There's no such thing as free lunch, right? Or maybe there is...
Tiny biotech Portola Pharmaceuticals (PTLA) has won itself collaboration agreements with some of healthcare's biggest pharmaceutical companies, such as Johnson & Johnson, Pfizer, and Bristol-Myers Squibb, for developing a drug called andexanet alfa.
Large companies partnering with smaller ones is nothing new in the world of biotech, but what stands out here is that Portola has managed to secure this funding while maintaining 100% of the worldwide commercialization rights to the drug. Money for nothing? Sounds like a free lunch to me.
What's in it for Big Pharma?
You'd be right to question why these large companies are willing to fork over funding without getting something in exchange. Well, it turns out that Portola's drug could kick off a takeover of a new class of blood-thinners called Factor Xa inhibitors, which includes J&J's Xarelto and Bristol and Pfizer's Eliquis. Andexanet alfa is being developed as an antidote to these anticoagulants and would be used in the relatively rare case of a bleeding event or an emergency surgery of a patient taking a Factor Xa inhibitor.
Since no such antidote is currently available, doctors have been hesitant to prescribe Factor Xa inhibitors to higher-risk patients. Instead, doctors have been sticking to an older blood-thinner called warfarin, which can be reversed with Vitamin K. Factor Xa inhibitors have fewer side effects and are more effective than warfarin, but their sales don't stand to really take off until an antidote is available. And suddenly the fuss over Portola, with its game-changing antidote in phase 3 trials, makes sense.
Furthermore, you better believe that if andexanet alfa gets FDA approval and makes its way to market in 2016 as planned, Portola won't be on its own to commercialize it. Marketing efforts for Factor Xa inhibitors would incidentally promote andexanet alfa, as increased use of these anticoagulants would require hospitals to have the antidote available. Indirectly, the deep pockets of J&J and its peers could put some wind in andexanet alfa's sales. Ultimately, Portola sees the opportunity for Factor Xa antidotes being $2 billion -- bigger than the company's entire current market cap.
An even bigger opportunity
Portola is also developing its own Factor Xa inhibitor, betrixaban, which holds several distinct advantages over competing anticoagulants. First and foremost, if approved, it would be the first anticoagulant indicated for both in-hospital and outpatient use. The latter presents a significant opportunity, as the majority of the blood clotting events in question occur after patients are released from the hospital.
Betrixaban also stands to compete for in-hospital use given that it has a longer half-life than its competition, and its method of metabolism means it may have fewer drug-to-drug interactions than its competitors. Portola has stated that it sees a $3 billion-$4 billion opportunity for betrixaban if it wins approval for both in-hospital and extended-duration use, though this should be taken with a grain of salt. Results from the drug's phase 3 trial should be announced early next year.
At what cost?
Looking at the underlying valuation of the company, it can't be denied that Portola is on the expensive side. According to projections from Capital IQ, the company doesn't stand to become profitable until 2019 -- and even then, revenue is only projected to be roughly $212 million.
Cash burn is a more pressing financial issue that the company faces. The company's cash equivalents totaled $392.3 million exiting 2014, and management is expecting the company to end 2015 with less than half of that left.
Given that marketing is just about to start ramping up (if the drugs do indeed get approval), it's safe to say expenses will only increase from here -- and the money won't come from thin air. In March, Portola announced an offering of common stock netting the company $94.2 million.
More shareholder dilution is possible, but my hunch (OK, hope) is that Portola will be able to squeeze some more funding out of its Big Pharma partners without having to further dilute. And, given that Portola still has the huge advantage of owning 100% of the commercial rights to both of its late-stage drugs, it also has the option of partnering and licensing out some rights in exchange for funding.
Is this a portal to profit?
The next two years will prove crucial for Portola as its phase 3 trials for andexanet alfa and betrixaban wind down and the focus hopefully pivots to approval and commercialization. More conservative investors may want to wait until these drugs gain approval and have a few quarters of commercial success before diving in; however, at that point, much of the success is likely to be priced into shares. For the most speculative portion of my portfolio, I've already built a small position, and am seriously considering adding to it in hopes that Portola can become the next big player in the $10 billion market for anticoagulants.