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Prta
Summary
The stock of Prothena Corp. lost just over two thirds of its market value in trading Monday after terminating its lead drug program.
The drop means the company's cash on hand slightly exceeds its market capitalization, and the firm still has other assets in development.
Should investors wade into this name after yesterday's implosion? We take an in-depth look at what remains of the investment case in the paragraph's below.
nothing, on the other hand, can be more impenetrable to the uninitiated than a legislation founded upon precedents." - Alexis de Tocqueville
One of the downsides of investing in small developmental biotech concerns is, every now and again, you are going to encounter a trial setback that implodes one of your investments. This is why I always stress the importance of making myriad smaller investments within a well-diversified biotech portfolio, as well as ample use of Buy-Write strategies which we outline frequently for those of my followers that have signed up for real-time alerts.
Yesterday, it was the shareholders of Prothena Corp. (PRTA) who felt the brunt of what happens when a company's lead drug candidate fails in trials. The stock lost slightly more than two thirds of its market value on Monday after the company announced it was terminating development of its lead drug candidate 'NEOD001' for the treatment of AL amyloidosis. The decision was made after disappointing results from its Phase 2b PRONTO study, as well as a futility analysis of a Phase 3 VITAL study that showed little chance of success.
This obviously was a huge setback. This wholly-owned compound was being counted on to deliver some $1.5 billion in peak sales, according to some analysts, provided it was approved. Unfortunately, that is no longer a plausible scenario which cratered the stock.
So, what is left for Prothena and its shareholders? Well, the company did end 2017 with just over $420 million in cash on hand, which represents all most all of PRTA's now ~$450 million market capitalization. In addition, in March, the company announced a large collaboration deal with biotech stalwart Celgene (CELG). The partnership will center around three proteins implicated in the pathogenesis of neurodegenerative disorders: tau, TDP-43, and an unnamed target. None of these is connected to the failed NEOD001 program, which is in the process of being discontinued.
Source: Company Investor Presentation
Celgene paid $100 million upfront for this collaboration deal, which means Prothena should now have a higher cash balance than its current market capitalization. Celgene also took a $50 million equity stake in the firm by buying 1.2 million shares at just over $42.50 a piece. Prothena can also earn potential exercise payments, milestones, and royalties on net sales for the three proteins that will be part of the collaboration arrangement.
In addition, the company has other compounds (see chart above) in pre-clinical development. Prothena also has initiated a global Phase 2 PASADENA study of PRX002/RG7935 in patients with early Parkinson's disease with its partner Roche (OTCQX:RHHBF). This triggered a $30 million milestone payment to Prothena in the fourth quarter of 2017.
Analyst Commentary:
Yesterday's announcement and market action has brought out the analyst community over the past 24 hours. Oppenheimer, RBC Capital, BTIG, Barclays, and Jefferies all downgraded PRTA to a 'Hold'. Wedbush (the only analyst firm that was duly skeptical on Prothena, it appears before Monday's news) reiterated their Hold rating. Cantor Fitzgerald ($14 price target), Deutsche Bank ($16 price target) and Nomura all reissued Buy ratings, albeit with much reduced price targets. Deutsche lowered its price target already the down from $78 a share but 'still thinks the company's total value is underappreciated following yesterday's selloff. Prothena's "strong" cash position and "interesting" pipeline could host several upside drivers over the next 12-24 months"
Verdict:
This high-profile trial failure basically moved Prothena from late-stage 'Tier 4' concern to a much more early stage Tier 4 play. The stock sells for less than Prothena's current cash on hand. In addition, the important collaboration deal with Celgene should remain intact; it has a mid-stage asset it is developing with Roche. With the NEOD001 program terminated, cash burn should come down significantly from the ~$135 million level of 2017. Therefore, for patient investors, yesterday's selloff will be offering an attractive entry point for an entity that seems undervalued from a 'sum of the parts' perspective.
I closed out the Call portion of my Buy-Write order on PRTA yesterday for pennies on the dollar. I averaged down a bit in PRTA today with the intention of selling new out-of-the-money calls against the entire holding before the end of the week.
A prisoner's shackles would always be a lawyers joy." - Dennis E. Adonis
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