties" create volatility and limit the effect of underlying good news, I believe this is a very good entry point ahead of Q1 results at the end of April.