This is a pitch from Jason Stutman’s The Cutting Edge newsletter, his higher-end service from Angel Publishing (about $1,500/year), and what caught my eye was the headline promise that Harvard University is “calling for a 29,000% surge for one tiny company you’ve never heard of.”
So what is it? Well, it’s appropriate that we’re looking at this during the same week that Doc Gumshoe looked into the opioid epidemic for us… because this is a pitch all about nasal Naloxone, marketed as Narcan, the anti-overdose drug (an opioid antagonist, if you want to get technical) that’s carried by most first responders (and increasingly other folks, like friends and neighbors of addicts) and is used to reverse the effects of heroin or other opioids in folks who have overdosed.
The “Lazarus” bit is, of course, a dramatic reference to Jesus’ final miracle (at least before his own resurrection, I guess, if that counts as one of his miracles), the resurrection of Lazarus of Bethany four days after he died and was buried. And yes, Naloxone can bring patients “back to life” who are on the verge of death and have stopped breathing because of an overdose of heroin or oxycontin or other opiates.
Naloxone is a generic drug, off patent for almost 40 years, so it is relatively inexpensive and should be widely available, but, like with the Epipen and epinephrine, the delivery mechanisms and distribution platforms are anything but generic — there are currently a couple companies making autoinjectors and nasal formulations of naloxone, in addition to the basic drug (for injection), with pretty wide variants in pricing and marketing strategy. And though outrage has perhaps been slower to build when it comes to saving the lives of addicts (naloxone) instead of saving the lives of little kids with peanut allergies (Epipen), there have been several waves of outrage in the past about pricing for Naloxone and how that might deter distribution of the overdose-reverser.
So what is it that Stutman is pitching here? Here’s a taste of the ad:
“But one tiny California company has come up with a solution… a treatment you’ve seen in action before your very eyes today.
“It involves a simple burst of lifesaving medication, inhaled through the nose, which immediately reverses the effects of this deadly disease.
“‘It literally snatches them back from the brink of death,’ says one eyewitness.”
He’s clearly specifically pitching Narcan nasal spray, which is sold by Adapt Pharma — he even shows some videos and photos of Adapt’s specific branded nasal spray delivery system for Narcan, which differs from some of the other atomizer-type nasal applicator kits for the drug that aren’t specifically FDA approved, but which seem to be in pretty wide use regardless.
If you’re confused about the names “Narcan” and “naloxone”, naloxone is the name of the chemical compound, and the generic name… Narcan was the original brand name for naloxone in the 1970s, and a few years ago Adapt bought that brand name, which had not been officially in use in a product for several years, to give its nasal naloxone better brand recognition.
But Adapt Pharma is not a publicly traded company… so from whence will our riches flow, dear readers? let’s see what else is noted in the ad… first, a bit of tantalization for your wallet:
“This company isn’t one of several that are pioneering this treatment.
“There’s just one. And it’s the company I’m telling you about today.
“And it’s so far ahead of the competition that Harvard predicted this company’s sales will explode by 29,000%.
“I’m sure you can imagine what that kind of profit ride would mean for you as an investor…”
OK, so that’s at least an exaggeration — this is, as we noted, a generic drug, and there’s an opioid epidemic now in its second decade (depending on who you ask). There are other companies trying to sell into this market, regulatory questions about pricing, and different delivery systems being sold for generic naloxone. Perhaps this one has some unique “special sauce,” we’ll see, but emergency applications for opioid overdoses are, unfortunately, seeing growing demand… and growing demand for previously “niche” pharmaceuticals brings both crazy pricing and, eventually, more supply, particularly when no one has a patent on the underlying chemical compound.
But what else do we get as the hints are dropped and the newsletter is pitched? Here’s some more:
“Currently, this company is trading at a minuscule market cap of less than $100 million…
“But that’s right now, as I write this — and considering the contagious momentum this company’s valuation has recently seen…
“I wouldn’t be surprised if this number has already grown by the time this urgent message reaches you.”
Feel that itch? Deep in your hip pocket, near the wallet? That’s the same itch that comes up because the car salesman says he has to “go talk to his manager” and “we’ve only gone one more car we can sell at that bargain price this month.” Try not to scratch it, you’ll get an infection.
What other clues do we get? Well, there are several other hints dropped about Narcan, including references to the endorsements this lifesaving medicine has received from Dr. Oz, Sanjay Gupta and the U.S. Surgeon General (the past one, not Dr. Adams… though Adams also pushed for more Naloxone access when he was health commissioner in Indiana under then-governor Pence, and reportedly talked Pence into needle exchange programs to combat Indiana’s pockets of HIV infection). And all of those references benefit Adapt and its Narcan-brand nasal applicator, since they have the brand recognition (and since that’s the easiest way to give naloxone, with no needles or mixing).
Here’s a bit more from Stutman’s spiel…
“I know of at least one leading financial research firm that’s already starting to wise up to this profit situation.
“This firm, One Equity Research, is looking at the disruptive company behind the “Lazarus Project” with a string of dollar signs in its eyes…
“It’s calling this tiny company’s lifesaving invention a ‘billion dollar opportunity.’
“But not for just anyone.
“It’s only the ‘early movers’ in this space who will reap the lion’s share of the riches.”
And the ad also gives the implication that “it’s so easy, a child could use it” by referring to one well-publicized case of a nine-year-old who learned how to give Naloxone treatment because she was worried about her older brother relapsing and overdosing on heroin…
“In fact, nine-year-old Audrey Stepp is one such kid. She recently put her treatment skills on exhibition…
“I wasn’t kidding when I said this tiny California company designed this “miracle” medicine to be as easy to use as possible.
“Even a grade-schooler can use this lifesaving solution…”
That is a real case and a real example, though that reference is to a different formulation than the nasal delivery device sold by Adapt Pharma — according to the video story from last year, Audrey learns how to fill a syringe atomizer and also how to use a cartridge-based autoinjector, neither of which is the “easier” Narcan nasal spray that Adapt sells. Which is a good reminder that there’s more than one way to save a life, I suppose, but also that there’s often more than one provider for a desperate market.
What else do we get from Stutman?
“It’s now available over the counter.
“As I write this, CVS is already selling the ‘Lazarus Project’ rescue drug in 15 states… and it’s in the process of adding it to 20 more.
“That’s right — you can walk right into the CVS pharmacy and purchase it for home use without a prescription.
“It isn’t just CVS, either. Walgreens has it available over the counter, too…
“Already in 35 states and the District of Columbia.
“These are the two largest pharmacy chains in the entire world — and they’ve BOTH formed exclusive partnerships with the tiny California company behind the ‘Lazarus Project.'”
That’s true, though the number has gotten bigger now — and it’s not just specifically Narcan that’s available, though that’s probably the most common one. Naloxone in general has been “de-prescriptionized” by 41 states and can be sold by pharmacists in those states without a prescription (If you’re curious, Michigan, Maine, Delaware, Oklahoma, Kansas, Nebraska, South Dakota, Wyoming and Hawaii are the nine that still require a prescription, according to CVS… and yes, all of those states are facing pretty much the same opioid epidemic as the other 41. Technically, most places still require a prescription but the states have authorized a “blanket prescription” that anyone walking into the pharmacy can use just by asking the pharmacist).
There continue to be those who resist easy naloxone availability, including some first responders who refuse to carry the medicine for various reasons (fear of withdrawal symptoms, “moral hazard,” etc.), but clearly we’re seeing a nationwide increase in the awareness of the opioid epidemic as its impact continues to spread and touch more families, and a pretty broad adoption of “let’s give everyone naloxone” policies as part of the effort to save lives.
Any other hints about which naloxone formulation Stutman is pitching, or who the company might be? Here you go:
“… the ‘Lazarus Project’s’ rescue drug was first approved by the FDA in November 2015.
“So in less than two years, this tiny company:
- Has distributed nearly 750,000 doses of its “Lazarus” rescue drug throughout the United States to local and state government agencies and health departments, harm reduction groups, emergency responders, and other nonprofits at a stable, discounted price.
- Has formed crucial partnerships with the world’s largest pharmacy chains, including CVS, Walgreens, Rite Aid, and Albertsons.
- Has contracted broad coverage with medical insurance — 94% of U.S. citizens have access to this incredible medicine through health insurance.
- Has partnered with the National Association of School Nurses — So far, high schools across 32 states have started stocking up on this “miracle” drug.
- Has signed major, multimillion-dollar deals, including a $17.5 million deal with a specialized finance company focused on global health care initiatives and a $55 million licensing deal with a major pharma player.
“And this tiny California company just received another FDA approval on in early 2017 for an even lower dose of its ‘Lazarus Project’ drug (2 mg.) — and it still saves lives.”
OK, so, again, we’re talking about Adapt Pharma, which did indeed get approval for their 2mg formulation of Narcan back in January. But, still, Adapt ain’t a publicly traded company, and there ain’t a stock we can buy as a result. So what’s the deal?
A few more clues…
“Insider Kevin Pollock just grabbed 4,800 shares of this company at the start of the year.
“The CEO followed suit just four days later. So did company scientist Dr. Michael Sinclair, who scooped up 3,500 shares for himself.
“It’s a positive sign when insiders have faith — not only in their company’s product, but in their company’s financials as well.”
OK, so yes, Kevin Pollack did buy 4,800 shares (4,820, actually), though that was way back in January and he paid just $6.98 per share for a stock that is currently trading at about $35. This is, as you may well have guessed by now, not the private Adapt Pharma but its publicly traded partner, Opiant Pharmaceuticals (OPNT). Do be careful if you dabble in this one, it gives the impression of being a “normal” stock because it doesn’t trade at pennies, but it’s still a microcap and it’s very volatile, the stock has had both a near-15% fall and a 10% rise in just the past week.
And yes, Opiant has “signed major, multimillion-dollar deals” as teased — though they’re both for the same thing, this nasal Narcan product. The “$55 million deal” represents the total potential milestone payments Opiant could receive from Adapt as part of its licensing deal, and the “$17.5 million deal with a specialized finance company” is the deal they made to pre-sell some of their Narcan royalties as a way to get non-dilutive financing. More on that in a minute.
And the opioid addition story certainly draws attention to this stock, as has the surge of sales of Narcan — OPNT shares have fluttered around in roughly the $4-8 dollar range for close to five years, but took off like a rocket in the Summer as they moved to a Nasdaq listing and got to nearly $45 by the end of August, before settling back down a bit. It’s been a wild, wild ride for this stock, which remains tiny (it was a $15 million company a couple months ago, now it’s a $70 million company).
Opiant has been through some of the facade-shifting and costume-changing behavior that’s all-too-common down at the lower reaches of the OTC market, where it traded until they uplisted to the Nasdaq last month. Before changing its name back in 2016, Opiant was known as Lightlake Therapeutics (LLTP) and was working on developing anti-obesity drugs (and they only became Lightlake Therapeutcs in 2009… before that the company was known as Madrona Ventures and was, albeit briefly, a gold explorer).
Naloxone was previously cheap, and the market was small — first responders paid something like $1 per dose for a drug that now wholesales for roughly $40 per dose ($75 for a two-pack that looks kind of like Epipen packaging, since, as with the Epipen, the reversal drug for the problem is short-acting and a second dose might be needed before an ambulance can get you to the hospital… or, for autoinjectors, anywhere from $40 to $6,500, according to recent stories that expand on the criticism Mylan has been getting for its Epipen pricing).
Now its becoming much more widely available… but whither the pricing? I have no idea, but Opiant is in pretty good shape on that front — they’re not the front-line provider, they have partnered the drug with Adapt to be the commercial producer, and they just get a royalty (and milestone payments). So they don’t get all the headline risk of pricing arguments, but their revenues clearly depend on pricing since they get a tiered royalty on Adapt’s sales of Narcan — reportedly up to a “double digit” royalty if the sales reach certain milestones.
It gets a little more complicated than that, since Opiant actually sold part of its interest in the Narcan royalties to a third party financier, SWK, for $17.5 million a year or so ago. That cuts into Opiant’s near-term cash flow, but if Adapt keeps ramping up sales Opiant will begin receiving royalties before too long — once SWK receives a total of $26.5 million in exchange for their $17.5 million investment, Opiant will go back to receiving 90% of the royalty revenue and SWK’s share will drop to 10%.
Incidentally, we should note that’s a heckuva investment for SWK if Adapt’s sales keep doing well… which serves as a reminder, perhaps, that it’s the financial guys who often get the biggest reward from pharma deals, even if everyone hates them in the end — that’s why I own shares of Ligand Pharmaceuticals and avoid most drug developers, because LGND is run by financial guys and, though they pay themselves egregiously and may not add much to the world, they know how to wring a royalty out of a patentable drug discovery or delivery platform.
But that’s neither here nor there… what’s the actual financial picture for Opiant? Will that royalty mean the company is worth the current $70 million market cap? Was their deal with SWK the ultimate sucker deal from a payday lender, or was Opiant smart to “monetize” that royalty early in the face of possible competition or pricing/regulatory pressure?
It’s pretty hard to say still, particularly since Adapt’s Narcan has only been commercially available for about a year and a half. We know that Narcan has posted “at least $25 million in cumulative net sales during two consecutive quarters” so far this year, because that level of sales in the March and June quarters spurred the second tranche of payment in the SWK royalty deal back in August. Opiant’s investor presentation indicates that if net sales hit $55-75 million in 2017, which seems at least possible if they got to $25 million in the first half of the year, then Opiant will begin receiving royalties (meaning the SWK “advance” will be paid off and SWK will drop down from receiving 100% of the royalties to receiving only 10% of Opiant’s total royalties) at some point in 2018.
The argument is that as Narcan becomes more widely sold over the counter to families touched by opioid addiction, required for first responders and schools and other public facilities, and more widely prescribed (and it is now required in a couple states that any high-dose opiate prescription be accompanied by a Narcan or naloxone prescription), the sales will rise. And as sales rise, those royalties will begin rolling in to Opiant.
We don’t know what the royalty tiers are, but if we’re fairly generous and assume a 10% royalty rate, then the math is pretty easy — if Narcan hits $500 million in sales, Opiant gets $50 million in royalties.
The problem, of course, is that we have no idea what the pricing or sales levels will be, or whether there will be any regulatory pressure on pricing. You can model out how you think it might work — the FDA looked at generic injectable naloxone sales back in 2015, right before Narcan was approved, and noted the growth (and the initial growth of sales of the competing autoinjector Evzio, though that was also just starting sales back then)… but even though sales were rising pretty dramatically, with 1.5 million or so vials sold, that number still pales compared to the 250 million opioid prescriptions written that year — so a big question is how many of those opioid prescriptions are higher-dose and might end up being sold alongside Narcan, and whether the more user-friendly Narcan nasal spray will have dramatically higher sales than the previous generic injectables.
If, let’s say, Adapt’s Narcandoubles the sales of outpatient naloxone in 2015 and sells three million units, and if they get $40 wholesale per dose, that’s $120 million. It seems unlikely that Adapt will hit that number for 2017, but it’s possible… and 10% of that is $12 million in royalties, which is nothing to sneeze at for a $70 million company — but it’s not enough to cover Opiant’s current level of Selling, General and Administrative expenses ($16 million — a number that, despite Opiant’s other drugs in development, dwarfs their R&D spending of roughly $2 million per year). That’s just one guess at what a reasonable sales number might be, I have no idea how many doses Adapt has sold so far, but that $120 million number seems rational in light of Opiate’s seeming expectation that sales of Narcan in this first full year will total something in the $55-75 million range.
Opiant’s pipeline also includes an unpartnered opioid antagonist nasal spray that they’re testing in Phase II for eating disorders and “alcohol use disorder”, and a heroin vaccine that’s in preclinical studies, and they’ve also talked up similar treatments for cocaine users and others. I have no idea whether those have any real chance of reaching the market, or how much cash Opiant will spend developing those drugs, but it seems to me that a $70 million market cap for Opiant assumes either that Narcan sales will be substantially higher than that guessed-at $100-150 million range, or that Opiant will be successful in developing one of their other drugs.
Narcan has certainly been a hit, according to Bloomberg it very quickly captured a third of the naloxone market after being introduced last year — though that article also notes that the total market for naloxone products was in the $80 million range in 2015, so they need both rising market share and a continued rapid rise in the size of the overall market as more naloxone makes it out into communities.
So let’s look at it from that angle, since we don’t have a lot of other numbers to use for our guessing exercise. The $80 million in 2015 sales isn’t static — it was a quarter of that in 2011, so there has been growth. I haven’t seen any numbers from 2016 or 2017 sales, but if it’s rational to assume that naloxone sales quadrupled again in those two years (meaning sales accelerated pretty aggressively, partly because of the availability of Evzio and Narcan and a bigger public health push to make naloxone more available in general), then perhaps naloxone in total will have $320 million in sales in 2017. If Narcan’s share goes from the initial 33% reported in that article to, say, 50%, that’s $160 million — way above what Opiant seems to be expecting for this year, but perhaps a rational number for thinking about near-future years.
All of this is really just spitballing, but you can see that to get to those billion-dollar numbers and the pie-in-the-sky valuations for Opiant you need to get pretty dramatically far past those guesses. Yes, some folks are willing to be that optimistic, like Opiant itself, which in its investor presentation sees a $2 billion addressable market, with 95% of that coming from co-prescribing Narcan to 20 million prescription opioid users. And One Equity Research, which published the “report” cited by Stutman’s ad… though, we must note, One Equity Research, which no longer exists under that name, was paid $140,000 by Opiant (then still called Lightlake) to issue that research report — and even they, a paid promoter, anticipated just that Opiant would get 8% royalties on $50 million in sales in 2016 and therefore was underpriced and should have 240% upside from the $16 million market cap it had at the time. That would mean a market cap of $54 million, so that ship has sailed with OPNT’s listing on the Nasdaq helping to spur it to a $70 million market cap… but the $50 million Narcan sales estimate One Equity used for 2016 will also almost certainly be surpassed this year.
So there is certainly room for possible upside in Opiant, particularly if Narcan sales are dramatically higher than the naloxone sales trend has been over the past few years… but it also seems likely that they will continue to lose a lot of money for the next couple years, even at relatively high royalties from Narcan, because they seem to have pretty high overhead costs and they’re putting that cash flow into developing their other pipeline products. That means, if you’re investing in Opiant here, that you should make sure that you either see a really dramatic sales increase for Narcan or find their pipeline of future products appealing (or both) — if Narcan sales only increase by 30% a year or so, or if their other products require a lot of R&D spending or turn out to be ineffective, then Opiant isn’t necessarily all that appealing even with a relatively small $70 million market cap.
That’s what I think, anyway, after spending a few hours skimming through their filings — I could be missing something, or I could just be too skeptical (wouldn’t be the first time for either), so I’ll pass it over to you: Interested in Opiant and their Narcan royalties? Let us know with a comment below.
P.S. For those Irregulars who follow the biotech discussions led by Dr. KSS, he did mention Opiant following its presentation at the Rodman and Renshaw conference last month — you can see those brief comments here.