Description
Eagle Pharmaceuticals (EGRX) looks like a mess: it hasn’t filed financials since its 6/30/23 10-Q, its CFO resigned and its CEO retired. Its stock is down ~60% since the announcement of delayed results and it is in risk of default on its bank debt with a pending delisting from the NASDAQ. So what’s the good news? I believe this is a classic special sit. Though information is limited since the June 30 2023 10-Q, it is still possible to estimate its financials. I estimate this EBITDA positive specialty pharma company is trading around 0.6x sales and 2.5x current EBITDAR&D [I just made that up – but the idea is to show the value of the commercial business without its pipeline – this EV also does not reflect a 17% stake in a private co described below for which is paid $25 million]. The banks do not appear to want to put the company in default so they have amended the credit agreement three times this year and have shrunk but maintained EGRX’s undrawn borrowing capacity. Once it becomes current again and its outlook is updated, I think the stock will quickly rebound with further upside above that as its commercial and development portfolio matures.
Investment Thesis:
At a high level, three years of positive cash flow before royalties drop off are funding R&D and growth in the remaining portfolio. It does not require heroic assumptions to conclude that the other drugs will grow in the next 3 years to at least replace the higher margin royalty and maintain cash flow break-even status at worst. This would giving an un-expiring option on two clinical programs that are most of the $35 million R&D spend (and an additional option to acquire a company with another Phase 2 product post-data) that could be quite valuable.
The company’s market cap today is ~$70million – less than what the company paid for bolt-on “take-under” Acacia Pharma PLC in June 2022 ($100m). The EGRX enterprise value is ~$125m (using most recent balance sheet info and excluding $25m investment in Enlare). The company’s receivables likely exceed its debt (even after making an adjustment described below).
According to the November 9, 2023 notification of late filing the issue delaying the financials is related to the overstatement of 2023 sales of one of its drugs by $10-$20 million which will require an adjustment to reserves. It is specifically related to expired inventory at one distributor. After the maximum adjustment ,the 1H23 annualized sales for that product would still have been ~$40 million – it was only launched in 2022. Besides the product in question, the company also has a melting iceberg royalty through 2027 of ~$70 million on a Teva cancer drug (with an additional $30-$40m of sales of its own version). Its several other drugs generate revenues of ~$40 million. EGRX also has two potential blockbuster products in clinical trials with an NDA submission expected on one of them soon.
The company has an oncology division and an acute care division. Here is a little more on the company’s products and pipeline:
Products:
Pemfexy (alternative formulation of lung cancer drug Alimta): this is where the problem was. Though this is a generic drug now Pemfexy has a premium J-code (some others do as well but are not using it). The EGRX formulation is a multi-dose liquid vial and others are powdered. The other versions expire after 72 hours if not used. [$40-60m of revenue]
Ryanodex: under anesthesia a side effect can develop called malignant hypothermia (yikes) – with this drug a physician does not have to stop the procedure vs. stopping to mix the other available products which is not ideal in a crisis – also being looked at by the military as a treatment for exposure to nerve agents. [$30-$40m of revenue]
Bendeka/Belrapzo (bendaumustine): this is a legacy oncology product sold by Teva with IP through 2027 although in 2023 SymBio launched a product in Japan upon which EGRX gets a royalty (Terakisym). Overall this is declining about 10% / year. Teva’s disclosure is not helpful because it bundles the EGRX product Beneka with another one (Treyanda) that appears to be declining more. [$70-80m royalty income and $30-40m product revenue]
Barhemsys and Byfavo: first and only FDA-approved product for post-operative nausea after failed prophylaxis – came from Acacia pharma acquisition. Both Acacia- pre-deal investor materials and EGRX disclosure point towards multi-billion addressable markets. [Growing 20-30% annually off small base of $5 million – but former management must have seen something to pay $100m for this in 2022].
There was another commercial product called vasopressin but former management cut it in early 2023 because it was not very profitable.
Pipeline:
CAL02 – a new antibiotic for severe pneumonia in Phase 2. Former management said “KOLs are all over it.” Revenue opportunity $250m++. After 50% enrollment which is soon, can decide to finish the Phase 2 or not – it’s a tricky trial because elderly patients have co-morbidities but it is overpowered as a precaution.
EA-114 – formulation of breast cancer drug Faslodex that goes with a CDK 4/6 like Ibrance- different formulation of fulvestrant could lead to 25% market share – could be on the market in 25/26. Multi-hundred million dollar revenue opportunity. See: https://www.onclive.com/view/nda-submission-planned-for-ea-114-in-metastatic-breast-cancer-following-positive-type-c-meeting-with-fda
ENA-001 – through its 17% investment in Enalare for $25 million – it is a respiratory stimulant that is like Narcan for opioids but works on tranq where Narcan doesn’t. It could be like a poly-substance epi-pen for community drug overdose. It benefits from a $50m BARDA grant in 2022. After data EGRX has an option to fully acquire. Currently in Phase 2.
Investment Positives:
- Sufficient information to project a growing commercial portfolio – I can share my assumptions in the Q&A if there is interest.
- Even with financial reporting issues the banking consortium still letting company maintain undrawn revolver (although they shrank the capacity) – not filing financials could be an event of default. I do not project EGRX needs to draw on the liquidity.
- Smart small bets with big payouts represented in the pipeline - several big potential sources of value – CAL02, EA-114 and Enlare investment. EA-114 could submit an NDA for FDA approval this year.
- Vasopressin exit in Q123 ($63m in sales in 2022) further confuses as revenue is substantially down but absolute dollar product gross profit + gross margins are up Q223 vs Q222 (FYI you need to adjust for non-cash intangible amortization in COGS to see this).
- On the pipeline, still publishing and presenting at scientific conferences this year – can’t fake data etc.
- Large overhang eliminated with litigation settlement this month: July 3rd settled with their CDMO Jan 23 demand for arbitration - $10m paid - $10m in Feb 25 and $6.5m in July 25 – (was in 10-Q) removes overhang of in excess of $76.7m (26.5m over a year). Settlement was 33 cents on the sought after dollar.
- Former management was buying back shares as recently as July 2023 at much higher prices.
- Jan 2024 received a new patent on one element of its melting iceberg bendamustine franchise (Belzapro) which extends potential protection to 2031 – initiated litigation against other generic companies.
Investment Concerns:
- Uncertainty until financials are followed (and thus the discount) - they did a 36% riff in Feb 29 to realign sales and marketing for Byfavo, Barhemsys and Ryanodex – ($3.5m charge) which could be a sign of slower sales traction.
- Taking a long time for a contained issue but at least the auditor has not resigned.
- DSOs still higher than historical levels after adjustment for excess Pemfexy inventory.
- No clarity on senior leadership – the acting CEO is a long time board member who ran a generic drug company and was President of the generics division at Par Pharma (he had left by the time it was acquired by TPG in 2012 for $2b – then sold for $8b to Endo in 2015 just before generic pharma industry imploded – wow). I’m also not sure who the acting CFO is.
- The company keeps getting credit agreement extensions from JP Morgan et al but no guarantee – the next date for compliance is July 31 (prev deadlines that they did not meet were Feb 29, 2024 and May 13 2024.
- Delisting imminent? The exchange can grant up to 360 days from the due date of Q323 10-Q – even if this has been well telegraphed it could still drive a dip in the stock price by forced sellers who weren’t paying attention – I will flag this for you if it happens.
For More Info:
Disclosure
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Catalyst
Current financials – exchange listing maintained / re-listed if de-listed before it is current
Continued growth of existing drugs
Progress of clinical pipeline