The Life Sciences Report: Among other things, Rohit, you have a background as a wet lab bench researcher, performing investigations of specific enzyme epitopes and mitochondrial DNA. How does your experience in the lab inform your perspective of the drug development and lab industries?
Rohit Vanjani: My experience in the lab has come in handy a number of times, most recently when I initiated on a company called OvaScience (OVAS:NASDAQ). This company's technology uses mitochondria from egg precursor cells to improve fertility. Having an understanding of the importance of mitochondria, and of other uses mitochondria may have beside oxidative phosphorylation, came in handy when I was looking at OvaScience's Augment (autologous germ-line mitochondrial energy transfer). The idea is to improve egg quality by injecting mitochondria from the patient's own egg precursor cells into her mature egg during in vitro fertilization. One of the labs I worked in was involved with mitochondrial gene rearrangement, and that background certainly helps in following this stock.
TLSR: Some investors have shunned generic drug companies because, compared to biotechs, they perceive low margins and low return on investment. They perceive there's no pricing power. Investors seem to think that way about specialty pharmas as well. First, are investor perceptions wrong? Second, can volumes and lower research-and-development expenses overcome the lack of pricing power?
RV: I think the perceptions can certainly be wrong. It's not only on volumes and cost savings that generics can do well. Generic drug companies can be successful with the most basic item, which is taking price. There are opportunities in certain pockets of the market where generics have pricing power.
What investors should be looking for is a market where there are a limited number of players, so that if a price increase occurs, the other generics will follow suit. Investors should also look for situations where a certain product is difficult to manufacture, which will limit the number of generic entrants. A third favorable situation is one in which the active pharmaceutical ingredients (API), or raw materials, for the drug are scarce. To your question, I think institutional investors understand that there is pricing power for generics in certain pockets. All you have to do is look at the returns on some of these names.
TLSR: What about foreign competitors—particularly the generic drug makers in India?
RV: It used to be the case, a few years back, that a generic company took price, and then the Indian generics would come in, whack the company with price competition and take a bunch of share. There are two things going on now that have changed the landscape. One is that the Indian generics have been hit with a slew of manufacturing issues. In the past few months a number of Indian drug ingredient manufacturers have failed plant inspections by the U.S. Food and Drug Administration (FDA). Smruthi Organics Ltd. (SMRUTHI:BO) got hit. Canton Laboratories (private) got hit. USV Ltd. (private) also got in trouble. The FDA took action on Sun Pharmaceutical Industries Ltd. (SUNPHARMA:NSE) and Ranbaxy Laboratories Ltd. (RANBAXY:NSE). Last year, two Wockhardt Ltd. (WOCKPHARMA-EQ.NS) plants were banned by the FDA. This issue definitely created opportunities for other generics manufacturers. The second thing is that even if the Indian generics didn't have these issues, the Indian industry philosophy has changed somewhat. Indian generic firms have begun to act more rationally, rather than price compete.
With all generics, the fear is that while they have pricing power in certain pockets, when does this end? When will companies stop being able to take price? When will other competitors come in and steal share? There is a limited window for these opportunities. A company had better have a long-term strategy to grow and get branded-type margins with branded-type products. I can give you examples of two companies that I follow that have addressed these issues.
"OPKO Health Inc.'s 4Kscore Test will actually save the system a lot of money, and can better analyze for prostate cancer."
In the case of Lannett Company, Inc. (LCI:NYSE.MKT), its major franchise is a thyroid drug called levothyroxine. There are five players in the market. Since last August, there have been two significant price increases that, combined, have resulted in a greater than 100% increase on the price. And every one of the competitors has followed suit, though one competitor, Sandoz (a subsidiary of Novartis AG [NVS:NYSE]), has not yet followed suit on the second price increase. Last August, Mylan Inc. (MYL:NASDAQ) took the increase, then Lannett followed almost immediately, and it took about a month before Sandoz followed. The same pattern happened again at the end of April. Mylan is at the new higher price and so is Lannett, but Sandoz might take a little more time. We're still within that month-long window though. The other two competitors, AbbVie Inc. (ABBV:NYSE)and Pfizer Inc. (PFE:NYSE), were already at the higher price. So Lannett has realized the price increases, and impacted its guidance and its earnings.
With ANI Pharmaceuticals (NASDAQ:ANIP), its major drug is esterified estrogen/methyltestosterone (EE/MT), a menopause therapy. The main competitor, Amneal Pharmaceuticals LLC (private), fell out of the market last August, so ANI's share went from 20% to 90%. Not only has ANI grabbed a bunch of share, it has, concurrently, taken major price increases since the competitor left the market. The price has gone up more than 15 times. In both of those cases, the companies have seen a windfall in earnings.
TLSR: But one company can't maintain 90% market share. This is a limited window, isn't it?
RV: It is absolutely a limited window. What's making this still more complicated is that EE/MT is a Drug Efficacy Study Implementation (DESI) product, which means it is not formally approved by the FDA. Another issue is that the market for the drug is declining. Realistically, the only company that could come back into this market is Amneal, which I believe is working hard to find another API source so it can take back its share. If another company wanted to come in, it would probably have to get studies approved, which would be a two-year process. EE/MT, being a DESI product, limits who can compete.
TLSR: This will put pressure on ANI, will it not?
RV: Yes. ANI has realized part of the windfall, but I am modeling a base-case scenario of Amneal coming back by Q3/14. Any delays for Amneal are upside for ANI, according to my estimates.
TLSR: Rohit, investors love this stock. ANI has more than quadrupled over the past 52 weeks, and even in the last month, during a market pullback, it is up 34%. Investors are still gobbling it up.
RV: The whole sector took a hit at the end of March with the hepatitis C drug Sovaldi (sofosbuvir) pricing issue. Three congressional members sent a letter to Gilead Sciences Inc. (GILD:NASDAQ) about the pricing for Sovaldi, which is $84 thousand ($84K) per 12-week treatment. That set the whole sector in a tailspin, but it was also an excuse, I think, for investors to rebalance out of healthcare, which had such a great run last year. $84K is not the same as $200–300/bottle of generics, but it was a good excuse, and ANI got hit along with a lot of other stocks, becoming grossly undervalued. Then the company announced a major price increase on its EE/MT product, and shares went back up to where they were trading before the Sovaldi issue.
TLSR: Investors bidding up ANI could have thought of it as an offsetting play, something of an arbitrage or a hedge. What's your target price on ANI?
RV: I had initiated coverage with a $29 target price, but when new information became available on new price increases, I adjusted the model upward and moved the target to $40.
TLSR: What is your growth theory for Lannett?
RV: Lannett has a facility in Cody, Wyoming, where it manufactures controlled substances. This company is one of only seven in the U.S. allowed to import concentrated poppy straw, with which you can make Scheduled pain products. Over the next five years it wants to derive 50% of its revenues from controlled substances manufactured at its Cody facility. These are branded-type products, and it's a limited market set by the U.S. Drug Enforcement Administration. The company has visibility and pricing power that's helping the shares today, but I believe more in Lannett's long-term story, which is to leverage its Cody facility to get branded-type margins. That is the long-term thesis.
TLSR: You had written a note about Par Pharmaceutical Companies Inc. (private), another generics and specialty pharma manufacturer, saying it had begun to take market share of digoxin, and that it had gone from 1% market share of digoxin to 5% market share in just one month, between January and February of this year. The question is, how much more can Par get, and how significant could that be for Lannett?
RV: There is always a threat that a generic can come in and take share. Digoxin is an easier product to make, but Lannett's main franchise is levothyroxine, which is harder to make. In its guidance to the Street, Lannett says Par can take as much as a 20% share of digoxin. Par is already up to an 11% share, according to the most recent weekly prescription data, but there is always acceleration in the first quarter that the drug is out/launched. That acceleration is starting to curtail now; the pieces of share Par is taking are getting smaller and smaller.
"Generic drug companies can be successful with the most basic item, which is taking price."
If Par can get up to a 20% share of digoxin, which I would say seems reasonable, that share grab is well understood by the market. At this point, it's about who else might come in. Some of the Indian generics, which were supposed to come into this market, are having issues at their facilities, as I've noted. Lannett may be able to keep its share of digoxin for a while.
TLSR: What is your target price on Lannett?
RV: It is $49.
TLSR: Would you address OPKO Health Inc. (OPK:NYSE), another company you cover?
RV: OPKO is a pretty complicated story. When people think of OPKO's Chairman and CEO, Phil Frost, they think of his days at Ivax Corp., which he sold to Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ). Frost then became a member of the board of directors at Teva. People who have followed him think of OPKO as a pharmaceutical company, but I think the near-term play with OPKO is actually a diagnostics story.
"A generics company had better have a long-term strategy to grow and get branded-type margins with branded-type products."
There is not a good way to test for prostate cancer right now. You can measure a patient's prostate-specific antigen (PSA) level, or PSA velocity, but oftentimes patients have to go in and get a prostate biopsy, which is a painful procedure and can cause issues, including hospitalizations. The whole idea behind OPKO's 4Kscore Test, which assays for total, free, and intact PSA, along with human kallikrein 2, is to provide better specificity than PSA alone. It's a better way to test men for prostate cancer so they can avoid biopsy. The 4Kscore was launched in the U.S. at the end of March through OPKO's Clinical Laboratory Improvement Amendments (CLIA)-accredited lab in Nashville, Tennessee.
TLSR: The prostate biopsy is a money center for urologists—a real bread-and-butter procedure in their practices. How often can OPKO's 4Kscore Test prevent a biopsy? Is there going to be resistance by urologists to use it?
RV: I think prostate biopsy is more of a money center for hospitals. But I don't want to understate the relevance to the urologist. Biopsy is a revenue generator for both the urologist and the facility where the procedure is done, be it a hospital or an outpatient center. My understanding, from talking to urologists, is that patients want to avoid the biopsy for the reasons just stated, and that about 60–70% of biopsies come back negative anyway. The 4Kscore Test will actually save the system a lot of money, and can better analyze for prostate cancer. If the 4Kscore is better at detecting prostate cancer, or for screening out those patients who should have a biopsy, payers are going to drive the use of this product. It will probably be step therapy procedure, where the payer will want to know if a provider ran this test before he or she did the biopsy.
TLSR: You said this was a complicated story. How do you break down this company's valuation?
RV: I value the company on four products, two of them diagnostics and two of them pharmaceutical products. One of the diagnostics is the 4Kscore Test, which will grow outside the 1 million (1M) biopsy market and move to the 30M total and free PSA market. In other words, it could begin replacing the PSA test. Then there will be adoption of the other diagnostic, the Claros 1 point-of-care test, where significant value will be derived from vitamin D testing.
Then, on the pharma side, Rayaldee will penetrate and take share in the prescription vitamin D market; we will see that on the market in the 2015–2016 timeframe. Also, the company's hGH-CTP (human growth hormone) once-weekly dosing, versus current therapy's daily injections, will resonate with physicians and patients, and that product will take share in the human growth hormone market.
TLSR: In early 2013 OPKO acquired some RNA interference (RNAi) intellectual property from RXi Pharmaceuticals Corp. (RXII:NASDAQ; RXII:OTCQX). When could we see the company begin to develop some new pharmaceutical products?
RV: Phil Frost buys assets, and I think if it were up to him, he would see all of OPKO's assets to fruition. But sometimes he needs cash, so he needs to unload positions. The RNAi intellectual property and other company assets are early stage, so it's tough to get an understanding of when they might come to market and how to value them. The easy answer is that you don't value them. You value what's coming to market soon. The vitamin D product, Rayaldee, is a best-in-class compound. It's on an easier 505(b)(2) regulatory pathway, which means it's not being tested in rigorous clinical trials, because we already have experience with vitamin D. It is easier to value in a conservative manner. Rayaldee, a less sexy product if you will, is going to be first from OPKO as a pharmaceutical.
TLSR: What is your target price for OPKO?
RV: It's $12, which would take this company's market value up to about $5B from its current $3.4B.
TLSR: Thank you, Rohit.
RV: Thanks for your time.
Rohit Vanjani is a director and senior analyst at Oppenheimer & Co. Inc., covering generics and specialty pharmaceuticals. Vanjani has been with the firm since 2011, initially working on the Healthcare Services Team (healthcare IT, PBMs, and labs). Prior to Oppenheimer, Vanjani worked at Jefferies, UBS and Leerink Swann & Co., helping cover biotechnology, managed care and hospitals, and specialty pharmaceuticals. He has also worked as an assistant economist at the Federal Reserve Bank of New York, and as an economics associate at Stanford University, helping to conduct healthcare economic research. Prior to those roles, Vanjani worked as a laboratory associate researching enzyme active site residues and animal mitochondrial DNA. Vanjani holds bachelor's degrees in biochemistry and economics from the University of Michigan, and a master's degree from New York University's Stern School of Business.
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1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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3) Rohit Vanjani: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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