Catalyst Pharmaceuticals (NASDAQ:CPRX), a small-cap rare disease specialist, reported its third-quarter earnings after the bell on Tuesday. Yesterday, the drugmaker's shares closed down by 7.5% on over three times the average daily volume.
The stock dipped in response to two key developments:
- The company said that Firdapse -- a newly approved treatment for the muscle disorder known as Lambert-Eaton myasthenic syndrome (LEMS) -- should generate total annual sales of about $100 million in 2019. Unfortunately, Wall Street expected the drug to haul in $111 million for the year.
- Catalyst's high-end 2020 revenue projection of $155 million is also exactly $11 million shy of analysts' consensus revenue estimate for next year.
Although Catalyst's management didn't dwell on the underlying reason for these lighter-than-expected revenue figures, all signs point toward the off-label competition emanating from Jacobus Pharma's Ruzurgi. Underscoring this point, management noted that about 30 patients have now switched from Firdapse to Ruzurgi. That works out to a loss of around $11.3 million in annual revenue.
Should investors fear this competitive threat? Or is Catalyst's stock now safe to own? Let's take a look at the facts to find out.
Catalyst: The worst-case scenario
Whenever you buy a small-cap biotech, it's arguably always a good idea to consider what the worst-case scenario might turn out to be for the company in question. Tiny biotechs, after all, can go belly-up in the blink of an eye. Fortunately, that doesn't appear to be the case here.
Catalyst's low-end revenue guidance for 2020 came in at $135 million. Presumably, this lower end of the company's revenue projection is based on the assumption that Ruzurgi's market share will grow marginally in 2020, and Firdapse's blistering uptake will slow significantly next year due to the difficultly associated with identifying new LEMS patients.
What does this low-ball revenue figure mean in terms of Catalyst's valuation? The drugmaker's shares, in effect, would be trading at approximately 3.5 times next year's sales. For an orphan drug specialist, that's an absurdly cheap valuation quite frankly. The market, in turn, seems to be bracing for another blow from the Ruzurgi ordeal.
What might the market be anticipating? The clear and present danger is the fate of Catalyst's ongoing lawsuit against the FDA over Ruzurgi's approval. If this lawsuit turns into a dud, the company may be forced to compete with Ruzurgi on price to maintain its favorable reimbursement status. In that event, Firdapse's 2020 sales would likely fall well below expectations. That is the worst-case scenario facing Catalyst and its shareholders heading into 2020.
Is Catalyst's stock too risky?
There are a lot of moving parts to this rapidly developing story. If Catalyst prevails in its lawsuit, for instance, Firdapse would have a real shot at generating $400 million in sales by the end of 2023. That would mean that the biotech's shares are an outright bargain at these levels.
The problem is that the outcomes of lawsuits in the pharma arena are notoriously difficult to predict ahead of time. In other words, investors shouldn't be shocked if Catalyst loses this legal challenge -- allowing the Ruzurgi overhang to remain firmly in the picture for the whole of 2020 and beyond.
Bottom line: Catalyst remains a high-risk, high-reward stock following the company's Q3 report. As a result, this small-cap biotech probably doesn't belong in your portfolio unless you are comfortable with high levels of risk and uncertainty.