|Shares Out. (in M):||19||P/E||0||0|
|Market Cap (in $M):||200||P/FCF||0||0|
|Net Debt (in $M):||242||EBIT||0||0|
Novelion (NVLN) is not for the faint of heart. In addition to a history of FDA fines for “fast-and-loose” interviews and a still pending DoJ investigation, the company has a massive debt load (face value of debt = ~1.5x market cap; debt trades in the 80s) and a rather “storied” history that includes banker pitches that doubled as coke fueled wife swaps.
Despite all the noise, I think Novelion represents a fantastic risk/reward at today’s prices of ~$10.50/share. Significant insider buying late last year confirms the potential for the company, and conservative assumptions value shares at more than double today’s prices. In an upside scenario, it would not surprise me to see the stock acquired for 3-4x today’s share price in the next year.
Novelion was formed from the merger of QLT and Aegerion late last year. Going into some background on each of the companies is critical to understand why I’m so bullish on the potential here.
Let’s start with QLT, as it’s the simpler story. In late 2012, QLT had a new board take over; they were led by Jason Aryeh, who is now Chairman of Novelion. They sold QLT’s key products to Valeant and Mati for a nice prices and used the cash to pay out a big special dividend ($200m) and buy back a significant amount of shares (~10% of the company). After those moves, QLT had three assets: a significant cash balance ($100m+), an orphan drug (now called Zuretinol, discussed later), and a Canadian tax domicile with a ton of Canadian NOLs.
QLT understood that a small company with no revenue didn’t have the infrastructure to support running an orphan drug through Phase III trials, so QLT’s team went looking for a merger. And while the team was fantastically successful at finding merger candidates, that weren’t so successful at closing those mergers. First, in mid-2014, QLT struck a deal to merge with Auxilium that valued Auxilium for ~$21/share. The merger broke when Endo Pharma came over the top and bought Auxilium for $33.25/share. Then, in mid-2015, QLT announced a deal to merge with InSite Vision in a deal that valued InSite at ~$0.178/share. The merger broke when Sun Pharma bought InSite for $0.35/share.
So merging w/ Aegerion to form Novelion was actually QLT’s third shot at merging. Obviously, I like the fact that QLT’s first two mergers broke because someone paid a massive premium for the other side of the deal, as it seems to indicate QLT had an eye for spotting undervalued pharma companies. So what exactly were they seeing in Aegerion?
Aegerion has two drugs: Juxtapid (Jux) and Myalept (Mya). Both are orphan drugs (similar to QLT’s phase III Zuretinol), which means they are approved for a small patient population and enjoy extra regulatory / patent protection. Jux is used for patients w/ homozygous familial hypercholesterolemia (HoFH), a rare disease (effects one person in every 160k-1m people) that impairs the body’s ability to remove LDL-C (bad cholesterol) from the blood. Mya is used for Generalized Lipdystrophy (GL), a group of rare symptoms (affects ~ one in a million people) characterized by a lack of adipose tissue. The lack of adipose tissue causes a leptin deficiency, which makes patients experience significant fatigue, unregulated appetite, and leads to enormous issues.
Both Mya and Jux are very serious drugs. They come with boxed warnings discussing their side effects and they’re only available through a Risk Evaluation and Mitigation Strategy (REMS) program, not at a standard pharmacy. REMS program are designed to educate doctors about the risk of dangerous drugs, monitor patients during treatment, and restrict access to patients who truly need the drug.
Because of their small patient populations and strong patent protection, orphan drugs are often sold at huge costs ($300k-500k/year is typical). The high price point creates an incentive for pharma companies to expand drugs labels or even encourage doctors to prescribe it off label.
This is where Aegerion ultimately got in trouble. Their CEO went on TV and made off-label claims for Jux that got them in trouble with the FDA. The trouble ultimately ran deeper than just the CEO, as it turned out their sales force had been pushing the drug aggressively and their REMs program wasn’t up to speed. Ultimately, all of these issues got their CEO fired (and obviously the coke fueled wife swap rumors didn’t help); however, the damage had already been done as the share price had collapsed and the DOJ was demanding penalties. These issues, plus the release of a competitive drug class (PCSK9s) for Jux, destroyed Aegerion’s stock price, revenues, and cash flows.