Focused on rare diseases — the trickiest segment within the pharmaceutical industry, yet the most profitable when research delivers up to expectations — Pharming has been developing during 30 years a recombinant protein used for the treatment of hereditary angioedema.
Expensive and fraught with difficulties, this tiring process successfully came to fruition.
Aug. 15, 2016 to Dec. 12, 2019
Launched on the European market in 2010, Ruconest — the commercial name of rhC1INH, a stimulant of the inhibitory C1 protein whose deficiency causes the dreadful hereditary angioedema — has delivered excellent results in the treatment of acute attacks, with a success rate of 97%.
A substantial market opportunity lies in extending the treatment capabilities to more preventative functions ("prophylaxis"). Late stage studies are underway and keep delivering encouraging results, with success rates well above alternatives'.
Pharming must complete its transition from the treatment of acute attacks to prophylaxis, since the protocol for the care of hereditary angioedema is changing. In the United States, for instance, 80% of patients will be treated under a preventive regime within the next five years, compared to only 30% today.
If successful, Ruconest would become the only treatment approved for both acute attacks and prophylaxis.
Besides, the major competitive advantage of Ruconest is that it remains the only treatment for hereditary angioedema that does not require blood transfusions, unlike alternatives such as Cinryze (Shire) or Berinert and Haegarda (CSL Behring), which are C1-INH concentrates extracted from a donor's plasma.
The latter provides significant benefits in terms of costs, availability and epidemiological control. Combined with high effectiveness — its superiority is such that competing laboratories have abandoned the development of equivalent treatments — these characteristics position Ruconest as a potential blockbuster. That is how Salix describes it for that matter.
As of now, the treatment of hereditary angioedema represents a $1.7bn market in the United States alone. Despite its practical and technical superiority, Ruconest captures only 6% of this market, but its sales increase by +216%, a much more impressive pace than Berinert (+ 30%) or Firazyr (+ 14%).
The potential for growth remains substantial, especially if Pharming manages to get the necessary approvals to enter the Chinese market. In the longer term, management is also considering new indications for rhC1INH, for example in the prevention of certain abnormalities during pregnancy, and develops new compounds to address rare afflictions like Pompe or Fabry diseases.
Earnings-wise, momentum is strong and best characterized by the recent upswing in revenue: negligible three years ago (at only €16mil), it reaches €170mil this year and is expected to top €210mil million next year. In a like manner, the company should deliver net profits of about €40-€50mil in 2020.
In addition, thanks to a solid financial standing, if Pharming had to raise capital again, for example to fund development of new treatments from its existing therapeutic foundation, it would likely be able to do so in favorable terms.
A major unknown remains the number of shares outstanding for the foreseeable future. If management converts its options into shares — as they probably will, for the strike price averages €0.5 — shareholders will have to cope with a dilution of about 7%.
The company is currently valued at €945mil — with an enterprise value roughly equal to its market capitalization — akin to less than five times its anticipated revenue next year. Such valuation most likely understates what shareholders could obtain in the event of a takeover.
A direct comparable like Viropharma (focused solely on prophylaxis) was acquired by Shire for more than ten times revenue. In general, provided that things turn out well, fast-growing biotechs typically get taken over at valuations comprised between six and twelve times their revenue.
Partnerships with American company Salix and high-profile Swedish Orphan Biovitrum provide other seals of respectability. All the momentum indicators typical of Surperformance's ratings are thus in the green. As such, Pharming's stock is the latest addition to the Europa One fund, of which Surperformance — MarketScreener's editor — is the exclusive advisor.
In addition to the single-product nature of the company, the main risk lies in the potential failure of the transition towards preventive treatments — this, in spite of the latest encouraging results. It should also be noted that the two main executives of the company — the CEO and COO — are both aggressively selling their shareholdings at current price levels.
It will be critical to carefully follow what top management do with the equity securities they'll obtain through the exercise of their stock options.