PTC Therapeutics catches falling knife with Emflaza buy; or did it?

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Every now and again I’ll read about what seems on its face a boneheaded business deal between two Pharma companies and try to blow the lid off some super-stealthy, strategic, near-genius move that none of us industry observers can fathom.

I haven’t had much luck doing that. But this one is a real puzzle. Because after all, you don’t get to be CEO of a Nasdaq-listed company making boneheaded moves (well, usually not).

Here’s my quandary.

PTC Therapeutics (Nasdaq: PTCT) inherited a drug-pricing controversy last week when it paid $140 million for deflazacort (Emflaza), a steroid used to treat Duchenne muscular dystrophy (DMD). So it’s no surprise that just six days after the deal, congressional drug-price vigilantes Bernie Sanders and Elijah Cummings have come calling.

Sen. Sanders (I-VT) and Rep. Cummings (D-MD) sent a letter to Stuart Peltz, the CEO of South Plainfield, NJ-based PTC, requesting information about the price the company intends to charge for deflazacort.

PTC hasn’t yet disclosed a price. But Sanders and Cummings have zeroed in on the drug because its previous owner, Marathon Pharmaceuticals (Northbrook IL), priced deflazacort at $89,000 upon FDA approval in February–despite the fact that it’s been available in other countries for years at a fraction of the cost. The drug has no patent protection or market exclusivity in the US and can be imported from the UK, according to the letter, for anywhere from $1,000 to $1,200 per year.

“PTC is aware of the letter sent by Senator Sanders and Representative Cummings and we plan to respond within the designated timeframe,” said Peltz, in an e-mailed statement to Xconomy. “As previously stated, PTC continues to engage with key stakeholders to understand how to make [deflazacort] available to patients who need it.”

Deflazacort isn’t a cure for Duchenne, a progressive and deadly disease that causes patients to lose their ability to walk at an early age. It’s a steroid that reduces inflammation and helps boost muscle strength.

Marathon didn’t conduct the initial work on deflazacort. It acquired rights to clinical trial work done in the 1990s, ran some additional analyses, and then won FDA approval. What’s more, the approval also brought the reward of an FDA priority review voucher. These vouchers, which speed up the review of a drug, have been sold for as much as $350 million.

RBC Capital Markets’ Simos Simeonidis predicted PTC would have a “very difficult” time turning deflazacort into a profitable product given the controversy and current pricing environment.

“It is clear to us that the company has no choice other than dramatically lowering the price,” Simeonidis wrote.

Now, Sanders and Cummings are calling on PTC to do just that. They want PTC to keep the drug “at its importation cost,” according to the letter. “Doing so will allow patients to use deflazacort without going into bankruptcy,” they wrote, requesting a response by April 3. The two added that they want to know if the company intends to pursue FDA approval of the drug in juvenile arthritis–another orphan disease.

Steve’s Take:

At first glance, Marathon Pharma looks like the winner in this five-alarm fire drill, staged as another media circus to a large extent by Sen. Sanders and Rep. Cummings with the help of the prime-time news shows.

Certainly, Marathon is likely relieved that Emflaza is no longer its headache. And on the surface, the fact that it was able to exchange the generic steroid for $140 million is reason for merriment. On the other side of the deal, it looks as though having been snubbed by the FDA over its own Duchenne candidate, Translarna, PTC has chosen a desperate strategy in which the purchase of Emflaza is proof of same.

However, I don’t believe that Mr. Peltz is either boneheaded or desperate as PTC’s chief executive. To the contrary, his only dilemma, so to speak, will be how to price Emflaza. His company now owns an FDA-approved medicine. Parents of Duchenne children who had to rely on importing the drug from Europe or Canada will now have a US source.

The goal is to find a price point between Marathon’s proposed $89,000-a-year charge and apparently a $1,000-a-year cost to import. Peltz knows that somewhere between these two numbers will be a price PTC will be able to charge with full, or nearly full, insurance coverage for the US-approved drug.

Another point in his favor is that Peltz is very familiar with controversy. He managed to persuade the Europeans to approve ataluren for DMD, even though that med has failed three consecutive studies, including two specifically for DMD. He was rebuffed by the FDA, but used its own regulations to force a review and PDUFA (Prescription Drug User Fee Act) date for the drug, according to Endpoints News.

Here’s why I think PTC deserves serious consideration for a short-term, high-risk/high-reward buy.

On March 22, 2017 Barclays issued an equal weight rating on PTC with a price target of $13.00. As of 11am PT on Thursday, shares were trading at $8.45 each.

Analyst Dr. Geoff Meacham comments, “While we are encouraged by PTC’s move to bolster revenues, we remain cautious, given recent controversy surrounding the approval of Emflaza and the now-delayed launch. Recall that Marathon had generated significant controversy recently following their efforts to get Emflaza approved in the US–and then announcing an annual price-tag of $89,000 on a drug many US patients could import for ~$1,600/yr.”

Peltz is nothing short of genius. Marathon and its Emflaza became a giant lightning rod after pricing the med at $89,000 following a narrow FDA approval is an orphan treatment. The “s..t” hit the fan with outrage over price-gouging that left the PhRMA (Pharmaceutical Research and Manufacturers of America) reviewing its membership rules and whether Marathon CEO Jeff Aronin should be tossed from its board. Sanders and Cummings followed up with one photo op after another demanding to know why the FDA classified an inexpensive, decades-old steroid as an orphan drug, in a program the GAO will now review.

Marathon CEO Aronin was quite correct in arguing that his company had done the “heavy lifting” on Emflaza. Now it’s Peltz’s turn to take an inexpensive, old steroid and reprice and sell it profitably in the US market without another full assault from the likes of Sanders and Cummings. Not an easy task but also not as daunting the second time around.

Bottom Line:

Endpoints reminds us that Martin Shkreli practically invented the price-gouging brouhaha when he raised the price of an old generic med more than 5,000%. Shkreli resigned as CEO of Swiss drugmaker Turing Pharma but the biotech never discounted the price, despite congressional hearings, livid lawmakers and a media circus demanding expiation.

All of which is ancient history in today’s “famous for 30 seconds” news environment. Thick-skinned Peltz will find a price for Emflaza–perhaps somewhere in the $12,000 to $14,000 range–that is tolerated across the board as the next pharma brouhaha takes center stage.

Steve's Take: @PTCBio is a bargain for anything less than the target price of $14 (as of 3/23/17) Click To Tweet

Anyway I view it, PTC Therapeutics is a bargain at $8.45, especially where analysts have a current (March 23, 2017) average price target of $14. Oh, and remember–there are in fact no US laws circumscribing drug prices. Not yet, at least.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.