Catalyst Pharmaceuticals Inc. (CPRX, Financial) is an attractive biopharma stock to own, given the niche size of the addressable market and limited competition. Management has also been meticulous and efficient in expanding within the niche it operates in, and this is being reflected in the financials. If it was not for the recent management share sales (perhaps explainable by the stock price breakout after a long period of stagnation), I would rate the stock a strong suy rather than a buy. Here is why.
Business overview and competitive landscape
The biopharmaceutical company was founded in 2002 in Coral Gables, Florida. Catalyst Pharmaceuticals reached the commercial stage by focusing on niche aspects of the pharmaceutical spectrum, in particular the development and commercialization of therapies to treat rare debilitating, chronic neuromuscular and neurological diseases in the United States.
The main source of revenue for the company is the treatment of lambert-eaton myasthenic syndrome (LEMS), a neuromuscular junction disorder affecting communication between nerves and muscles with only 3,000 estimated cases in the United States. The number of cases in the U.S. makes LEMS an extremely rare disease affecting 0.001% of the population. The company's main selling drug is Firdapse, treating LEMS in adults, and its only competitor is Jacobus Pharmaceutical Co. Inc. (not listed).
Since its initial public offering in 2006, the stock has been trading in approximately a 50 cent to $5 range, with a price breakout since the third quarter of 2021 with a current price of $14 to $15 justifiable by commercial milestones achievements and improving financials. In this analysis, I will present what happened for the price to break out and how it remains a very attractive stock to buy in a biopharma niche.
Successful achievement of milestones demonstrating efficient management
The two companies in the LEMS treatment space, Catalyst Pharmaceuticals and Jacobus, have been competing for the better part of the last two decades to commercialize in the U.S. Jacobus Pharmaceutical had been manufacturing amifampridine (now better known under its trade name Firdapse) since the 1990s and had been seeking ever since the Food and Drug Administration's approval for the commercialization and marketing rights on it. On the other side of the Atlantic, BioMarin Pharmaceutical Inc. (BMRN, Financial) successfully obtained European approval in 2009 under the trade name Firdapse.
The winner of the competition between both companies is clearly Catalyst Pharmaceuticals. Indeed, it gained licence rights for the U.S. from BioMarin Pharmaceutical to apply for FDA approval in 2017 marketing rights for the drug. The FDA approved at the end of 2018 the adult version of amifampridine under the trade name Firdapse for Catalyst Pharmaceuticals. Jacobus Pharmaceutical obtained, on the other hand, approval in 2019 only for the pediatric version of the drug under the trade name Ruzurgi.
What I found when looking closer at the disease from a scientific perspective is that it hits majoritarily adults. The pediatric market is a significantly smaller one, given the average patient having the disease is around 58 to 60 according to my research.
Catalyst Pharmaceuticals gained a strong advantage relative to Jacobus Pharmaceutical and has therefore no real competition in the field anymore. This should allow the company to tap 100% of the total U.S. addressable market, albeit narrowly. One of the key risks, competition, is virtually reduced to zero as it is unlikely that an external pharma company would reallocate its resources into such a small niche - this situation makes the potential acquisition of Catalyst Pharmaceuticals by a large pharma group more probable.
Solid financials and fair valuation
These various milestones achieved by Catalyst Pharmaceuticals, including obtaining a strong edge in relation to the existing competition, have significantly improved its financial situation, as you can see in the below chart.
The total debt-to-Ebitda ratio currently stands at 0.04. Revenue, Ebitda and net income are positive and have significantly improved since 2018 (year of the FDA approval for Firdapse). In the last four years, all three have risen by more than 100%.
The returns on assets, capital and equity are also key metrics. These ratios are among the most favored indicators of stock investors, as they reflect how efficient a business is run. Every dollar invested in each category brings a multiple times that dollar in return. And the ratios also turned positive in the last four years, which is another sign for attractive growth prospects:
On the valuation side, the stock has been trading in the five-year period of 2020 to 2024 in a range of 1.61 times to 9.97 times last 12 months revenue. The stock is currently trading at around 4.50 times, which is approximately mid-range, as you can see below. The company is not overly expensive given the prospects presented in the previous section that could lead, in my opinion, to an acceleration of growth or a potential acquisition from a larger pharma group.
The stock is currently trading at values around the sector medians, despite the significant edge it has over its competition, which could justify a stronger valuation trading at a premium in the future, in my opinion.
Estimates from analysts also show revenue is likely to increase every year between 2024 and 2027 by 19.1%, 15.6%, 7.4% and 8.5%, while net income would increase over the same period by 17.2%, 7.0%, 8.0% and10.3%. These growth figures are highly attractive for a company that faces limited competitive risks given the small size of the addressable market. If valuation remains at the level it is (i.e., no premium applied for reduced competition risk), the share price should increase in line with the net income increase, on average around 10% per year over the next four years. My projected value estimate of the stock is therefore around $20 to 25 four years from now. The Federal Reserve interest rate cuts and loosening monetary policy could further raise my price target, therefore my estimate is rather conservative.
Virtually no competition since 2022
There is more to consider than financials and valuation, and this should persuade any investor on which company is the right bet to catch all the available revenue in the LEMS niche. Catalyst Pharmaceuticals announced a settlement in 2022 that is highly beneficial in gaining additional weight in the LEMS treatment space. Indeed, its main competitor, Jacobus Pharmaceutical, was accused of infringement of Firdapse-related patent rights in the marketing and distribution of the pediatric version of the drug Ruzurgi. Both companies announced a settlement where Catalyst Pharmaceuticals would withdraw from its lawsuits and instead acquire Jacobus' intellectual property rights, including the rights to develop and commercialize Ruzurgi in the U.S. and Mexico, granting Catalyst Pharmaceuticals a practically undisputed presence in the LEMS treatment field.
The legal battles won by Catalyst Pharmaceuticals, its growth strategy in a limited addressable market and the absence of competition in the LEMS niche are attractive arguments for a long-term investment.
What could invalidate my case: Management's (lack of) ambition
In the absence of proper competition, companies tend to become less focused on innovating and may not seek to increase overall corporate and financial efficiency. Of course, it is a complicated task as an external investor to perceive whether management remains fully focused on the growth of the business. One way to try to deduct a feel of management's focus on the business is by assessing its “skin in the game.”
Observing the recent trading activity of management, we can clearly see management (including the C-level) has been regularly selling shares with an acceleration of sells in the last 18 months. This coincides, however, with the price breakout of the stock above $5 observed in the same time period, as per the chart below.
It is possible management is solely taking some profits after many years of the stock trading in a 50 cent to $5 range. Therefore, the selloff does not indicate any potential decline of the business. However, it does significantly reduce management's skin in the game and is the reason why the stock has a buy rating as opposed to a strong buy rating, despite solid fundamentals and limited competition.
Bottom line
Catalyst Pharmaceuticals should be an attractive addition to any portfolio seeking to gain exposure to health care, in particular to the biopharma segment. Over the years, the company has successfully achieved important milestones by gaining licence rights from BioMarin Pharmaceutical, FDA approval for its LEMS treatment drug for adults Firdapse and more recently opened the path to the commercialization of its competitor's pediatric variant of the drug in the U.S. and Mexico. The solid financials and fair valuation justify the recent share price rise. However, recent trading activity among management, with an intensifying sale of shares held by the C-level executives in the last 18 months, lowered my rating from a strong buy to a buy, but it still an attractive biopharma stock to own.
