Like many biotech stocks, Catalyst Pharmaceuticals (CPRX -1.93%) has quickly rebounded from the low point it reached during the first quarter's pandemic-driven market plunge. The stock is up about 31% year-to-date, outperforming both the Virtus LifeSci Biotech Products ETF (up 6%) and the S&P 500 (down 11%).
The biopharma develops therapies for rare neuromuscular and neurological diseases, and last year was a turning point for the company. After receiving FDA approval in November 2018, it was able to launch Firdapse, a treatment for adults with Lambert-Eaton myasthenic syndrome (LEMS), an autoimmune disorder that occurs between nerve cells and muscles.
Considering how successful 2019 was for Catalyst Pharmaceuticals, can investors expect to see similar results this year and beyond?
A promising pipeline... with caveats
Catalyst Pharmaceuticals generated $102.3 million in net product revenues from Firdapse last year, with a total of 532 patients enrolling for treatment. But growth from here will be dependent on whether it can drive wider adoption of its treatments, and on successes in its clinical trials.
It is estimated that there are 3,000 people living with LEMS in the U.S., and Catalyst looks to increase the use of Firdapse among them through its sales efforts and distribution program. The company is shifting the focus of its sales efforts from neuromuscular specialists to neurology and neuromuscular healthcare providers.
Catalyst's distribution efforts may prove useful for capturing the LEMS market and improving its top-line growth. The company developed a personalized treatment program called Catalyst Pathways to provide support, education, and guidance to patients for proper dosing requirements. Also, it will be leveraging its distribution efforts through exclusive specialty pharmacies to target patients and offer treatment options. It's not yet clear how much the pandemic will affect the success of its sales and distribution efforts; the company will provide a full report on these activities during its first-quarter earnings call in May.
Catalyst has plenty of upcoming catalysts that could drive its stock higher. However, the pandemic's influence may hinder the timely completion of clinical trials, and could delay reporting.
Investors should note the upcoming events that will occur in Q2 2020 or later:
- Data readout for a phase 3 trial of Firdapse on muscle-specific kinase myasthenia gravis (MuSK-MG). If the trial is successful, Catalyst expects to submit a supplemental new drug application (sNDA) to expand Firdapse's use near the end of the year.
- Results of a proof-of-concept study for spinal muscular atrophy (SMA) Type 3.
- A regulatory decision regarding a New Drug Submission (NDS) for the use of Firdapse to treat LEMS patients in Canada, which is expected in the second half of the year.
The company is currently in talks with Japanese regulatory authorities to market Firdapse in Japan. An approval would create opportunities for additional revenue streams.
Among the areas of risk for the company and its investors are a pending lawsuit, a political and public relations problem, and a well-positioned competitor.
On Feb. 4, 2019, Sen. Bernie Sanders sent a letter to Catalyst Pharmaceuticals requesting an explanation as to why it had priced Firdapse (amifampridine) at $375,000 for a single year of treatment.
Sen. Sanders' letter pointed out that a functionally identical drug (Jacobus Pharmaceuticals' Ruzurgi) has been provided to LEMS patients for free under a compassionate-use program. The key difference between the two versions of amifampridine: Firdapse doesn't need to be refrigerated.
In June 2019, Catalyst filed a lawsuit alleging that the FDA's regulatory decision in May to approve Ruzurgi for pediatric LEMS patients was in part motivated by pricing concerns surrounding Firdapse. The lawsuit noted that the Ruzurgi approval was supported by evidence from well-controlled studies of the drug in adults, suggesting that doctors could potentially prescribe Ruzurgi off-label rather than Firdapse. In addition, a publication of the Regulatory Affairs Professionals Society (RAPS) reported that documents in the lawsuit focused on competition and price issues. Catalyst's pending lawsuit claims that this approval violates many conditions of the FDA regulations related to labeling, exclusivity, and other matters. The decision is expected near the middle of this year.
If the result of that lawsuit is that Catalyst loses regulatory exclusivity, the impact of competition could significantly hinder its revenue growth and affect its strategy.
Stable financials in an uncertain environment
Catalyst Pharmaceuticals is in a relatively healthy financial position now. Its assets exceed its liabilities, and it has enough funds to operate for at least the next 12 months. It has $94.5 million in cash and investments and reports that it has no funded debt. Also, the company had a debt-to-equity ratio of 1.08% in its most recently reported quarter. This suggests that Catalyst is not using too much debt to finance its operations.
Management says that so far, the coronavirus pandemic's impact on the company's business has been "minimal," but also said they will "continue to evaluate our yearly guidance based on this dynamic environment." Investors can expect to hear more on that topic during the company's next earnings call in May.
Catalyst is currently trading at 12.8 times future earnings, which is lower than its trailing 12-month ratio of 16.2; a low forward price-to-earnings (P/E) ratio indicates that analysts anticipate slower growth ahead. Peers such as Exelixis and Pfizer are trading at forward P/Es of 33.5 and 13.7, respectively, indicating how the market views Catalyst's prospects relative to the broader biotech sector.
But P/E isn't the only metric one can use gauge how a stock is valued. Catalyst Pharmaceuticals' price-to-book ratio is 5.92, while the biotech sector's average P/B is 3.36, which suggests that the company is overvalued compared with the broader biotech market.
Another metric to consider is return on equity (ROE); an overvalued growth stock will frequently have a low ROE and high P/B ratio. Catalyst has an ROE of 46.06%. Generally, investors consider 15% or higher to be a good value. A high ROE demonstrates that the company is making effective use of investors' money. Although in many cases, that type of effective management provides security to investors, in this case, its value is diminished. Key factors that will determine how the company performs in the future -- court decisions, regulatory decision, and even the results of clinical trials -- are beyond management's ability to control.
Too fast, too risky
Although the company currently has not felt much impact from the pandemic, and its financials are healthy, its current legal, regulatory, and competitive issues -- and the possibility that the pandemic will delay its clinical studies and pipeline progress -- make this stock risky as a long-term investment. It's now only 4% or so below its 2020 peak, which it hit just before the February market plunge. Investors will want to consider all the potential risks facing Catalyst Pharmaceuticals before investing in its stock.