A Rare Junior Biotech–It Has Cash Flow! Opiant Pharma OPNT-NASD

Junior biotechs are like junior mining deals to me–no cash flow, completely reliant on the Market for financing their research, and a long lead time between major catalysts.

As a result, they generally trade very cheaply to what the potential is–you know, if in the case of mining they hit the motherlode or in biotechs find a drug that gets approved. That means capital gains can be a life changing win–if you pick the right one and have the patience of Job.

Opiant is little different–they are a drug development company …BUT… have a royalty stream from a leading drug fighting the opioid overdoses – and one that I think is the only one you can take in a nasal spray.  

Being the only one, they appear to have a technology moat in this manner. They don’t need to raise money, so there is no ongoing cap on the stock like there is for most junior biotechs.

Combined, those two factors make the stock interesting to me. Then they have almost half their market cap in cash. What sealed the deal for this stock to get on my radar is that there is only 4 (four) million shares out…giving the stock explosive upside if the Market adopts one of their products in a big way.

I am not long, but I am watching.

The opioid crisis is obviously A Big Deal in North America, and sadly (for society), the market for this drug is increasing rapidly.

The good news for the company is that they will receive a balloon milestone payment tied to record revenue from the drug by year end.  The company has lots of cash. And they are sitting on a pipeline of high impact candidates.

And all this sits in a very tight structure, only 4 million shares, though there are a bunch of management options to the CEO, Dr. Roger Crystal, and Chairman Dr. Michael Sinclair.  So liquidity is an issue; doesn’t trade much.

The $14 share price isn’t reflecting much other success.   If I assume the basic (non-diluted) shares outstanding of 4 million, the market capitalization is $56 million.

Assuming the milestone payment of $11 million and taking the midpoint of the company’s year end cash guidance of $18.5 million (which I think they will exceed), we are left with over half the market cap in cash.  If they have been conservative with their year-end cash estimate, as I expect, then that number is only higher.

Most analysts pay more attention to Enterprise Value (EV) than Market Cap (MC). EV = MC + net debt or MC – net cash. So subtract the $18.5 million cash from the $56 MC and you get EV of $37.5 million.

Paying $37.5 million for 3 high-impact development opportunities, and the continued NARCAN royalty stream seems…somewhat reasonable.

QUICK FACTS 

Trading Symbols:                OPNT

Share Price Today:              $14.50

Units Outstanding:              4 million 

Market Capitalization:         $58 million

Year End Net Cash:              $30 million (includes forthcoming royalty)

Enterprise Value (EV):        $28 million

2019 Revenue Estimate       $29 million

2020 Revenue Estimate       $28 million

POSITIVES

• Over $30 million in cash on the balance sheet by year end
• EV= 1x sales
• Continued royalty stream from NARCAN (naloxone nasal spray) sales
• Naloxone market expected to grow 20-25%+ CAGR over next 5 years
• High impact pipeline of overdose intervention drug candidates

NEGATIVES

• Naloxone competition on the horizon from generics and OTC options
• No drug pipeline catalysts until 2020
• Overhang from legacy stock options in the money ($7.25-$10 strike)

NARCAN Nasal Spray

Opiant Pharmaceuticals is a development stage pharmaceutical company focused on developing solutions for addiction.

The company would operate like a typical development stage pharma company, burning cash every quarter, except for one unique attribute.  Opiant has a stream of royalty and milestone payments coming from a revenue producing product, NARCAN nasal spray.

Source: The Atlantic: Naloxone Has Made Overdosing Less Terrifying

NARCAN contains the active ingredient Naloxone, which is for treatment of opioid overdoses.  Naloxone reverses opioid overdose by inhibiting heroin and other opioids, including commonly prescribed painkillers, from binding to opioid receptors in the brain.

The advantage of NARCAN is its formulation into a nasal spray.  The alternative is injection, which requires a level of expertise–and some cost– to administer.

The opioid epidemic in the United States is staggering.  I was personally shocked by some of the numbers.  According to the Center for Disease Control (CDC) there are 34 million Americans that are at “elevated risk” of an opioid overdose.

That statement is pretty shocking.  It amounts to 10% of the population of the United States.  With the proliferation of fentanyl this is only getting worse.

With the epidemic so large and getting larger, sales of NARCAN have been strong. This drug can help people manage their opioid addiction by just a nasal spray–I’m surprised users/media/investors aren’t on this story more.

Emergent BioSolutions – NARCAN’s current owner

NARCAN is owned and marketed by Emergent BioSolutions (EBS-NYSE).

EBS is a mid-sized ($2.3 billion market cap) company that in addition to NARCAN sells vaccines and anti-infectives like an antidote to the anthrax virus BioThrax.

EBS bought the rights to NARCAN late last year for $735 million from Adapt Pharmaceuticals.  Adapt is who Opiant made the royalty agreement with.

The EBS purchase was a significant pay-up for the drug, but they have done a good job of building revenue to justify it.  Sales of NARCAN in the first six months of 2019 increased to $138.5 million from $80 million the previous year.

NARCAN Royalty Revenue

Sales of NARCAN are directly tied to the royalty that Opiant receives.  As annual revenue increases, Opiant’s royalty goes up as well.

Source: Opiant May Investor Presentation

Opiant has a sub-royalty agreement with SWK whereby they pass on 10% of the gross royalty they receive.  They made the agreement with SWK in December 2016 in return for upfront cash.  Opiant keeps the other 90%.

The increasing royalty can be seen in Opiant’s increasing revenue this year. Q1 19 royalty revenue was $3.75 million.  That increased to $6.1 million in Q2.

EBS has guided somewhat lower revenue from NARCAN in the second half of this year – they said it would be between the high-$50 million and low-$60 million range in Q3 and Q4.

The tiered royalty means that royalty revenue should remain strong even if sales slow.  Using the EBS revenue guidance for NARCAN, I come up with the following estimates for the third and fourth quarter revenue.

Source: Opiant and EBS SEC Filings

In the second quarter Opiant was able to do 39c EPS and generate $2.4 million of funds flow from their ~$6 million revenue run rate.

NARCAN Revenue and Demand

Revenue of NARCAN was boosted in the first half of the year following the adoption of naloxone co-prescriptions in the state of California in January and New Mexico in June.

Co-prescriptions are legislation that require the dispensing of a naloxone product with some opioid prescriptions.  The product is prescribed to anyone considered at risk.  Opiant says this works out to about 10% of opioid prescriptions.

Naloxone scripts are covered by 97% of insurers, with co-pay that is usually no more than $10 and many insurers cover the co-pay entirely.  The cost of naloxone prescription is insignificant to the majority of patients.  NARCAN is the preferred product because it is the easiest to administer.

In addition to legislated prescriptions, scripts (that’s slang for prescriptions) come from first responders and opioid addicts.  EBS has guided that revenue is about 50/50 between retail demand and what they call public interest demand (ie. first responders and co-prescriptions).

While EBS guidance has NARCAN sales declining a little in the second half, it’s possible there is a beat.  On the August EBS conference call one analyst noted that scripts written (which are publicly available data that are often tracked by analysts) had increased in July versus the second quarter average.

There is also a large milestone payment.

A further boost in revenue could come from any number of states that are considering co-prescription legislation.  New Mexico was the 9th state to implement the legislation (joining Virginia, Rhode Island, Vermont, Arizona, Florida, Washington, Ohio, and California).

Also, the sad reality is that demand for Naloxone based products is increasing.  A couple of recent market research reports, one by Fior Markets and the other by Reports and Data, pegged the global market size at over $900 million by 2026, versus $177 million in 2018.  The works out to a compound annual growth rate (CAGR) of over 20%.

Milestone Revenue

In addition to royalties, Opiant receives certain payments when sales or development milestones are achieved.

One of these milestones is expected to occur later this year, when NARCAN achieves $200 million of revenue for the first time.  With $138 million in the first half, NARCAN revenue is almost certainly going to exceed this amount, potentially THIS quarter.

When the milestone is exceeded–a payment of $13.5 million will go to Opiant.

After subtracting the share taken by SWK, Opiant will net a little over $11 million.  That works out to a little less than $3 per share.

Competition

With such a large and growing market NARCAN can’t expect to exist without competition.  Right now, there are existing competition from non-nasal spray Naloxone treatments.  These require administration by injection, so unless there is a health care provider present their use is less straightforward and NARCAN is preferred in most cases. Further competition will arise at some point from generics and over-the-counter (OTC) options.

There is a patent on NARCAN that goes until 2036, but because the market is so large, a number of generics firms are looking for ways around it.

Teva (TEVA-NYSE), for instance, applied for a generic version two years ago.  That product was approved in April by the FDA for a generic form of a Naloxone nasal spray product.  Perrigo is also trying to put together a generic but they are roughly a year behind.

However, it is not clear whether the FDA approval of the Teva generic means competition, at least in the short term.  Court documents have been filed by Opiant and EBS. A trial is expected to begin later this year. Analysts agree it will be some time before the legal side is clarified and any generic drug hits the market.

The FDA has also said that they are looking at OTC formulations (which would be weaker strength).  Their primary interest is to increase availability of the drug in an effort to reduce overdose deaths.

While the competition is likely to come, I’m of the mind that the increasing size of the market should support NARCAN sales.  

Cash on hand and from operations

The ~$3 per share of cash from the milestone payment will add to the existing $6 per share that Opiant has in the bank right now (about $24 million).

Opiant is forecasting a cash level of $17 to $20 million by year-end before accounting for the potential royalty payment.  I suspect that level is conservative.  The company put out the year-end cash forecast at the end of 2018, before sales of NARCAN increased significantly.

While I expect an increase in expenses in the second half as Opiant begins trials on a couple of pipeline candidates, I still think the company could be close to cash flow neutral in the second half (this is before considering the milestone payment).  But at the very least, over half the market capitalization will be cash by year end.

Opiant’s Pipeline

Half the story here is the incoming cash from NARCAN.  The other half is the pipeline of drug opportunities where positive results could give investors a step change in the stock price.

Opiant has a pipeline of commercial candidates addressing various forms of addiction.

OPNT003

OPNT003 is a faster onset, longer acting nasal spray used to combat opioid overdose.  It would be a replacement for NARCAN.  While the company just completed a Phase 1 study last year, the FDA approved a 505 (b)(2) pathway for development, which should speed up development significantly. 

The 505 (b)(2) development pathway is available to certain types of drugs that give them the opportunity to acquire FDA approval without performing all the work that’s required with a new drug approval (NDA).

It is generally approved for drugs that are not strictly generics, but that use active ingredients (in this case the drug Nalamefene) that have already gone through the approval process.

As an alternative to Naloxone, OPNT003 promises faster onset and a longer half life in the system.  It is considered to be a preferred option for fentanyl overdoses.

The accelerated pathway means that Opiant can complete a second study (called the PK study) beginning in the third quarter, report topline data late this year and file for an NDA some time in 2020.

As it addresses the same market as NARCAN, sales estimates, if approved, are significant.  Northland Securities has projected as much as $400 million peak sales for the drug.  Cantor Fitzgerald is a bit more conservative, estimating a ramp to $75 million in revenue by 2027.

The costs associated with bringing OPNT003 through the pipeline are covered by government grants.  Opiant has government grants from the NIH and BARDA totaling $12 million that will be used to offset development costs.

OPNT004

OPNT004, known as Drinabant, is an in-licensed drug from Sanofi (SNY-NASD).  It is used for the treatment of cannabinoid overdose, called acute cannabinoid overdose (ACO).

While cannabis is not typically thought of as a dangerous drug, the potential for overdose does exist.  This is particularly the case with edibles, which are sometimes consumed in large quantities by individuals that do not realize what they are eating.  Particularly at risk are children.

ACO resulted in 1 million emergency treatments in 2018 and this is only expected to increase with legalization.  There is currently no approved treatment for ACO and no other drug in development.

Drinabant has been tested for oral ingestion.  In Phase I and II studies (by Sanofi) it was proved to be well tolerated.  Opiant is reformulating the drug for injection so it can be used in emergency room situations with overdoses.

Clinical studies are expected to begin in 2020.  

Opiant received global licensing of the drug from Sanofi.  In return Sanofi receives a 7% to 12%-tiered royalty and a number of milestone payments. 

While Opiant hasn’t provided any guidance on what sales might achieve, the milestone payment tiers are interesting.

That the first milestone doesn’t occur until $75 million of annual sales suggests that at least the potential for the drug is significant.  I also found that Northland has a peak global sales estimate of $500 million.

OPNT002

The final pipeline candidate worth mentioning in OPNT002, or nasal naltrexone.  The drug is being developed to address alcohol use disorder (AUD).

Opioid antagonists like naltrexone reduce heavy drinking because they block the opioid receptors that give the dopamine “reward”.  The result is a dampening of alcohol-induced dopamine release and less desire for the individual.

Naltrexone is already approved as a tablet or injection.  Like NARCAN, Opiant is reformulating the drug as a nasal spray, to be delivered at the onset of a craving.

Phase I has been completed and it demonstrated rapid absorption of the drug and confirmed suitability.  Next will be Phase 2 initiation, which will begin in the second half of this year.

A positive that was pointed out on the last conference call was that the FDA agreed to a “harm reduction” endpoint for the study as opposed to an abstinence endpoint.  This should make it easier to achieve success with the endpoint.

Assuming positive results with the Phase 2 study, Phase 3 would begin late in 2020.  That puts new drug approval into 2021 with first revenue coming in 2022.

There is also an early stage drug in the pipeline, OPNT005, that will tackle heroin overdoses.

STOCK CHART

CONCLUSION

There are a number of catalysts with the stock but the near term one is the cash influx.  

The $11 million of cash will flow down to earnings and make the numbers look extremely good for a quarter.  It is most likely to happen here in Q4 and could drive $2 EPS for those 3 months.

Maybe more importantly it puts another big chunk of cash on the balance sheet and takes the market capitalization to 50% cash.

In addition to the milestone payment that will boost earnings and add significant cash there are a number of catalysts in 2020.  There are study results and approvals for the 3 main pipeline candidates.

By the middle of 2020 we could have an NDA filing for OPNT003, Phase 2 data on OPNT002 and a start to clinical studies for OPNT004.

Opiant was a $15 stock heading into 2019.  The stock price drifted lower beginning in April after one of its drugs, OPNT001, didn’t meet the endpoints of a Phase 2 study.

The sub-$14 price isn’t reflecting much other success.   If I assume the basic (non-diluted) shares outstanding of 4 million, the market capitalization is under $60 million.  

Add the milestone payment of $11 million and taking the midpoint of the company’s year end cash guidance of $18.5 million (which I think they will exceed), the stock has over half the market cap in cash.  If they have been conservative with their year-end cash estimate, as I expect, then that number is only higher.

Paying $30 million for 3 high-impact development opportunities, and the continued NARCAN royalty stream seems reasonable.

The company doesn’t need financing–it has cash flow. The technology is in a tight share structure where management owns a lot of stock…so it ticks a lot of my boxes. I’m just not sure what the catalyst will be for the stock in a Market where small caps and micro caps are so shunned.

Keith