Catalyst Pharmaceuticals (CPRX) reported very strong financial results for 2019’s second quarter, reporting 60% upside to the analyst consensus revenue estimate, also driving the company into profitable territory. We were a bit surprised with the muted reaction to the earnings print, however CPRX was up roughly 25% since mid-July in anticipation of potentially positive 2Q results.
Despite the run-up into earnings, we still see significant long-term upside from here, and also expect short-term follow-through on the positive quarterly results as investors digest the highly positive results and their implications for long-term value. In addition, many institutional investors will return from vacation in late August and begin to evaluate the healthcare stocks to own in the second half of 2019. We believe CPRX will pass such screens.
In this brief follow-up to our prior article on CPRX, we identify possible reasons for the muted reaction and offer analysis on why we remain bullish on the stock.
Reasons for the initial muted reaction to CPRX’s 2Q 2019 financial results
We believe there are 4 key reasons that the initial reaction was essential neutral to CPRX stock after earnings:
- As seen in the chart above, profit-taking was likely the primary culprit, in our view, particularly given the nice short-term run-up that CPRX had into 2Q earnings in the back half of July and into early August. The event-driven money came in, and likely exited right after earnings, particularly with the stock acting like it did not want to go higher on the huge revenue beat. We think this is positive for patient investors, as the stock needed to digest the buying and selling of fast-money investors and can now attract longer-term investors.
- The second-quarter upside was highly impressive and is unlikely to be duplicated based on positive, but less dramatic, guidance. In this regard, management state that: “We expect enrollments in this range around 15 patients per month during the next phase of commercialization, which now gets into the tougher work of raising awareness…“. Nevertheless, the company is still poised to grow significantly in the coming quarters, and we believe penalizing the stock for the sooner-than-expected sales inflection is not a reason to sell. Based on management’s guidance, CPRX is expected to exit 2019 with an estimated 500 LEMS patients on Firdapse, and simple math would suggest that revenues could be annualizing in the $150 million per year range (assumes $300k annual price tag). Analysts are now forecasting in line with this calculation for 2020 revenues, and we believe that the company could continue beating expectations. Nevertheless, with $150 million in estimated revenue for 2020, CPRX is trading at about 3.5 times sales, and with growth expected to continue, the shares look cheap.
- Gross margin was unusually high in 2Q 2019. The gross margin for CPRX in the period came in at 85%, and with the royalty that the company needs to pay BioMarin Pharma (BMRN), the cost of goods (COGS) should be higher. And this also is true, as COGS in the second quarter were unusually low, as Catalyst booked revenue for Firdapse with little to no costs to manufacture the product because its inventory had been written off in prior quarters. Nevertheless, management corrected this on the call suggesting that analysts use a 20% COGS or an 80% gross margin going forward. Essentially, Catalyst recovered the cash that it spent to make Firdapse and wrote off in prior periods. That’s a good thing, and an 80% gross margin on sales going forward is still very attractive.
- Lastly, the company reset its expectations for clinical trial results for the potential MuSK-MG indication for Firdapse, with enrollment expected to complete before the end of this year and results in 1H 2020 (vs. prior guidance of results in 2H 2019). Given that this and other study results have been pushed back several times, this was once again disappointing, although management left room for the possibility that results could be announced earlier in 2020. Nevertheless, the clinical trial for Firdapse’s CMS indication remains on track for 2H 2019, and this is an important milestone and potential stock-moving catalyst that we believe is not priced in.
OK, now here are the positives
- In no uncertain terms, we believe that 2Q earnings were impressive. 60% revenue upside, positive EPS and generating cash just two quarters into a product launch are the first points to be called out. Highlights of some of the details included a 90%+ refill rate and 95% patient satisfaction in a survey conducted by the company for half of its patients. Management is executing extremely well on its business plan.
- Catalyst Pharmaceuticals is now a self-funding company. Another positive that seems to have been lost is that the company has now crossed over into cash-flow positive territory, rather than being a typical cash burning small-cap pharma company. Usually, when a company crosses this milestone, there is upside to be had, as the risk profile of the business has been lowered. It’s one thing to have strong sales, and it’s another to be adding to the balance sheet each quarter with free cash flow, removing the need to raise capital to fund operations.
- Nearly all patients on the compassionate use programs for both Catalyst and Jacobus are now on Firdapse, essentially wiping out the threat that patients will go back to Ruzurgi. There is much friction to switch treatments in this patient population, notwithstanding that Ruzurgi is not actually indicated for adults, the majority of LEMS patients. While the low-hanging fruit for CPRX has been picked by running through the compassionate use patients, the company will now focus efforts on identifying and diagnosing new LEMS patients, at an estimated rate of about 15 per month, according to management. This is a huge undertaking that requires significant resources, the kind of thing that Jacobus is unlikely to compete with, especially given Ruzurgi’s pediatric-only label.
- Lastly, on the positives, we will point to valuation and upside potential of future milestones. With estimates calling for CPRX to produce $150 million in sales in 2020, the stock is trading at only 3.5x revenue with the ability to continue to grow sales in LEMS. Note that the company has three potential new indications that have potential to triple the market for Firdapse, and there remains the potential that Catalyst wins its litigation against the FDA to vacate the approval for Ruzurgi. We believe that the upside from these potential catalysts are not factored into CPRX shares.
After very strong 2Q 2019 results, CPRX shares did not take advantage of the upside, likely due to a sell on the news reaction for some investors. After the dust settles, once investors re-evaluate the stock’s current valuation, growth potential, upcoming catalysts and the company’s ability to fund its own growth with cash flow, we believe the shares will have a positive delayed response to the recently reported financial results.
Disclosure: I am/we are long CPRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.