Free NPV

I’ve discussed Furiex (FURX) here in the past so if you are unfamiliar with the company, please see my older write ups in the FURX section. They are going to report earnings next week on the 11th, and it is possible to make some predictions on their royalty based revenue. FURX has two drugs that are active in the market, Nesina and Priligy. Priligy has been on sale in Europe for some time, but Nesina just came online in it’s first market, Japan, this June. That means that this is the first quarter we will see the impact of Nesina revenues.

FURX is entitled to 4% to 8% of the revenues of Nesina in Japan. From speaking with FURX, this number starts off at the low end and as sales increase, the royalty percentage also increases. Thus it will be around 4% this quarter. FURX partnered with drug company Takeda to develop Nesina. Luckily for us, Takeda releases their earnings about 2 weeks before FURX does and is kind enough to break down the sales of their individual drugs. Looking at the Takeda earnings release which can be found here we see that Nesina has revenues of 1.1 billion Yen this quarter. The Yen moved in a relatively straight line down from 88yen/USD to 82yen/USD. So using the mean of 85 yen per dollar this works out to sales of around $12.9 million. Furiex is entitled to 4% of this, so royalty revenues amount to about 520 thousand.

From the last quarter we see that royalty revenues, which were mostly Priligy sales, were $547 thousand. Thus I am predicting that FURX reports Royalty revenues of around $1 to $1.1 million. This is an ok increase, but is not nearly enough to be offsetting the $13 million in R&D expenses FURX burned through last year. The bulk of their revenue will still be comprised of milestone payments for some time which will be triggered by bringing new drugs to markets or by hitting sales based milestones.

On that note, it is possible FURX either hit some sales based milestones for Nesina this quarter or will shortly. Management was not allowed to articulate the exact number of sales that trigger milestones to me over the phone, but maybe we will get more information in the conference call next week.

So, for now, I would still not buy FURX until we can see higher royalty based revenues as the cash burn each quarter will make the company less and less attractive. Luckily for us, with our Takeda trick we can take our time and still get in before the rest of the market.

Furiex (FURX) lost money again this quarter, as expected. Revenues consisted of $7.5 million in milestone payments for bringing Nesina (Diabetes drug) to market in Japan, and $547,000 in royalty payments for sales of Nesina and Priligy. Obviously these sales numbers are low but Nesina was only on the market for a few weeks at the end of the quarter in Japan. It will be interesting to see the sales numbers next quarter, when it has been on the market for the entire quarter.

Expenses totaled 16.2 million. This was composed mainly of R&D costs as well as some SG&A costs. This cash burn rate is expected to continue for the next few quarters as FURX currently has 3 drugs in the research phase, which requires heavy uses of cash. Management has warned that these costs will come to between 30-40 million for the second half of the year. They also said that FURX has enough cash on hand to sustain itself through the end of 2011, as the cash burn rate will slow after they finish developing these new drugs.

Therefore for investors drawn to this company as a net cash play, be warned: the net cash market cap will most likely drop in half before it will rise again. The company may have quite successful drug patents in Nesina and Priligy but it is hard to determine at this point in time how successful they will be. Therefore I will keep a watchful eye on FURX but cannot buy at this time as I have little knowledge on when or how much future cash flows will be.

As an aside, it is interesting to note that David Einhorn, founder and manager of the hedge fund Greenlight Capital, recently disclosed that he has a new position in FURX totaling 490,000 shares or about 5% of the total float. It is interesting that he is buying since a 5% position amounts to only $5 million and his hedge fund has 3.3 Billion in AUM.

Furiex Pharmaceuticals

Furiex (FURX) is an interesting place to start looking for an investment opportunity. Joel Greenblatt writes in his book, You can be a Stock Market Genius too, that spin-offs of small companies from much larger companies can often create great value situations. This is because often the original shareholders are not interested in owning this business outside their area of interest or due to the fact that many ETFs and mutual funds are limited by their prospecti to invest only in companies of a certain size. Furiex is much smaller than its parent (Market cap of 110 million vs. 3 billion) and is also in a different industry, or at least investor class. As I will talk about later its entire revenue stream is from future prospects vs. the stable cash flows of PPD inc. the parent company.

Furiex is a recent spin-off from PPD inc. the drug manufacturer. FURX was a small internal division which assisted drug development by speeding up the time it takes to get drugs to market. Basically FURX would partner up with a large drug manufacturer like Janssen and would run many trials simultaneously (such as state I and stage II trials, assuming stage I success to speed up the process). This would help companies like Janssen get their new drugs to market much faster than they could have done on their own. In exchange for this help, FURX would get paid based on advancement down the drug pipeline phase, called milestone payments. These could be trigged when a drug goes from stage I to stage II, when it is approved for marketing in a new country or is sold in a new market. They also get royalties, which are a percentage of total sales (normally 10-20% depending on volume) of any drug they helped develop that is successfully brought to market.

Currently FURX only has 1 drug it has developed in any actual market, and that is Priligy in the European market. Priligy is a drug designed to help men with premature ejaculation (side note: it’s always fun to research premature ejaculation drugs when your roommate is walking by). It has been in development since 1998 and management first tried to bring Priligy to market in 2004. The FDA did not approve the drug and the testers, including FURX, went back to the drawing board. It is currently in stage III trials again and will hopefully be brought to the NA market soon. Priligy is selling in Europe however and thus is bringing in small amounts ($230,000 in Q1) of revenue due to royalty sales.

FURX also has a few other drugs in the pipeline that they are entitled to milestone and royalty revenue for, including a type II diabetes drug that in the marketing application stage in the US and was recently approved for marketing in Japan. Here is a link to an image from FURX that shows the different drugs FURX helped develop and where each is in the different stages of worldwide development Drug Development Stages

So basically what all this means is that FURX currently has almost zero current income but a lot of future potential. The interesting part is the valuation. There are approximately 10 million total shares of FURX floating around at a price of 11.60 for a valuation of 116 million. The company has about 7 million in total liabilities, and as part of their spin-off agreement from PPD, 100 million in cash. So their net cash value alone is 93 million, putting the value of all their royalty and milestone claims at only 23 million. This seems quite cheap for a company that can possibly hit a homerun with a large drug and be entitled to hundreds of millions in royalty revenues.

However there is a catch. Extrapolating Q1 numbers, FURX burns through about 32 million a year in research and development costs. This is used for the development and trial of new drugs, the income streams of which might not be realized for many years, if ever. So it is possible FURX begins to burn through their 93 million net cash position. Because of this I feel more comfortable waiting 2 weeks until they report their Q2 numbers, to see if perhaps the sales of Priligy have increased in Europe, to see if maybe they can give a bit more color on the success of the stage III trials at the FDA and to see when they expect their diabetes treatment to reach the Japanese market. This is an intriguing story and one I intend to keep my eye on.

Side note: According to Greenblatt, another important thing to examine in these types of plays is if new management is taking a stake in the new company. This is another positive as upper management (although FURX only has 25 employees total) are each getting stock options for about 1%-2% of the entire company. While dilutive, this aligns their incentives with those of investors.