Business Description
SuperGen, Inc., a pharmaceutical company, primarily engages in the discovery and development of therapies to treat patients with cancer. The company’s products in research and development include Amuvatinib, a multi-targeted Tyrosine Kinase Inhibitor that is specific for mutant forms of c-kit, PDGFRa, and FLT3; SGI-1776—Pim Kinase Inhibitor, a novel, orally administered, small molecule anticancer compound that blocks the pro-survival activity of Pim kinases, allowing these potentially malignant cells to self-abort; and SGI-110—DNMT1 inhibitor that is in pre-clinical development stage. Its discovery programs comprise JAK2 inhibitor, Axl inhibitor, and ETK/BMX inhibitors; and products that are sublicensed or sold include Dacogen.
Investment Thesis
Buy into a promising biotech company with: 1) a significant cash position ($103MM), 2) positive free cash flow, 3) a royalty stream from Dacogen that will fund R&D spending into the future ($10-$20MM of revenue/quarter), 4) that trades at 1.25x cash on the balance sheet.
Valuation
SuperGen has a market cap. Of $127MM ($2.11/share; 60.3MM share out.). It sits on $102.6MM of cash – an amount that has grown with free cash flow generation of approximately $11.5MM in the last twelve months. Often biotech companies suffer from high burn rates whereby the cash on the balance sheet feeds a never ending R&D budget in search of the next big compound. Supergen is slightly different. Dacogen, the company’s main royalty drug for the treatment of patients with myelodyplastic syndromes (“MDS”) was approved by the FDA in May 2006. The Company receives royalty revenues on Dacogen – approximately $9.8MM in Q2’10 (a 62% increase over Q2’09) – which it then re-invests in promising new discoveries.
In short, I believe that you get the cash on the balance sheet for about the market cap. plus around $10 to $15MM of FCF a year (Dacogen royalties less all expenses) and have a fully-funded R&D program that could produce some outstanding drugs with major milestones being paid with cash from GSK. There is at least $100MM+ of value in SuperGen's shares that is not being recognized by the market ($1.50-$1.75/share for a $2.11/share stock).
Recent Developments – Drivers of Value
The Company’s primary developmental efforts revolve around the products from the acquisition of Montigen Pharmaceuticals, Inc. (‘‘Montigen’’), a small-molecule drug discovery company, in 2006. The Company initiated Phase I in-human clinical trials in June 2007 and initiated Phase Ib clinical trials in late 2007 for the first Montigen product, amuvatinib (MP-470), a DNA repair suppressor. In early 2009, Supergen initiated clinical trials for a second internally developed product, SGI-1776, a PIM kinase inhibitor.
Driving value into the future, in October 2009, the Company entered into a Commercial License and Research Agreement with GlaxoSmithKline (‘‘GSK’’). Pursuant to the terms of this agreement, Supergen will collaborate with GSK over a period of five years to discover and develop specific epigenetic therapeutics. At the end of the research term, or earlier if GSK elects, GSK may exercise its option to license from us the compounds that are the result of the joint research effort, in order to continue the development and ultimately commercialize and sell the resulting products worldwide. Upon execution of the agreement, Supergen received an upfront payment of $2 million from GSK, as well as a $3 million investment in shares of Supergen’s common stock, sold at a 10% premium to market price. GSK is obligated to make certain additional payments to the Company if and when the compounds reach specified developmental milestones, as well as payments to us if and when the compounds that GSK has licensed achieve certain regulatory milestones. The agreement further provides that, if the licensed compounds derived from the joint research team become products, GSK will pay Supergen sales milestone payments as well as royalties on annual net sales of such products. Total potential development and commercialization milestones payable to Supergen could exceed $375 million according to SuperGen’s 2009 Annual Report. The tiered royalties, into double digit magnitudes, will be paid on a country-by-country and product-by-product basis
Dacogen Royalty arrangement – the cash flow engine…
In September 2004, SuperGen executed an agreement granting MGI exclusive worldwide rights to the development, manufacture, commercialization and distribution of Dacogen. Under the terms of the agreement, MGI made a $40 million equity investment in Supergen and agreed to pay up to $45 million in specific regulatory and commercialization milestones. To date (through 12/31/09), the Company has received $32.5 million of these milestones. The Dacogen license has also created for the Company a royalty income stream on worldwide net sales starting at 20% and escalating to a maximum of 30%.
In July 2006, MGI executed an agreement to sublicense Dacogen to Janssen-Cilag, a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. In accordance with our license agreement with MGI, we are entitled to receive 50% of certain payments MGI receives as a result of any sublicenses. Supergen received $5 million, or 50% of the $10 million upfront payment MGI received, and, as a result of both the original agreement with MGI and this sublicense with Janssen-Cilag, the Supergen may receive up to $17.5 million in future milestone payments as they are achieved for Dacogen globally. Janssen-Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while MGI retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. MGI was acquired by Eisai Corporation of North America in January 2008.
Management expects global annual hypomethylator sales consisting of Dacogen and Vidaza sales to continue to grow and could be in the $700 million range in 2010.
Recent Management Guidance
Management revised guidance upward for royalty revenue for Dacogen on its recent investor call (8/02/10). “Our financial guidance for 2010 has been modified as follows. Royalty revenue for Dacogen has been revised upward and is now expected to increase up to 17% from the prior year. We have modified the range in our prior guidance from $41 million to $45 million to a revised range from $44 to $48 million. Our development and license revenue remains unchanged from our prior guidance and is estimated at $500,000. This revenue represents the recognition of deferred revenue relating to prior payments received pursuant to the research and license agreement with GSK.”
R&D costs “are estimated to decrease slightly from our prior guidance of $34 million to $37 million to a revised range from $32.5 million to $35.5 million. Research and development expenses continued to be influenced by the timing and amount of financial commitments for the various activities relating to our clinical trial programs and other discovery and development activities.”
The Company runs about $10MM/year in other G&A. While no guidance has been provided for 2011, it appears conservative that the company could generate over $15MM in free cash flow independent of any major milestone payments from the GSK relationship ($375MM over next several years if milestones are hit) or significant lift in Dacogen sales – which have been growing nicely.
SuperGen, Inc., a pharmaceutical company, primarily engages in the discovery and development of therapies to treat patients with cancer. The company’s products in research and development include Amuvatinib, a multi-targeted Tyrosine Kinase Inhibitor that is specific for mutant forms of c-kit, PDGFRa, and FLT3; SGI-1776—Pim Kinase Inhibitor, a novel, orally administered, small molecule anticancer compound that blocks the pro-survival activity of Pim kinases, allowing these potentially malignant cells to self-abort; and SGI-110—DNMT1 inhibitor that is in pre-clinical development stage. Its discovery programs comprise JAK2 inhibitor, Axl inhibitor, and ETK/BMX inhibitors; and products that are sublicensed or sold include Dacogen.
Investment Thesis
Buy into a promising biotech company with: 1) a significant cash position ($103MM), 2) positive free cash flow, 3) a royalty stream from Dacogen that will fund R&D spending into the future ($10-$20MM of revenue/quarter), 4) that trades at 1.25x cash on the balance sheet.
Valuation
SuperGen has a market cap. Of $127MM ($2.11/share; 60.3MM share out.). It sits on $102.6MM of cash – an amount that has grown with free cash flow generation of approximately $11.5MM in the last twelve months. Often biotech companies suffer from high burn rates whereby the cash on the balance sheet feeds a never ending R&D budget in search of the next big compound. Supergen is slightly different. Dacogen, the company’s main royalty drug for the treatment of patients with myelodyplastic syndromes (“MDS”) was approved by the FDA in May 2006. The Company receives royalty revenues on Dacogen – approximately $9.8MM in Q2’10 (a 62% increase over Q2’09) – which it then re-invests in promising new discoveries.
In short, I believe that you get the cash on the balance sheet for about the market cap. plus around $10 to $15MM of FCF a year (Dacogen royalties less all expenses) and have a fully-funded R&D program that could produce some outstanding drugs with major milestones being paid with cash from GSK. There is at least $100MM+ of value in SuperGen's shares that is not being recognized by the market ($1.50-$1.75/share for a $2.11/share stock).
Recent Developments – Drivers of Value
The Company’s primary developmental efforts revolve around the products from the acquisition of Montigen Pharmaceuticals, Inc. (‘‘Montigen’’), a small-molecule drug discovery company, in 2006. The Company initiated Phase I in-human clinical trials in June 2007 and initiated Phase Ib clinical trials in late 2007 for the first Montigen product, amuvatinib (MP-470), a DNA repair suppressor. In early 2009, Supergen initiated clinical trials for a second internally developed product, SGI-1776, a PIM kinase inhibitor.
Driving value into the future, in October 2009, the Company entered into a Commercial License and Research Agreement with GlaxoSmithKline (‘‘GSK’’). Pursuant to the terms of this agreement, Supergen will collaborate with GSK over a period of five years to discover and develop specific epigenetic therapeutics. At the end of the research term, or earlier if GSK elects, GSK may exercise its option to license from us the compounds that are the result of the joint research effort, in order to continue the development and ultimately commercialize and sell the resulting products worldwide. Upon execution of the agreement, Supergen received an upfront payment of $2 million from GSK, as well as a $3 million investment in shares of Supergen’s common stock, sold at a 10% premium to market price. GSK is obligated to make certain additional payments to the Company if and when the compounds reach specified developmental milestones, as well as payments to us if and when the compounds that GSK has licensed achieve certain regulatory milestones. The agreement further provides that, if the licensed compounds derived from the joint research team become products, GSK will pay Supergen sales milestone payments as well as royalties on annual net sales of such products. Total potential development and commercialization milestones payable to Supergen could exceed $375 million according to SuperGen’s 2009 Annual Report. The tiered royalties, into double digit magnitudes, will be paid on a country-by-country and product-by-product basis
Dacogen Royalty arrangement – the cash flow engine…
In September 2004, SuperGen executed an agreement granting MGI exclusive worldwide rights to the development, manufacture, commercialization and distribution of Dacogen. Under the terms of the agreement, MGI made a $40 million equity investment in Supergen and agreed to pay up to $45 million in specific regulatory and commercialization milestones. To date (through 12/31/09), the Company has received $32.5 million of these milestones. The Dacogen license has also created for the Company a royalty income stream on worldwide net sales starting at 20% and escalating to a maximum of 30%.
In July 2006, MGI executed an agreement to sublicense Dacogen to Janssen-Cilag, a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. In accordance with our license agreement with MGI, we are entitled to receive 50% of certain payments MGI receives as a result of any sublicenses. Supergen received $5 million, or 50% of the $10 million upfront payment MGI received, and, as a result of both the original agreement with MGI and this sublicense with Janssen-Cilag, the Supergen may receive up to $17.5 million in future milestone payments as they are achieved for Dacogen globally. Janssen-Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while MGI retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. MGI was acquired by Eisai Corporation of North America in January 2008.
Management expects global annual hypomethylator sales consisting of Dacogen and Vidaza sales to continue to grow and could be in the $700 million range in 2010.
Recent Management Guidance
Management revised guidance upward for royalty revenue for Dacogen on its recent investor call (8/02/10). “Our financial guidance for 2010 has been modified as follows. Royalty revenue for Dacogen has been revised upward and is now expected to increase up to 17% from the prior year. We have modified the range in our prior guidance from $41 million to $45 million to a revised range from $44 to $48 million. Our development and license revenue remains unchanged from our prior guidance and is estimated at $500,000. This revenue represents the recognition of deferred revenue relating to prior payments received pursuant to the research and license agreement with GSK.”
R&D costs “are estimated to decrease slightly from our prior guidance of $34 million to $37 million to a revised range from $32.5 million to $35.5 million. Research and development expenses continued to be influenced by the timing and amount of financial commitments for the various activities relating to our clinical trial programs and other discovery and development activities.”
The Company runs about $10MM/year in other G&A. While no guidance has been provided for 2011, it appears conservative that the company could generate over $15MM in free cash flow independent of any major milestone payments from the GSK relationship ($375MM over next several years if milestones are hit) or significant lift in Dacogen sales – which have been growing nicely.
