For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What Raptor Pharmaceuticals does
Raptor Pharmaceuticals is a biopharmaceutical company focused on treating both ultra-orphan and chronic diseases. The company currently has one drug approved by the Food and Drug Administration called Procysbi for the treatment of nephropathic cystinosis, and is testing RP-103 (the scientific name for Procysbi) in mid- and late-stage trials for the treatment of nonalcoholic fatty liver disease and Huntington's disease, with data due out for both indications in 2014. Its other clinical-stage drug is Convivia, which is licensed out to Uni Pharma and is currently in mid-stage trials for ALDH2 deficiency.
In Raptor's most recent quarterly results, the company delivered $21,000 in total revenue from Procysbi sales -- in all fairness, the drug was only launched 13 days prior to the end of the quarter -- compared to no revenue in the year-ago period while losses ballooned from $3 million, or $0.06 per share, to $24 million, or $0.43 per share. Selling and administrative expenses more than doubled, while fair value adjustment to its warrants following its share price spike hurt its bottom-line figures.
Whom it competes against
Here's the good news: Raptor Pharmaceuticals' Procysbi is pretty much in the clear when it comes to competition for a while. Having received orphan drug status, it will not have any competition for at least seven years in the U.S., and looks to be on its way to an approval in Europe after receiving a positive opinion from the European Medicine Agency's panel.
Raptor's remaining pipeline has all-or-nothing potential. Take RP-103 for Huntington's disease as a perfect example. Right now, treating HD -- an inherited and rare neurodegenerative disorder that leads to degeneration in the cerebral cortex and basal ganglia -- is done simply on a symptomatic basis. There is no cure, just palliation of the symptoms. This means Valeant Pharmaceuticals (NYSE:BHC) and GlaxoSmithKline's (NYSE:GSK) Xenazine, which is approved to treat chorea (an involuntary muscle movement) associated with HD, is often used to treat the motor aspects of the disease. The need for mood-stabilizing, or antidepressant drugs like Forest Laboratories (UNKNOWN:FRX.DL) now generic Lexapro, are also commonly prescribed for HD patients. RP-103, since it has demonstrated the potential for blood-brain barrier transcendence, has an actual shot at alleviating the cause of the disease, and not just focusing on the symptoms.
After carefully reviewing the prospects on Raptor Pharmaceuticals, I've decided to make a CAPScall of underperform on the company.
I don't make a CAPScall of underperform without some hesitation here as ultra-orphan drug companies are well protected by patents for many years, and they can easily garner six-digit annual price tags for their therapies. However, valuation stands out as a very large concern given the maximum potential of Procysbi in nephropathic cystinosis.
The total number of people who've been diagnosed with nephropathic cystinosis is only estimated at 2,000 worldwide with roughly 500 of those persons in the U.S. In a best case scenario, Raptor is going to generate $60 million in peak sales in the U.S. and perhaps another $50 million-$60 million in Europe (assuming it's approved). At its current market value of $700 million, it's valued at somewhere between five and six times the peak sales estimates of Procysbi, worldwide. That seems particularly rich, all things considered.
Another factor that gives me cause to pause on Raptor is its mid- and late-stage studies. At its current price, investors appear to be pricing in moderate success for RP-103 in treating HD and nonalcoholic fatty liver disease. The concern I have with HD is the same concern I have with any drug designed to treat disease of the brain -- they rarely work. The blood-brain barrier is largely a mystery, and, as a good example, nearly every Alzheimer's drug that's worked its way into late-stage trials in recent years has gone belly up. Eli Lilly's (NYSE:LLY) solanezumab may ultimately show a benefit in fairly early stages of Alzheimer's, but it failed to meet its primary endpoint in late-stage studies last year. The same goes for Pfizer and Johnson & Johnson's bapineuzumab, which also failed in multiple late-stage trials. The track record for success isn't high, and investors should keep that in mind when properly valuing Raptor.
Unless Raptor really stuns me with its nonalcoholic fatty liver disease trial, then I'm not going to be very supportive of its current pricing. Trading at more than five times peak sales is a level that I feel wouldn't even attract the most desperate of big pharmaceuticals companies looking to nab growth prospects through an acquisition. My suggestion is to keep on moving until either Raptor gets significantly cheaper or reports fantastic NAFLD data in 2014.