Posts tagged ‘biotech’

Jan 28

Nuvectra: New position, didn’t even know it was a spin-off

I don’t go out of my way looking for spin-offs. I read Joel Greenblatt’s book You Can Be a Stock Market Genius years ago, I even did a take-off on the title a few years back, so I understand the value that can be there, but it has seemed like a saturated niche since value investing has gone mainstream.

Maybe the best way to find a spin-off is to unwittingly stumble upon one. That’s what happened to me with Nuvectra. I came up with the idea from a retweeted tweet by @ValuewithaCatalyst pointing to their large cash position and $0 enterprise value.

$NVTR – Not sure what it’s worth, but certainly more than cash… I really like the optionality here: https://t.co/s7IOIq39bw

— ValuewithaCatalyst (@ValuewaCatalyst) January 17, 2017

I looked into the company and found that Nuvectra is indeed trading at cash but that they also are burning through it. The company is in the early stages of a ramp of a new neuro-stimulation therapy, called the Algovita SCS system. They’ve hired a salesforce (headcount of 42 at the end of the third quarter and expected to reach 50 by year end) to begin marketing the product across the United States. They have kept up a decent sized R&D program (run rate of $3.5 million per quarter) and they are only just starting to generate revenues.

The consequence is they have a fairly significant cash drain of $5-$6 million per quarter. This plays against a market capitalization of around $60 million and an enterprise value that, up until Friday, was close to zero (I’m using the numbers based on my purchase price below because I started this post before the stock moved the last couple of days):

Their Algovita SCS system reduces back pain by stimulating the spinal column with small pulses of electricity. These pulses stimulate the nerves and override the pain sensation, replacing it with a tingling that eventually disappears entirely.

The system consists of a pulse generator, leads that are surgically inserted into the spinal column, and programmable GUI devices for the patient and physician.

There is a good video that describes the procedure in general here.

Algovita was approved in late 2015 and began to launch in the US in 2016. So its early in the ramp. Because Algovita is in the early stages, the market is not giving much credit to the product yet. There is also a lot of competition. The incumbent products are made by Boston Scientific, Medtronics and St. Jude, and a more recent newcomer is Nevro. From what I have read, Algovita’s feature set stacks up well against the incumbents but Nevro has a very good product that may or may not be superior to Algovita. Without question this is a very competitive landscape and that is at least partially responsible for the low enterprise value.

At this price, I think its worth seeing how the sales ramp plays out. The company said late last year at the Piper Jaffrey conference that within 12-24 months of the beginning of a sales ramp they expect a sales territories to generate $1-$1.5 million. This works out to 75 trials resulting in 50 permanent implants at $20,000-$25,000 a pop. Thus the expectation from the current hirings should be at least $50 million in annual revenue. The vast majority of their reps were hired in the third quarter and after, so we should start to see their benefit in the upcoming quarters.

The total addressable market (TAM) is fairly big, so reaching $50 million is only taking a sliver of market share away from their competitors (note that SCS stands for spinal cord stimulation):

Algovita revenue was $1.1 million in the third quarter. This was up from $569,000 in the second quarter. The third quarter was the first real quarter with any sales traction in the United States. The company is still mostly in the trial stage with its early adopters. At one of the conferences management said that trial revenues were only a fraction of permanent implants.

There are likely to be bumps in the road. In addition to the newly trained salesforce, Nuvectra is making slow progress to get insurers on-board and work through hospital approvals. The process entails agreements on doing business, payment terms, etc. It takes time. In smaller settings this happens in 1-3 months, while in larger regional systems it can take 3 months to a year.

In addition to Algovita the company has a strategic development agreement with Aleva Therapeutics that allows Aleva to market Algovita for use in the direct brain stemp (DBS) market for the treatment of Parkinson’s disease.

DBS is $600 million market today, dominated by Medtronic, Boston Scientific also in market. Nuvectra will receive $6 million in aggregate payment, and recognized $1.1 million in the third quarter related to this. Once in production Nuvectra will receive a royalty, though I actually wasn’t able to find the details on the royalty payment yet.

Finally, Nuvectra has a “world class group of neuroscientists” that they refer to as Neuronexus (interesting website here). This group “creates probes and other neuro-technology for clinical applications and labs around the world.” The company expects sales from Neuronexus, would be around $5 million in 2016. I don’t get the sense that the business will be a huge revenue driver, but their research gives insights into the latest developments in neuro-stimulation.

So there is a lot of innovation, and hopefully some of that innovation translates into revenue growth. Its not a perfect investment case of course, none of my ideas are; there is a cash drain, there is plenty of competition, and there are insurance approval hurdles that could take months. I am prepared for a lumpy ride, and as usual I have kept my position small until I can see sales get more traction.

Nevertheless, if they prove that they can meet their goal of $1-$1.5 million in sales per territory in the next year or two, the stock should trade at a decent multiple to revenue, which is multiples of what its trading at now. And the cash drain will be no more.

Nov 16

Third Quarter Earnings Update: SUPN

I bought Supernus over a month ago and added to that position after the election result. With concerns of political attacks on the biotech industry abating I wanted to increase exposure to biotechs. Supernus seems like a good vehicle for that.

But going into last Friday I was getting a bit worried. The company had not announced its third quarter results or given any indication of when they would announce them. More often than not such silence foretells a negative event.

In this case however, there was no such concern. On Friday Supernus did announce (ominously) that they would have to restate prior results (generally the worry when you have radio silence leading into a quarter) but the reason behind the restatement was benign. A $30 million royalty from 2014 was previously classified as revenue and is to be reclassified as debt. The change came up after their accounting firm was given guidance by the SEC for another company in a similar situation.

I dug into the details a bit and to be honest it doesn’t make much sense to me why a royalty not being paid back has to be classified as debt but whatever, its water under the bridge.

The preliminary third quarter results, announced on Monday, were quite good. The company reported strong growth and raised guidance.

Year to date consolidated sales were $149 million, which is a 48% increase year over year. Total prescriptions for both Troxendi and Oxtellar were 131,000 for the quarter, an increase of 30% year over year. Troxendi prescriptions were up 32% while Oxtellar’s were up 26%.

As had been previously announced, there was a tentative approval from the FDA for Troxendi to be used in the treatment of migraine, which should help continue sales momentum.

The company illustrated the total addressable market for these drugs in their slide presentation. The opportunity for growth remains large.

The drug pipeline consists of two drugs in later stages of development, SPN-810 and SPN-812. Both are being trialed for children, the former for impulsive aggression and the latter for ADHD.

SPN-810 had been struggling with enrollment and in the second quarter the company took steps to address this. In the third quarter update they listed a number of initiatives taken (engagement of an enrollment agency, increasing the patient screening period, giving more education to caregivers on proper diary compliance) and gave color that these had a “positive impact on patient referrals”.

Results of the Phase 2b study for SPN-812 were announced a month ago. Following up on those results, management commented that they would begin discussions with the FDA on a Phase 3 trial. An interesting development is that the trial may include a higher dosage than those used in Phase 2.

Being a non-stimulant gives SPN -812 an advantage with side-effects but stimulants also typically have higher efficacy. That did show through in the results from the Phase IIb trial, where results were “remarkable” for a non-stimulant, but still not quite on par with its stimulant comparatives.

There is a market for SPN-812 as a non-stimulant for patients where stimulant side-effects are too severe. However there is a much bigger opportunity if SPN-812 can show efficacy that is in-line or better than a stimulant. The Phase 2b trial did not take the dosage high enough to test out this possibility. However the benign side effects and the strong efficacy at lower dosage suggest it has a chance.

Both SPN-810 and 812 are a couple of years away from approval. The company would like to fill the gap between now and then with an approved or nearly approved drug. Ideally they would be looking for a drug in neurology, where they could leverage the existing sales staff, or in psychiatry, where they could gain an early foothold before 810 and 812 are launched.

Supernus was a bit of a gift in the mid teens but its moved quickly back to $23 in the last couple of weeks. At this level it trades at an enterprise value of 5x revenue. Growth is over 40% and not slowing down. I continue to like Supernus and am happy with my current position size.