Opiant Pharmaceuticals (OPNT), formerly Lightlake Therapeutics, is a micro cap company likely to generate $25MM in royalties and milestones in 2018 on a $40MM market cap.   Shares of the company represent a multi-year option on its self-funded, substance-abuse oriented pipeline that carries several catalysts within the next 12 months.  Applying empirical average clinical phase FDA success probabilities to its pipeline, conservative patient penetration and selling prices, capitalizing at 5x for an estimate of market value, using a 20% discount rate to account for the fact that approval would be a few years out, and applying against a fully diluted share count that more than doubles current shares, all indicates that OPNT could be worth in the area of $50/share compared with a $14/share trading price today.

The opportunity exists because:

1.     Investors would rather see cash royalties distributed than reinvested in pipeline.

2.     Microcap company – has market cap of less than $50MM.

3.     Major options package awarded following Narcan approval had the effect of increasing shares outstanding by nearly 30% at current stock prices – would be higher if stock remained in $20+ area.

4.     Very small float and low trading volume, <2.5MM shares in free float and 50-day avg daily volume is 24,000 shares.

5.     Less than a year ago its shares were traded on pink sheets.  Previously traded OTC, began trading on NASDAQ on August 29, 2017.

6.     Weak technical – stock has come crashing down from north of $50/share.

Opiant’s key asset is a ~10% royalty on Narcan.  Narcan royalties will generate $10MM+ in annually cash revenue for the company for the foreseeable future, plus a potential $15MM milestone that could be received within a year or potentially within 2018, earned as Narcan eclipse $200MM on a cumulative basis.  At the same threshold, the Narcan royalty will rachet up to 12% from 10%. These figures compare with a May 2018 10-Q that carried 2.7MM shares outstanding and $11MM in balance sheet cash.

Narcan

Any quick news search will reveal that Narcan is (1) used frequently (2) highly effective and (3) realizing lower and lower barriers to sales as insurance companies reduce or eliminate co-pays, as states push to sell on an OTC basis, and as all sorts of first responders are equipped with the drug.

Narcan has a 2-year shelf life and retails for $140 for a two-dose package.  Opiant estimates wholesale price is $90 per two-dose package. The active ingredient is naloxone, and nearly 50-year old drug that acts as an opioid antagonist, essentially bumping the opioid from the receptor and blocking opioid and endorphin attachment.  There are no significant side effects other than immediate withdrawal symptoms. The drug lasts for 30 minutes to an hour, often multiple doses may be required for heroin overdose. Given ease of administration, immediate & life-saving efficacy when nasally administered, and little to no side effects, sales of the Narcan has sky rocketed and it has become the gold standard in savings victims of heroin and other opioid overdose.

Background

Opiant developed Narcan, which has an active ingredient Naloxone that was approved by the FDA in 1971.  Patent expiration is decades old but the drug has a tremendous track record as an opioid antagonist, meaning it binds to receptors better than opioids.  Accordingly, it immediately alleviates opioid overdose affects. Side effects are virtually non-existent and very short-term in nature. Opiant developed Narcan as a way to nasally administer Naloxone which allows for fast, nearly immediate absorption.

In December 2014, the company sold a global license to Adapt for Narcan in exchange for Adapt contributing most of the development costs and Opiant retaining a royalty.  In February 2015, Narcan received fast track status by the FDA, Adapt submitted the NDA to the FDA in late July 2015, and by November 2015 the FDA had approved Narcan.

On December 13, 2016, Opiant sold its royalty to SWK.  The PSA can be accessed here https://www.sec.gov/Archives/edgar/data/1385508/000114420417014770/v461395_ex10-2.htm and the announcement here https://www.sec.gov/Archives/edgar/data/1089907/000155278116002151/e00632_swkh-8k.htm

SWK paid a total of $17.5MM, inclusive of a $3.8MM funded in the third quarter of 2017 when Narcan had two consecutive quarters of $25MM in sales, and received $25.677mm in proceeds over the 12/12/16 to 2/28/18 time frame.  To summarize, once a targeted ROI in the form of a 1.5x CoC return was achieved by SWK, the majority of the royalty would revert back to Opiant. SWK would still clip 1/10th of the royalty stream.

In an August 2017 slide deck by SWK, 8/8/2017 achieved $25MM in cumulative sales during two consecutive quarters, SWK funded add’l $3.8MM with 1.5x COC cap. https://www.sec.gov/Archives/edgar/data/1089907/000155278118000224/e18229_ex99-1.htm

In a September 2017 slide deck, OPNT mgmt. said that the royalty was likely to revert back to Opiant in 2018 if net sales for Narcan hit $55MM to $75MM.  https://www.sec.gov/Archives/edgar/data/1385508/000114420417047698/0001144204-17-047698-index.htm

In February 2018, the company announced that it would received 90% of the Narcan royalty going forward, with the remaining 10% going to SWK. (https://www.sec.gov/Archives/edgar/data/1385508/000138550818000008/opiant-form8xkroyaltyandmi.htm

Source: OPNT investor slide deck, July 2018.

Narcan recent highlights

• 47 states allow for Narcan without a prescription.

• Co-prescribing in Vermont, Virginia, Arizona – this transitions the addressable market for the drug from solely emergency & first responder use to that of general pain killer prescriptions.

• Stocked in all CVS and Walgreen’s nationwide.

• Just a few days ago, was credited with savings Demi  Lovato’s life. (https://www.pharmacytimes.com/news/narcan-reportedly-saves-singers-life)

• June 2018 – Iowa state initiative to give out Narcan for free, 350 pharmacies to participate

• June 2018 – California issued statewide order to make Narcan available without a prescription.

• December 2017 – Aetna says it will eliminate copays for Narcan

• April 2018 – U.S. Surgeon General Jerome Adams issued an advisory statement that said more American should routinely carry opioid antidote.

• December 2017 – University of Wisconsin says will supply security officers and RAs with Narcan

• September 2017 – all Connecticut state universities and colleges will have Narcan available.

• There’s no shortage of press on Narcan.  A simple google search will indicate the wide and growing acceptance of carrying & prescribing, and high efficacy for its intended use.

Pipeline

The Narcan royalty allows Opiant to fund most or all of its pipeline of similar drugs through the cheaper 505(b)(2) pathway, which allows the company to rely on existing studies and data, not performed for or by the company, to be used to reference safety and efficacy.  This type of drug development is generally less risky, less time consuming and as a result less costly. For OPNT001, 002 and 003 on rely on nasal spray IP as well, similar to Narcan. 001 is essentially Narcan but in multi-dose formulation for daily use. In other words, this pipeline is more doubles and singles than long-shot, entirely new molecules and applications.

Several near-term catalysts exist over the next 12 months for OPNT’s pipeline.

• OPNT001 for Bulimia – this is essentially multi-dose Narcan, currently in phase 2 with last patient visit targeted for Q4 2018 and data readout in Q1 2019.  Approx 2.5MM patient in USA with Bulimia. Dosing would be daily, so much different volume profile than Narcan.

• OPNT002 Opioid antagonist nasal spray for Alcohol abuse – Company plans to initiate phase 2 in Q4 2018 with patient enrollment in Q1 2019.  Similar to OPNT001, this would be daily dosing.

• OPNT003 Nalmefene Nasal Spray – this is similar to Narcan, used on opioid overdoses, but with a longer half life than naloxone (Narcan active ingredient) so better engineered for heroin and fentanyl overdoses which often take several Narcan dosings over the course of a few hours.  Note that fentanyl is 50x more potent than heroin and has a half-life of 8-10 hours versus 0.5 hours for heroin. Opiant anticipates a 2020 NDA filing.

• OPNT005 – Opioid vaccine.  Company applied for NIH grant funding and expects a grant decision during Q1 2019.

All are 505(b)(2) pathways except for OPNT005.

Valuation

• For OPNT001, the addressable market is 2.5MM patients.  Assumption is for 10% of market at a price of $50/month net to Opiant, or $600 per year per patient, and capitalized at 5x.

• For OPNT002, market is 1.8MM that are receiving pharmacotherapy or seeking treatment for Alcohol Dependency.  Actual alcohol dependency may be as high at 16MM but no assumption is given for increased diagnosis rates and treatment penetration.  $50/month per patient, with 10% penetration (180,000 patients) is assumed and capitalized at 5x.

• For OPNT003, estimate for market value of drug is SWAG.

• No other value is assigned to rest of pipeline.

Other considerations

• Mylan filed an application for generic Narcan.  30-month stay would end in mid-2019.

• Mgmt hinted at need to potentially raise equity capital to better fund pipeline if all studies progress positively in tandem.  CFO said it would be in $20MM zip code.

• Aggressive options package that begins to dilute share count materially at $25.  See below.

Source: OPNT investor slide deck, July 2018.