Shareholders of Catalyst Pharmaceuticals (CPRX +2.44%) got a nasty shock on Jan. 23 when the company reported that a competitor, Teva Pharmaceutical Industries (TEVA +4.30%), was planning to make a generic version of its only marketed drug, Firdapse. With Catalyst's shares falling 30% in a day before slightly recovering, it's clear that the market is interpreting Teva's actions as severely threatening, and it's reasonable for investors to wonder if it's time to start looking for the door.
So, is this biotech on the road to desolation, or is the crash of its stock just an overreaction by panicky markets?
NASDAQ: CPRX
Key Data Points
No news would have been good news
First, let's take a moment to understand what Firdapse means for Catalyst Pharmaceuticals. Firdapse treats Lambert-Eaton myasthenic syndrome (LEMS), a rare autoimmune disease that causes muscle weakness, fatigue, and a constellation of other symptoms. Sales of the drug were anticipated to bring in as much as $210 million in 2022, and its revenue has grown consistently since its launch in late 2018. And Wall Street analysts expect on average that it'll drive $322.1 million in revenue for 2023.
While the business has stated that it plans to acquire the rights to market an epilepsy drug in the first quarter of 2023, potentially generating around $136 million in sales per year, that wouldn't be enough to offset the loss of Firdapse. So at the moment, all of the company's eggs are in the Firdapse basket.
Enter Teva Pharmaceutical Industries, a generic drug manufacturer. Teva notified Catalyst that it had sent in an abbreviated new drug application (ANDA) to the Food and Drug Administration (FDA) so that it could manufacture a generic copy of Firdapse well before the drug's patent protections are scheduled to start expiring in mid-2032. Teva alleges that the biotech's patents are either unenforceable or not relevant, as its manufacturing plans won't infringe on them anyway. Now the ball is in Catalyst's court, as it likely will initiate a patent-infringement lawsuit that could block the FDA from approving any generic copy of Firdapse before May 2026.
But if the courts find that Teva's claims about the provenance and relevance of the patents are proven true before then, Teva could move forward sooner. And if that happens, it's likely to destroy Catalyst's top line within a couple of years.
NYSE: TEVA
Key Data Points
The real fight hasn't even started yet
The risk presented by Teva's initiation of the patent dispute is large, but the market seems to be jumping the gun by assuming that Catalyst will lose the legal battle. Legal proceedings tend to drag on for years, and during that time the company will continue to rake in the cash while growing its sales of the drug. What's more, the biotech can and will search for pharmaceutical assets to acquire and commercialize, and its portfolio is likely to continue growing.
Aside from having a scant $4 million in debt and more than $256 million in cash, Catalyst is strongly profitable, and it generated trailing-12-month (TTM) free cash flow (FCF) of more than $95 million. So it has an abundance of resources to use for hiring lawyers, not to mention acquiring, developing, and commercializing new medicines. Talk of its looming demise is simply inaccurate, as it could easily take out new debt at attractive rates or issue new stock to raise money -- not that it'll need to do either anytime soon.
Nonetheless, the move by Teva does ratchet up the riskiness of an investment in Catalyst's stock. It's difficult to predict the outcome of pending litigation, to say the least. That should probably be enough to discourage conservative investors from buying shares.
But for existing shareholders or risk-tolerant investors, it might make sense to buy the dip while shares are cheaper than they were before. Even if Catalyst eventually has to face fierce generic competition that erodes revenue from Firdapse, it's a living business that can adjust its actions based on its operating environment. And regardless of what happens, it'll likely be launching new medicines to drive revenue growth over the next few years.
