Pharmacyclics Valuation Jumps Over $1 Billion On Newest Developments Print E-mail
By Brian Wilson, Lead Contributor   
Tuesday, 19 February 2013 07:20
icon_marketmoverIt’s a very good time for Pharmacyclics (NASDAQ: PCYC) shareholders, who are now sitting on roughly 24% gains from the last week and 50% gains since the start of the year. Not bad when you consider that the iShares NASDAQ Biotech Index (NASDAQ: IBB) is up just a little over 6% since January 2nd.

The most recent buying of PCYC seems to be driven entirely by the company’s Q4 2012 earnings report, which was released on February 14th, 2013. Although the company’s revenue and income have actually shrunk down relative to the 2011 numbers, analyst estimates seemed to lowball the company’s expected cash flow. This overperformance seemed to excite the market.

Pharmacyclics has four separate drug development programs, one of which is PCI-32765 (Ibrutinib), which can be considered their flagship drug. This molecule is an inhibitor of Bruton’s tyrosine kinase, which has been linked to blood cell cancers. Due to this, Ibrutinib is being developed as a potential treatment option for a variety of blood cancers including multiple myeloma, chronic lymphocytic leukemia, mantle cell lymphoma, and diffuse large b-cell lymphoma. Ibrutinib’s furthest developed indication is for chronic lymphocytic leukemia, which is now in a phase III trial that is expected to yield data in April 2015.

This particular trial, which began enrollment in 2012, is what caused a huge $50 million milestone payment by their partner Janssen – a wholly owned subsidiary of Johnson & Johnson (NYSE: JNJ). Johnson. What’s amazing to me is the sheer size of the milestone payments that are being offered here, which will eventually total $975 million if all goes well with Ibrutinib. Only $150 million of this total pool of milestone revenue has been realized up to this point, which leaves about $825 million on the table for Pharmacyclics throughout the next few years.

As if that weren’t enough, it was announced last week that Ibrutinib was designated as a breakthrough therapy by the FDA, which means that we could see an FDA approval of the compound prior to the full results of the ongoing phase III trials.

In an ideal situation, this would mean that Ibrutinib receives approval in the United States well before 2015 and gets marketed by one of the big pharmas. Not only would this bring huge potential from sales revenue, but it would trigger the release of up to $825 million in milestone payment from Johnson.

Pharmacyclics certainly deserved to move up on this news, although the valuation of the company is beginning to look quite hefty.

PCYC is currently trading with a market capitalization of over $6 billion. Although Ibrutinib does have orphan drug designation in a very profitable indication, worldwide sales revenues will be cut significantly to the partnership with Johnson & Johnson. If this drug doesn’t meet sales expectations a few years down the line, realize that PCYC has a very long way to fall.

Let’s say we think that Ibrutinib will generate annual sales revenue of about $1 billion at its peak (which means $500 million for Pharmacyclics due to the partnership). If we don’t consider any more one-time events, like milestone revenues, we can see that the stock doesn’t have all that much upside potential left after the most recent jump. This is especially true if you factor in a discount rate, which accounts for the fact that this hypothetical sales revenue is years down the road.

There’s no doubt that Pharmacyclics has done an incredible job with the creation and development of Ibrutinib, but every investor always has to look at what he is buying today. PCYC is 3.5 times more expensive than it was just a year ago, and it’s now been priced to perfection. This leaves it very vulnerable to sentimental shifts and news related selling, as well as profit-taking incentive.

The investors who want to buy PCYC for the long haul should simply wait for any price dips that would occur during periods of slow news, and much less attention from the broader market. Ideally, you’d want to average into this company closer to $60/share.

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