"Undervalued" Theratechnologies Inc. (OTC:THTCF) (TSX:TH) Print E-mail
By Terika Ray   
Thursday, 22 October 2009 06:52

“GMP securities called the stock undervalued…” Dow Jones, Oct. 6 2009. 
Theratechnologies Inc. is a biopharmaceutical company that discovers novel therapeutic products for development and commercialization. These products target unmet medical needs in commercially attractive specialty markets.

The Syndrome

You have been diagnosed with HIV.  As a result of your HIV therapy and disease, you undergo disfiguring body changes characterized by accumulation of subcutaneous fat on the back (buffalo hump), loss of subcutaneous fat, or lipoatrophy (sunken cheeks, buttocks wasting) and excess visceral fat accumulation (potbelly)…changes associated with lipodystrophy (refer to Figures 1 and 2).

Are you more likely to die of AIDS or a heart attack? Studies show you are twice as likely to experience a heart attack or diabetes than non-HIV patients.  This is due to high levels of “bad” cholesterol and triglycerides & low levels of “good” cholesterol, as well as irregular glucose accumulation in your blood—the culprit? Lipodystrophy once again—a metabolic disorder related to growth hormone deficiency.
You can fill in your sunken cheeks by using FDA approved cosmetic drugs, like Sculptra ® by Sanofi Aventis, but what about your health risk and avoiding embarrassing stares at yourpregnant-like potbelly? You desperately search and discover an off-label Growth Hormone (GH) injection infamous for reducing VAT along with putting you at high risk for diabetes, but there are no FDA approved treatments for lipodystrophy, that is until…

The First Solution

Founded in 1993, Theratechnologies (OTC:THTCF) www.theratech.com, Le Prix Santé 2009 Award winning Canadian company will be the first to market a treatment for lipodystrophy—Tesamorelin (TH9507).  NDA acceptance was 12 August 2009. FDA response is expected at the end of March 2010. 

Successful clinical trials prove Tesamorelin can reduce visceral fat (VAT) by 18% over a 52 week period--imagine reducing your body weight from 200 lbs to 164 lbs-- stabilize your cholesterol and triglyceride levels without interfering with glucose levels, and even build  2.87 lb (1.3kg) of muscle mass.  You have a 10%-14% chance of experiencing injection site redness, injection site itchiness, and joint pain.

"Furthermore, Tesamorelin selectively reduces VAT without affecting SAT: which may be important for those patients that suffer from both lipoatrophy and excess abdominal fat accumulation." -- Dr. Steven Grinspoon, Professor of Medicine, Harvard Medical School, Director of the Massachusetts General Hospital Program in Nutritional Metabolism, and Lead Investigator for the Tesamorelin trial in the United States.
HIV participants also expressed significantly greater satisfaction with their overall appearance.

Now you are 6-8 months away from sliming your potbelly without worsening your sunken cheeks and buttocks and building muscle mass so you can look normal, as well as minimizing your health risk of a heart attack/diabetes.

Or are you? Is THTCF capable of making Tesamorelin available to you and sustaining growth?

The Profitability

Business Strengths

• THTCF’s strategy:  Focusing on unmet needs in specialized markets allows them to be the market leader and seeking opportunities with manageable clinical trials and a straightforward regulatory pathway minimizes risk for FDA rejection.

• The Strategic partnership with a former competitor, EMD Serono, eases market entry while minimizing competition—without violating anti-trust laws.  EMD Serono was actually 2 years ahead of THTCF in developing a competitive treatment when unfavorable side effects led them to market the more successful Tesamorelin.

• EMD Serono will assume U.S commercialization responsibility and manage reimbursement challenges, minimizing THTCF expenses and risk, while optimizing U.S
sales.  Leveraging EMD Seronos’ experienced distribution channels for the U.S HIV community would maximize profit in the largest lipodystrophy market.

• The partnership allows THTCF to be financially secure by receiving $30MM in an upfront payment; $22MM license fee payment; up to $215 MM (including upfront payment) for additional milestone payments; an equity investment of $8MM ($3.67 a share) as well as 60.4MM remaining shares plus global sales and royalty payments on U.S sales. In other words, if $811MM is the market potential, THTCF’s payments alone total~30% of the market plus up to $811MM in possible sales and revenue from remaining shares.

• Even with R&D expenses, the 2008 economic downturn, and preparation for product launch expenses, THTCF managed to consistently increase its EPS from Q4 2008 (.26) loss to Q3 2009 .10 and reduce its adjusted burn rate by 40.4%, indicating effective financial management.  One more thing: they have no debt.

• Tesamorelin ensures a strong competitive advantage by being the first and only FDA approved drug on the market to treat lipodystrophy, protected by a U.S patent (7,316,997) until the year 2023 as well as various international patents pending in 9 countries and Europe.     

• Dr. Steven Grinspoon, recognized authority in endocrinology from Harvard Medical School is the lead investigator for Tesamorelin clinical trials, which ensures confidence in the management of the trials.

Market Opportunities

• Large market opportunity: “The number of patients with HIV-associated lipodystrophy… projected in 2012 is approximately 380,000 patients. Based on what is observed today, the projected 2012 market potential for the US and Europe for HIV-associated lipodystrophy is estimated in the range of $811MM - $1.3B USD.” This opportunity increases as THTCF expands globally into the European, Brazilian, and Canadian markets.

• Conforming to anti-trust laws under the Hart-Scott Rodino Act for exclusive U.S commercialization rights to Tesamorelin enables THTCF to dominate the market.

• A treatment that reduces fat and builds muscle can be applied to diverse markets, leading to market development with minimal investment, maximizing profit. Tesamorelin is undergoing preclinical and Phase II trials to address various unmet HIV and non-HIV related needs of 5.3MM patients.  Although Tesamorelin would be the first product launched for THTCF, there is a product portfolio currently in development to maintain growth.

Business Weaknesses

• Transitioning from an R&D company to a profitable company may pose challenges to support substantial growth.  Leveraging EMD’s commercialization resources, ramping up on manufacturing & supply resources and focusing on U.S launch as a priority should facilitate the transition.

• Brand equity has not been established, but with few competitors, Tesamorelin should quickly build a brand reputation

• Research for long term effects of Tesamorelin during the 52 week period was not compared to a placebo, but the treatment results are consistent with the 26-week period results which were compared to a placebo. Long term effects past 52 weeks are yet to be determined.

• THTCF is a Canadian based company with expected global sales: foreign exchange rates would affect sales; but prioritizing the U.S launch in the largest lipodystrophy market where the dollar is strong should initially generate significant revenue.

External Threats

• FDA does not approve the drug: Involving a world renowned expert from Harvard to lead successful clinical trials, NDA acceptance and a straightforward regulatory pathway increases the probability of approval.

• Reimbursement challenges could affect revenue and are addressed by a survey conducted by Boston Healthcare which concluded that: “It is likely that most payers will provide reimbursement for a product such as Tesamorelin to patients that need treatment providing that payers are assured that the medication is being used appropriately.” More than 60% of HIV-positive individuals in the U.S are on Medicare or Medicaid.

• Threat of competition is low: A competitor with an HIV cure, lipodystrophy cure/one-time treatment, a drug with significant improvements to Tesamorelin, all without adverse effects, are some threats to the success of Tesamorelin.  But these treatments are not likely to develop in the near future.

• Threat of substitutes is low: Liposuction is not possible for VAT, only SAT, which leaves diet and exercise as a substitute; the strong competitive advantage of Tesamorelin with minimal alternatives should result in high demand for the product.

• Exit barriers are low: Although THTCF has a specialized expertise, it does not prevent them from entering non-HIV related markets, just in case a powerful competitor dominates the HIV market.

How does Tesamorelin differ?

The Product (How it works)

Tesamorelin is a synthetic analogue of growth hormone-releasing factor (GRF) that acts on pituitary cells in the brain, triggering the formation and secretion of growth hormone (GH).  In other words, rather than direct injection of GH which can bypass the pituitary’s natural regulation process causing adverse effects, Tesamorelin controls GH secretion at the pituitary source, providing a more favorable outcome.

The Verdict

THTCF's existence since 1993 along with their business strategy and operations indicate they are capable of not only generating revenue, but sustaining profitable growth.

Clearly there is significant need for lipodystrophy treatment that can improve overall appearance, minimize health risk without interfering with current HIV treatment—Tesamorelin is well-positioned to be the first solution.

The choice is yours.

The sources:

www.theratech.com press releases and website

Disclosure: Long Theratechnologies Inc.

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