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Oral Relistor Is Just One Of The Reasons Progenics Is A Buy

Progenics’ share price has suffered in the last couple of months due to the meltdown in the biotech sector.

Oral Relistor should be a significant growth driver in 2016 and beyond and Progenics is entitled to royalties in mid to high-teens and up to $250 million in milestone payments.

The company also has three pipeline candidates that could generate substantial revenues if they are approved.

Current valuation does not reflect the potential of oral Relistor and likely assigns little/no value to the pipeline.

The correction might not be over, but Progenics represents a solid opportunity for long-term investors.

Progenics' (NASDAQ:PGNX) share price was down almost 50% from its summer highs, largely due to the correction in the biotech sector. The drug "price gouging" as seen in the eyes of the democratic presidential candidate Hillary Clinton has had an additional negative effect on the sector, and Valeant (NYSE:VRX) is one of the companies that were mentioned as the leaders of the aggressive pricing group of pharma stocks, which has brought negative publicity and Progenics might have been affected given its ties to Valeant, which is in charge of Relistor's commercialization. While the issues surrounding drug pricing will not go away anytime soon, I already expressed my views in recent articles on the stocks in the sector and will only repeat here that I believe that Clinton will end up doing little or nothing to change the situation in the industry, but I agree that the negative publicity is a short and medium-term negative for the sector. That said, the focus of this article will be Progenics and its upside potential, which I believe is significant based just on Relistor, while the pipeline also has the potential to generate significant revenues for the company and meaningful gains to Progenics' shareholders in the next 3 to 5 years. The sector correction may or may not be over, but Progenics around $7 provides ample opportunities for long-term oriented shareholders.

Relistor injectable inventory issues to be resolved by end of 2015, oral version to lead to significant upside if and when approved in 2016

Progenics is not seeing much from Relistor royalties in the last three quarters due to Salix's inventory issues. In the meantime, Valeant has acquired Salix and revealed plans to take the inventory levels from 4.5 to 5 months to just six weeks before the end of 2015. However, based on management comments on the Q2 call and the fact that Valeant reported Q2 revenue of just below $12 million, it seems that Relistor inventories came down to more appropriate levels. This means that royalties should trend higher in 2H 2015 and improve more significantly in 2016. Valeant revealed in the Q3 call that Relistor prescriptions are up a healthy 36% Y/Y in Q3, but I did not manage to find the actual revenue figures for Q3. Having Valeant as a partner instead of Salix is certainly a bonus for Relistor and I think that Valeant should be able to market the drug more successfully given its much broader reach and success in the field (apart from the pricing issues raised and discussed in the introduction of this article). The other difference that was observed by Progenics' management upon Valeant's acquisition of Salix was the fact that Salix was focused on discounting to increase sales, while Valeant is less inclined to do so, which translates to higher royalties going forward.

Relistor sales should also get a significant boost from the expanded indication. Relistor was approved for the treatment of opioid induced constipation (NYSE:OIC) in patients with chronic non-cancer pain in the U.S. in late September 2014 and the broader indication was approved by the European Commission in June 2015. This expands the addressable market considerably and should positively affect future sales.

However, the most important development surrounding Relistor is the oral version. Valeant and Progenics announced in early September that the FDA accepted their NDA for oral Relistor with a PDUFA date of April 19, 2016. The approval should be a significant event since the oral version will provide a much more convenient way to take the drug as opposed to a subcutaneous injection. Both Valeant and Progenics are very optimistic about the growth prospects of an oral version of Relistor, and Salix had expectations for peak sales of around $1.3 billion prior to being acquired by Valeant. Their expectations for the injectable version were around $300 million. Analysts are not as optimistic for oral Relistor, and see peak sales in the $500 million to $750 million range and fellow SA contributor Kanak Kanti De expects peak sales at $930 million. Getting the annual revenues to $500 million translates to around $80 million in royalties for Progenics along with $125 million in milestone payments ($50 million for approval of the oral version, $10 million when sales in a calendar year reach $100 million, $20 million for $200 million and $25 million for $300 million), while royalty rates range from 15% for the first $100 million, 17% for the next $400 million and 19%...