Puma Biotechnology's (NASDAQ:PBYI) roller-coaster ride to approval is finally over. After fits and starts in clinical trials, the FDA gave the company's breast cancer drug, Nerlynx, a green light, clearing the way to its commercialization later this year. The decision is welcome news to investors who have endured violent moves in the company's share price over the past two years. Will shares continue higher now that an approval is in hand, or will they drop?
First, the back story
Alan Auerbach is Puma Biotechnology's founder and CEO, and this isn't his first rodeo. Previously, Auerbach was the founder and CEO of Cougar Biotechnology, the company that developed the multibillion-dollar prostate cancer drug Zytiga, which Johnson & Johnson acquired for $1 billion in 2009.
Auerbach founded Puma Biotechnology shortly thereafter to develop Nerlynx, a once-daily oral tyrosine kinase inhibitor that can be used as maintenance therapy in adults with early stage HER2-positive breast cancer to delay disease progression.
While today's news shows that developing Nerlynx was well worth the effort, it was far from a lock that Nerlynx would win over regulators and make it to market. There's a big unmet need for new breast cancer treatments like Nerlynx, but a higher-than-hoped rate of grade 3 diarrhea was observed in trials, and that cast doubt over Nerlynx's future.
Globally, about 1.7 million Americans are diagnosed with breast cancer every year, and of them, about 20% to 25% involve patients who over-express the HER2 protein. Breast cancer can be tougher to treat in these patients, and being HER2-positive can increase the likelihood the disease will return.
Because of this risk, breast cancer patients are often prescribed one year of Herceptin therapy to help delay progression following surgery. While it works for many patients, about 25% still see their disease return despite using Herceptin.
In the U.S., Puma Biotechnology estimates there are roughly 36,000 early-stage breast-cancer patients who could be prescribed Nerlynx following Herceptin therapy. In these patients, Nerlynx could make a significant impact, given that Nerlynx reduced the risk of disease recurrence or death by 34% in trials.
Nerlynx's efficacy has never been the big reason for investor concern. In fact, optimism about Nerlynx's role in the indication helped Puma Biotechnology's shares skyrocket to more than $250 per share in 2014.
The cloud hanging over optimism was safety. In trials, grade 3 or higher diarrhea was more common than desired, and that raised questions over patient use and adherence, if eventually approved. As a result, shares fell sharply in 2015.
Last year, however, shares began making headway again, when Puma Biotechnology reported that using anti-diarrhea medicine alongside Nerlynx reduced occurrence rates to 16.8%. This year, shares continued to climb on optimism that a sub-20% rate would be good enough to win FDA approval.
Is Puma Biotechnology undervalued?
It remains to be seen how many doctors will embrace Nerlynx, and how quickly they begin to prescribe it.
While the risk exists that Nerlynx could be a commercial dud, there's evidence to suggest its sales could at least be in the hundreds of millions of dollars per year.
It's estimated that use of Herceptin in the adjuvant setting for one year generates between $4.5 billion and $5 billion in annual sales worldwide. Since many of these patients could get transitioned to Nerlynx after their one year is up, Nerlynx would seem to have a good shot at sales in the nine-figure range, or higher.
Although industry watchers' forecasts vary, and peak sales forecasts often miss the mark by a wide margin, they generally back up the thinking that Nerlynx could be a top seller. For example, Leerink is targeting Nerlynx sales of more than $200 million next year, and it believes U.S. sales could eventually peak at $1.3 billion per year.
If they're in the ballpark, then an argument could be made that Puma Biotechnology's expensive in the short term but arguably underpriced long-term.
It's not uncommon for biotech stocks to trade at high-single-digit multiples to revenue, or for mergers and acquisitions to value stocks even higher. For instance, shares in the cancer drugmaker Celgene trade at 9 times sales, and last year, Pfizer paid about 14 times sales to acquire 50% of the prostate-cancer drug Xtandi.
In the short term, Puma Biotechnology's shares are trading at about 17 times Leerink's 2018 revenue estimate. If sales make it to $1 billion, then you could argue that buying it today, when its market cap is only $3.5 billion, is a bargain. In that scenario, perhaps a valuation of $5 billion-plus is more reasonable.
Ultimately, Puma Biotechnology's valuation depends on what investors are willing to pay for it, and that's going to depend on Nerlynx's success or failure. The company plans to start selling it in September, so we should have more insight into its commercial opportunity at this time next year. Until then, this is a risky stock with an intriguing drug that, long-term, might be undervalued.