Sometime in the next two months, Pain will announce phase 3 data for its abuse-resistant extended-release oxycodone compound, named Remoxy. Shares of Pain have gone up 30% in the last three months in anticipation of this data -- is now the time for investors to sell their shares?
I think not. After subtracting Pain's $206 million in cash, shares are trading at an enterprise value of about $270 million. At a 20-times multiple, this valuation could be supported with only $13.5 million in sustained annual free cash flow. Any way you want to calculate Pain's expenditures, this valuation doesn't imply a lot of Remoxy sales baked into Pain's share price.
As the guilty pleas earlier in the year for Purdue Pharma show, the DEA and Justice Department have been more than unhappy with how Purdue Pharma marketed OxyContin in the past. Judging from a similar situation with another opioid named Talwin in the late 70s and 80s, there's a chance that if a more abuse-proof version is available, the easier-to-abuse OxyContin could be taken off the market or given a harsher scheduling at the DEA (effectively causing the same result).
Branded OxyContin prescriptions were down 64% last year. Temporary generic competition ended last month in the U.S. as a result of settlements with Purdue. The possibility of having OxyContin pulled from the market would be a bonanza for Pain, development partner King Pharmaceuticals (NYSE: KG ) , and drug reformulator DURECT (Nasdaq: DRRX ) .
Another benefit for Pain is that Purdue might not be willing to risk the avalanche of negative attention and possible criminal convictions that could come its way if it tries to delay a safe alternative to OxyContin from reaching the market. Purdue has shown it isn't afraid to defend its OxyContin patent estate, but if it tries to hold up the FDA's approval of Remoxy 505(b)2 with a patent infringement suit, the risks of bad PR have gone down only slightly.
As with any drugmaker, there are still plenty of clinical-trial, regulatory, and commercialization risks ahead for Pain Therapeutics. It could be prudent to hedge your investment by buying put options -- but all in all, it's a good time to be a Pain Therapeutics shareholder.
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