Interview key points
Number 1. As an interviewer and analyst, it is rare to come across an instance where a CEO openly states that their company is undervalued, especially in the case of clinical-stage biopharmacetuicals. Thus, we are encouraged by Mr. Warma's remarks regarding why he believes the current stock price of Opexa does not reflect the value of its pipeline assets and the overall sales potential of Tcelna. In particular, he provided us with an example of what Opexa's future valuation could look like if Merck Serono exercises its licensing option on Tcelna, and if the drug receives regulatory approval. We will now provide several hypothetical SPMS sales scenarios (excluding RRMS), in order of desirability, that elucidate the long-term investment opportunity in Opexa to complement Mr. Warma's remarks.
•Scenario A) Sales of Tcelna exceed $2 billion. Opexa's royalty payment of 15% equates to $300 million, which does not account for $170 million in upfront milestone payments payable to the company depending on FDA filing ($35 million), EU filing ($30 million), Phase III trial ($25 million) and commercial milestone payments ($80 million). Opexa's current market cap is only $45 million, representing a fair market value of $12.11 a share. Further, if the license fee of $15-$25 million is considered in addition to the $170 million in milestone payments, Opexa's market cap would range between $555-$565 million, and a conservative estimate would place shares at ~ $16.50 a share.
•Scenario B) Sales of Tcelna reach $1 billion. Opexa's royalty payment would be around 11.5%, which equates to $150 million, excluding $170 million in milestone payments and the license fee of $15-$25 million. This represents a fair market value of $6.84 a share ($195 million/$45 million= ~4.3X current share price of $1.58). For our purposes, let's assume that Opexa receives an additional $15 million from the license fee and $150 million in milestone payments. The market cap would be $360 million, representing a fair market value of ~ $12.64 a share.
•Scenario C) Sales of Tcelna reach $500 million. Opexa's royalty payment of around 11.5% equates to $57.5 million, excluding the milestone payments and license fee. This represents a fair market value of $3.60 ($102.5 million/$45 million= ~2.3X current share price of $1.58). If Opexa receives an additional $15 million from the license fee and $130 million in milestone payments, the market cap would be $247.5 million, representing a fair market value of ~ $8.69 a share.
•Scenario D) Sales of Tcelna reach $250 million. Opexa's royalty payment of 8% equates to $22.5 million, excluding the milestone payments and license fee. This represents a fair market value of $2.40 ($67.5 million/$45 million= ~1.5X current share price of $1.58). If Opexa receives an additional $15 million from the license fee and $110 million in milestone payments, the market cap would be $118 million, representing a fair market value of ~ $4.14 a share.
(Note #1: Opexa has sole rights to market Tcelna in Japan, which offers additional sales potential that we excluded in the fair market share values calculated in scenarios A-D)
(Note #2: The agreed Royalty payments take the form of a tiered structure from 8-15%, at points $500 million, $1 billion and $2 billion. Since the specified percentages of each tier have not been disclosed at this time, we have used 11.5% as an approximation)
While there is substantial variation in fair market value between scenarios A-D, the least ideal scenario (D) is approximately 260% higher than Opexa's current stock price of $1.58. While our intention in providing these scenarios is not to mislead investors into believing that there are no alternative outcomes to A-D, it is important nonetheless to offer a perspective on what Opexa's potential valuation could be if Tcelna receives regulatory approval, the partnership executes properly and the market demand for the drug aligns with analyst expectations.
Number 2. We cannot stress enough how significant the lack of treatments for SPMS is to Opexa's market opportunity and overall valuation potential. As Mr. Warma repeatedly emphasized, Novantrone (which he did not name), the only FDA approved chemotherapeutic medication specifically for SPMS on the market since 2000 is less desirable due to its inferior safety profile. Case in point, in 2005 the FDA added a black box warning to the prescribing information of this medication, stating the dangers of cardiotoxicity, Secondary acute myelogenous leukemia (AML), infections and other serious conditions that have ultimately hampered sales of the drug.
In fact, Pfizer (PFE), which markets a generic version of Novantrone called Mitoxantrone, did not care to specify the sales of the drug in its most recent 10-K, and it surely does not help that the EU's 2006 hazard classification for this compound is DANGER, accompanied by the scary image above. According to a representative of Merck Serono (the company that markets Novantrone), "We believe [the black box warning] is not going to have an effect on the product. The product is for very severe forms of MS, for people who have no choice." Nevertheless, four years later in 2010, the side effects noted in the black box warning, i.e. cardiotoxicity and AML, were found to be worse than previously thought. The risk for heart damage is about 12% and less than 0.5% for heart failure, meaning for every eight people given mitoxantrone, one will develop heart damage. Further, the risk for AML is about less than 1%, meaning for every 123 people given mitoxantrone, one will develop AML. As more research is conducted on the degree of prevalence of these side effects, we expect a continued increase in accordance with a previous rise in AML and cardiotoxicity cases from 2000-2005, as well as during 2005-2010 (post-black box warning). Clearly, the representative's 2006 prediction failed to account for these externalities.