NuPathe (PATH)

Background: NuPathe is a pharmaceutical company that developed an FDA approved treatment for migraines. The treatment, ZECUITY, uses iontophoresis to deliver sumatriptan to migraine sufferers. This past week, NuPathe announced that they will be acquired by Teva in Febuary. Shareholders receive the following:

1. $3.65 in cash for each share

2. One Contingent Value Right (CVR) for:

      A. $2.15 per share if sales of ZECUITY are more than $100 million in any four consecutive quarters.
      B. An additional $1.00 per share if sales of ZECUITY exceed $300 million in any four consecutive quarters.

The CVR expires 9 years after the first sale of ZECUITY.

Investment Thesis: NuPathe is a small cap pharmaceutical being ignored by most investors. The likelihood of ZECUITY achieving $100 million in sales is significantly higher than the market is pricing in. Investors can purchase shares of PATH, tender them in a month and they will receive the 90% of their initial investment back in cash. Although an investor will "lose" $0.50/share for each share tendered right now (a 13.7% loss), this $0.50 could be worth up to $3.15 in the future, implying a return on outstanding investment of up to 530%($3.15-$0.50/$0.50). To keep things simple, I will only analyze sales up to $100 million, which limits upside to 330%, with the same downside.

The upside/downside is compelling and the immediate return of cash provides investors with the opportunity to deploy to alternative situations. In an overvalued market this kind of investment allows investors to capture upside while limiting downside, all the while avoiding complicated Black Scholes arguments.

Migraine Market

There are an estimated 31 million American's that suffer from migraines and 63% of these sufferers have a migraine at least once per month. A big side effect is nausea, impacting 73% migraine sufferers. When facing nausea, most people don't want to take a pill. So pharmaceutical companies invented an injectable form of sumatriptan(most prescribed migraine relief compound). The problem with the injectable form is that many users feel get chest tightness, feelings of pressure and other symptoms commonly referred to "tripan sensations" after administration.

Enter ZECUITY.

ZECUITY is a patch of sumatriptan that delivers the drug iontophoretically. The advantages are two-fold. First the drug avoids the gastrointestinal track, addressing the issue of nausea and the administration of sumatriptan during a migraine.

The second advantage, evidenced from the clinical trial, was the low occurrence of "triptan sensation." Only 2% of patients in the trials had these sensations compared to the injectable drug, which had an occurrence of up to 7% of all patients.

The bottom line: This is not a cure-all but it seems to be a positive step in the right direction for many migraine sufferers. But will it help the bottom line of investors too?

Sales Potential 

Sales need to hit $100 million to trigger the first CVR, otherwise I'll just prove to be an incredibly poor merger arb trader. There are two things here to consider, sales price, and the amount of product sold.

Sales price is pretty straightforward. In conference calls management has said they expect the sales price to be around $100 per patch and potentially up to $150/patch. These prices seem reasonable compared to other migraine medication costs. No orphan drug pricing here.

Low Price: $100/patch
Mid-Price: $125/patch
High Price: $150/patch

The amount of product sold is pretty tough to accurately predict, but let's have a go. There are 8 million migraine sufferers who nausea on the majority if their attacks and 1.5 million of those vomit every single attack. Now the triptan sensation occurred in ~7% of patients who enrolled in the injectable Imitrex(brand name of sumatriptan) study. Thus it seems reasonable to believe 7% of the 1.5 million people who vomit each and every time would likely benefit from ZECUITY. By switching this population could switch to an application that lowers triptan sensations and avoids the need to ingest a drug(and risk vomiting it up).

At the low end it seems reasonable to expect 7% of 1.5 million people, or 105,000, would possibly switch.

Since the average migraine sufferer has 1-4 attacks per month(with 14 million experiencing attacks on a daily basis) I will assume that at the low end, sufferers will use ZECUITY once per month, 12 months per year.

At the low end that means 105,000 will be using a product that costs $100/patch/month. This works out to sales of $126 million per year.

That leaves $26 million per year of extra room for: discounts, poor distribution, switching to an alternatives, etc. But don't just take my word for it, Teva projected (page 34) that sales would hit $143 million by 2016 and would exceed $300 million by 2021. Obviously, a lot can happen in the next nine years(plus or minus a year or two) so I won't try to argue the upside. With a robust patent platform to launch off of, Teva can leverage their existing sales force and work towards a $100 million/year sales goal. First the deal needs to go through.

Merger Likelihood

I believe the merger is very likely to go through. Teva is huge and acquiring a company like PATH is not an issue. The deal is being paid for with cash and the largest shareholder, Quaker BioVentures II LP, owns 24.9% of shares. A partner at Quaker actually introduced PATH to an executive at Endo(who originally offered to buy PATH in a similar deal) in October of 2013(page 19) so I doubt Quaker will reject the deal.

NuPathe doesn't have many other options, Teva has already loaned them money and paid Endo a termination fee. It seems as though this deal will go through without any hitches.

Conclusion

Purchasing shares in PATH today ensures an investor they will lost about $0.50/share. However, owners will have the rights to future payments that could result in returns of 330% or 530% from their original loss. Based on average prices and modest assumptions, ZECUITY appears to have a good chance of achieving $100 million in annual sales in the next nine years.


Long PATH