Penwest Pharmaceuticals PPCO
July 18, 2001 - 1:21pm EST by
2001 2002
Price: 17.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 15 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Penwest Pharmaceuticals Co. is engaged in the research, development and commercialization of novel drug delivery technologies and has expertise in developing, manufacturing and selling excipient ingredients for the pharmaceutical industry. Based on its fundamental expertise in tabletting ingredients, the Company has developed its proprietary Timerx controlled-release drug delivery technology, which is applicable to a broad range of orally administered drugs, and ProSolv, a co-processing drug delivery technology platform. The Company is utilizing the Timerx system to formulate generic versions of branded controlled-release drugs, controlled-release formulations of marketed immediate-release drugs and New Chemical Entities.

This is not my typical kind of "value" investment, in that it is somewhat long term, but it is nonetheless interesting. Also, the stock has run up a bit since I started doing my research, so it's not as cheap as it was. That said, the discussion:

PPCO has two basic segments.
1) Excipients. Excipients are the inert ingredients in tablets and capsules utilized in the manufacture of drug and nutritional finished products. The business does about $35-$40mm in sales and is growing low teens. The business is stable, growing along with the drug industry, and has north of 30% gross margins. This business provides good cash flow to PPCO, but is not significant in terms of the valuation.

2) Timerex. Timerex is a patented oral controlled-release technology that allows drugs to be released into the body at varying rates. The process is much simpler than most currently available controlled-release processes. Theoretically, most immediate-release drugs could be re-formulated to take advantage of the benefits of a controlled-release system. The opportunities for the technology are large.

Opportunity: The key to this investment is PPCO's Neumorphan drug. They have a 50/50 joint venture with ENDO. The drug will compete in the moderate to severe pain area. It will compete against other controlled-release opiod pain medications. Currently there is only one drug that dominates that category -- Oxycontin (by Purdue Fredrick). Oxycontin is a $1.2-1.5 bln drug. The opportunity here is two-fold: a) Neumorphan should be able to take compete in an enormous arena (pain management) simply by being a new drug in a relatively uncompetitive market, and b) and more importantly, Neumorphan overcomes some the serious problems of Oxycontin. Oxycontin currently has a serious publicity problem. Tens of thousands of people in the US are addicted to it. Addicts say it is better than herione. There is a story in some newspaper in the US almost every week about the problems of people dying from over-doses of this drug. The Timerex technology makes the actual pill more difficult to abuse than Oxycontin. It cannot be disolved in water so it cannot be injected and snorting it is more difficult. I can go into more details on any of these things if anyone wants.

Neumorphan has completed some parts of Phase II and Phase III trials. They should be done by year's end with the remaining trials, at which time they will file and NDA with the FDA. If it takes the normal 1-1.5 year review time, Neumorphan should be launched in early 2003.

Numbers: If Neumorphan can achieve a not-aggressive 20% market share, they will do $300mm in sales. The drug will have approx a 90% gross margin. After S,G&A and their 50/50 split with Endo, they will earn approximately $125mm in pre-tax profit. After tax that would be approximately $5.40/share in earnings. Obviously, lesser sales would mean lower earnings, and higher sales would mean higher earnings.


FDA filing at year end. Approval in early 2003.
There is a possibility that FDA could approve it faster, as the the public outcry over Oxycontin addiction grows.
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