Description

PLx Pharma (PLXP) $7.96

12/13/2021

Summary

PLx Pharma (PLXP) is a specialty pharmaceutical company that currently sells one product over-the-counter, Vazalore, which is the first liquid-filled aspirin equivalent that is based on their proprietary PLxGuard delivery system.

The Company has delivered on its operational benchmarks in 2021 for bringing its first product to market. While an intelligent estimate of the market opportunity can be constructed, PLXP has sold off significantly in the last two months along with other show-me stocks. I believe that PLXP offers an interesting reward-to-risk opportunity over the next few years.

Background

Modern day aspirin dates to the late 1800s and provides an easy and inexpensive means of treating pain. In that 20^th Century, low dose aspirin (81mg/d) became the standard of care for patients that had already experienced a cardiac event like heart attack or stroke, due to its blood thinning properties. However, aspirin, like many NSAIDs (non-steroidal anti-inflammatory drugs) including ibuprofen (Advil) and naproxen (Aleve), can upset the stomach, and in some cases, cause intestinal ulcers and bleeding.

An estimated 40MM Americans take low dose aspirin daily due to a prior cardiac event or diabetes and will likely do so for the remainder of their lives. Historically, there have been options for stomach-sensitive patients, estimated at 10% of the population, to offset these issues. First, is to take an antacid like famotidine (Pepcid) along with the aspirin. Second, Enteric Coated aspirin is an encapsulated aspirin that withstands the acidic stomach environment to dissolve slowly in the small intestine.

Each option has limitations. Taking an antacid is an additional expense and pill to manage while enteric coated aspirin is known to have lower absorption and more variable results than regular aspirin and has been alleged to not offer much in terms of a gastric benefit.

PLxGuard is a technology that binds a lipid (fat) to a liquid aspirin formulation. The lipid allows the aspirin to pass through the acidic stomach intact and release in the more neutral pH of the small intestine. In contrast to enteric coated (EC) formulations, the PLx formula has been shown to offer more rapid absorption and more consistent results.

PLXP got FDA approval to offer both low dose (81mg) and regular dose (325mg) versions of its aspirin product, called Vazalore in March 2021. By late August, 2021, Vazalore was released for sale in over 30,000 retailers including Walmart, CVS, Walgreens, and Amazon.

PLXP has launched a direct-to-consumer marketing campaign including TV commercials to create consumer awareness, while simultaneously working with influential members of the cardiology community to help educated doctors about the benefits that Vazalore may offer to certain patient pathologies.

Valuation

Vazalore is PLXP’s only product and it was launched in late August 2021. There were limited sales of $7MM in the September quarter and the expectation is that sales in the December quarter will be lower as the launch inventory from the prior quarter is sold off. Consequently, the Company has not yet established what normalized sales will be and it’s likely that there is a dearth of data available until later in 2022. This has made PLXP a show me stock and the stock price has fallen -63% from its 52-week high reached in early October.

I argue that while the exact timing of the ramp is unknown, the market opportunity can be readily estimated, and given the dramatic repricing, PLXP presents as an interesting situation, albeit a somewhat speculative one with respect to timing.

There are an estimated 27MM cardiac patients and another 16MM diabetic patients in the US who comprise the target market for low-dose Vazalore. It is likely that 10%, or 4MM individuals likely experience gastric issues relating to regular aspirin and would be good candidates for Vazalore.

A daily course of Vazalore costs between $240-300 per year, which is significantly higher than for regular aspirin – and this comprises the prime focus of the bear case. However, I would argue that while it’s substantially more expensive than regular aspirin, for the targeted population, it offers the ability to get high absorption and consistent results without needing to take an antacid and at $20-25/month vs. $6/month for EC aspirin is not an unreasonable cost to absorb in comparison to vitamins and other health expenditures. I would gladly pay an extra $20/month to avoid daily stomach discomfort and possibly bleeding.

Because of the cost differential, my expectation is that while the direct-to-consumer TV and print ads may drive consumer awareness, it will really be the doctor directed recommendations that drive consumers’ purchasing decisions here. And so the question becomes: a) how quickly can they educate physicians and b) how quickly can those physicians influence their patients.

A recent Raymond James report on PLXP surveyed 25 high volume cardiologists as to how they would recommend Vazalore to their patients.

·       2 (8%) said they’d recommend it to greater than 20% of their patients

·       8 (32%) said they’d recommend it to 10% - 20% of their patients

·       7 (28%) said they’d recommend it to 5% - 10% of their patients

·       6 (24%) said they’d recommend it to up to 5% of their patients

·       2 (8%) said they would not recommend it to their patients.

This sample of high-volume cardiologists would recommend Vazalore to 6% - 12% of their patients, and presumably would do so as soon as feasible, which is dependent on office visits.

I made a matrix of the patient populations by acuity and assigned weights and presumed number of office visits a year to calculate how long it might take for doctors to recommend Vazalore to their patients. You may well choose to use a different matrix in your evaluation.

I assume that the most acute patients are 10% of the population and see their doctor twice a year, the middle 40% have an annual visit and the least acute 50% only visit every other year. Using a low-end target of 6%, about 4.5% of the target population would be reached within the first year, or 1.9MM patients.

1.9MM patients would result in $319MM in revenues at PLXP. Consensus estimates for 2022 are only $35MM in revenues, which equates to an implied user base of only 206K consumers or 0.5% penetration.

2023 consensus revenue estimates are $65MM which equates to only 389K consumers or 0.9% penetration of the target market.

My thesis is simple: the 2022 and 2023 estimates could be significantly under what PLXP can deliver if it is effective in convincing cardiologists of the benefits of Vazalore and they, in turn, recommend the product to a small segment of their patients for which the additional cost of Vazalore is greatly outweighed by the medical benefits.

Why do I have confidence in the ability of PLXP to deliver results well above consensus estimates? Primarily because of the track record of the team that is behind this launch. This management team successfully brought Mucinex to market and successfully sold that company years later. They have a deep bench of talent that is highly experienced in both consumer pharma launches and educating and influencing physicians – and they are well incentivized to deliver results.

Large cap pharma tends to sell at 4x-5x EV/Revenues, with small cap pharma deal multiples often hitting 7x EV/Revenues. If PLXP penetrates 4.5% of its target population and has 1.9MM consumers using Vazalore, the revenue base of $319MM would equate to $1.3b at only 4x revenues, which would equate to a stock price of $29 vs. $8 today. I am ignoring the cash on the balance sheet of $83MM and any cash generated from those sales assuming that it is used to build the revenue base up to that level.

While the exact ramp of sales is unknown, we know enough about the target population and the process of generating both consumer awareness and physician recommendations to estimate where this business can get to over the next two years.

In addition, the PLxGuard platform can be used for other NSAIDs like Ibuprofen and Naproxen and that platform value could well exceed the value of the Vazalore product, but I assess no value to it in this analysis.

PLXP is a more speculative opportunity, but one where there is a clear path to a significant revenue pool, combined with a proven management team and with the necessary cash on the balance sheet to execute the plan.

I believe that PLXP has fallen precipitously not because of any failure of execution or potential, but simply as a victim of current market conditions where speculative names are getting crushed. I think PLXP is a speculative opportunity worthy of consideration.

Catalyst

The Company will have to demonstrate that Vazalore is being recommended by physicians and adopted by consumers as a standard of care for its target population. This should occur in 2022.