Nabi Biopharmaceuticals presents investors with a non-linear payoff of greater than 20:1-its downside protected by cash, future milestone and royalty payments and $178 million of NOLs, its upside driven by a potential blockbuster vaccine for smoking cessation, called NicVax. If NicVax fails, cash and remaining payments support a value of $3.50 per share; if it succeeds, Nabi could be worth more than $45 per share. NicVax is expected to complete the first of two, 1,000-person, year-long, Phase III clinical trial in September, after which GlaxoSmithKline (GSK) may commercialize it under an option and license agreement.
For $5.25 per share, investors own (i) $2.50 per share in cash, (ii) $0.95 per share in present value from remaining milestones and royalties from Fresenius Medical Care AG, (iii) NOLs, and (iv) NicVax. At an implied price of less than $1.80 per share (approximately $75 million), NicVax is extraordinarily undervalued. If NicVax meets the endpoint of the first Phase III trial in September, under the terms of the option and licensing agreement between Nabi and GSK, GSK will have 25 days to exercise its option on NicVax. If the option is exercised and NicVax commercialized, Nabi is entitled to:
$1.36 per share from an exercise payment;
up to $1.64 per share based on NicVax's labeling;
up to $1.43 per share based on approval in certain major markets;
up to $0.99 per share for milestones on future generation NicVax developed by GSK;
up to $4.91 per share in tiered sales milestones, beginning at $300 million with subsequent tiers at $600 million, $900 million and $1.2 billion; and
Royalties ranging from 10%-15%
Post-exercise, Nabi has no responsibility to manufacture or provide anything to GSK; it will simply collect milestone and royalty payments.
In addition, assuming the compound reaches its endpoint at the conclusion of the second Phase III trial in December 2011, GSK will pay Nabi $0.47 per share, whether or not it exercises its option.
Conditional on successful completion of Phase III clinical trials and commercialization, NicVax has extraordinary value. For illustrative purposes, if NicVax is approved and achieves sales of $1.2 billion annually, the after-tax royalty alone would be approximately $2.30 per share annually ($3.70 pretax) and Nabi would have already received up to $8 per share, after-tax, in milestone payments. Applying a 15x earnings multiple and adding the cash would imply a $46 stock. This is by no means a projection, but rather, a suggestion of the potential upside.
Smoking is obviously an enormous health problem that costs insurance companies, governments, and society very large sums of money. To put some figures to it: The World Health Organization estimates there are over 1.3 billion smokers worldwide and 5 million tobacco-related deaths per year. The Center for Disease Control puts the US death toll at 443,000 per year and annual health-related economic costs to the US at approximately $193 billion.
The current smoking cessation market is estimated to be approximately $4 billion annually. The most successful prescription treatment is Pfizer's Chantix, which generated $880 million of sales, a figure that was growing significantly, when Chantix was hit with a 'black box' warning in November 2007 for its tendency to incite "suicidal ideation and behavioral changes" in some patients. A major study released in July 2011 found Chantix increases the risk of heart attack and other heart problems by 72%.
NicVax's efficacy was comparable to Chantix in its Phase II trials, and it should have none of Chantix's issues (although it could have others) as it operates on a completely different mechanism. The NicVax vaccine is comprised of 6 shots that trigger a patient's lymph nodes to produce particular antibodies. When the patient subsequently smokes, the antibodies attach to the nicotine molecules and become too large to pass the blood-brain barrier. Consequently, smokers who have had NicVax in their system will not get a nicotine 'high' when they smoke.
Nabi has taken several steps to reduce regulatory risk. The Phase III clinical trial adds a 6th injection over six months to adjust for a finding from Phase II trials that a significant percentage of participants did not build up enough antibodies from 5 injections to make NicVax effective. In addition, Nabi is having participants in the Phase III trial quit smoking after week 14 rather than in week 5 as they did in the Phase II trial because antibodies build gradually. The trial design has been blessed by the FDA in the form of a Special Protocol Assessment (SPA), providing a clear path to approval if NicVax meets the endpoint agreed to in advance. The European Medicines Agency, the FDA's European equivalent, provided Nabi with scientific advice, which is the closest thing to an SPA in Europe.
Should NicVax fail, the risk is that the board will forget the commitment they made to return remaining cash to shareholders and instead dissipate assets. In assessing this risk, it should be helpful to examine the company's history and management's track record. Nabi's once-promising staph infection vaccine (StaphVax) failed its Phase III trial in November 2005. Over the following two years, several activist funds succeeded in changing management and the board and Nabi subsequently divested all of its businesses and drugs with the exception of NicVax. Transactions included selling PhosLo to Fresenius in November 2006 for $65 million plus $85 million in milestones and royalties, selling its biologics business to Biotest Pharma in December of 2007 for $185 million, and selling PentaStaph to GSK in November 2009 for $46 million, including milestones Nabi already received. Nabi then used this cash to repurchase all of its $112 million in convertible debt and $85 million of common stock. As further evidence of management's commitment to building shareholder value, SG&A declined from $37 million in 2005 to $6 million in 2010. Board members Jason Aryeh and Tim Lynch are themselves good investors who approach capital allocation from the perspective of value.
Downside protection in the form of cash and royalties
Upside:downside of more than 20:1
Shareholder-friendly board and management
Near-term catalyst with Phase III NicVax data in September (SPA in place)
GSK ready to commercialize NicVax, conditional on good data