PROLOR Biotech: A Top Takeover Candidate

Billionaire Phillip Frost is an esteemed entrepreneur and philanthropist who built his fortune from pharmaceuticals. His success in the field, in my view, is unrivaled; his story, a classic. Fortunately for investors, Frost is still active in healthcare companies. He currently chairs PROLOR Biotech, an emerging biopharmaceutical firm that is trading significantly below intrinsic value with favorable risk/reward, as evidenced by comparable past buyout multiples.

PROLOR is engaged in the biosimilars and biobetters space, developing new forms of perviously approved biologic therapeutics. Since products are not coming from scratch, valuing a business like PROLOR is much less speculative than it is for other biotech companies. At the same time, the firm's products have relatively minimal time to commercialization, since clinical trials use short-term biological parameter readouts and are not dependent on primary endpoints from outcome measures.

The company employs Carboxyl Terminal Peptide (CTP) technology to develop new forms of previously approved biologic therapeutics. CTP, a small peptide that is naturally found in hCG, is attached to other proteins to significantly increase longevity with minimal risk. Further limiting downside, this technology is being leveraged for diverse solutions, thus providing the kind of safety and breadth that is heavily demanded by large biopharmaceutical companies. In particular, I see Merck & Co. (MRK) and Pfizer (PFE) as possible suitors. Merck, for example, has licenses for 4 fertility-focused proteins while PROLOR has licenses for all other human therapeutics of natural or non-natural sequence. Pfizer, on the other hand, has a weak pipeline among pharmaceuticals and buying out PROLOR would yield substantial revenues synergies by opening the target's products to sizable patient populations.

Perhaps one of the most important factors to consider when investing in biotechnology is market potential and diversity in the portfolio. A winner in both concerns, PROLOR has major developments in hemophilia, weight loss, multiple sclerosis, and human growth hormone. Accordingly, the firm has a very "strong buy" rating on the Street and Morgan Joseph places the price target at $16, representing a 280% premium.

Consider, for example, that PROLOR is developing the first FDA-approved long-acting hGH. hGH-CTP has a market potential of $3B annually and has already indicated safety advantages and strong efficacy. Phase II clinical trials indicated that hGH-CTP could produce results with much fewer injections than what is currently marketed (ie. weekly, possibly even twice monthly, versus daily). Patients in all three cohorts showed average IGF-1 levels returning to normal range on all of the days when there was an assessment. In addition, hGH-CTP has indicated a very strong pharmacokinetic profile, which contributes to safety and ease in dosing. Having aggressively secured patents around everything from the composition of hGH-CTP to production and manufacturing, PROLOR has the solid IP protection that will be attractive to a larger biopharmaceutical company weary about risk. The hGH-CTP program is scheduled to enter Phase III trials in 2012.

Now consider that Roche earlier acquired Marcadia Biotech for $287M upfront in cash and $250M more if the target's diabetes drugs meet certain milestones. PROLOR is trading at nearly a quarter of this potential value while offering a substitute - long-acting oxyntomulin MOD-6030 - in addition to a variety of high-growth versions of therapeutic proteins. Factor VIIa-CTP and Factor IX-CTP, for example, have a cumulative potential market of $2B, growing 14% annually. These hemophilia solutions have already indicated superior longer-acting and clotting activity in preclinical trills. The market has yet to fully rationalize such a favorable context.

In conclusion, I find myself in agreement with the Street that the company represents a very attractive value play. While solid IP protection and a diverse biosimilar / biobetter market provide meaningful safety, undervaluation of the parts compared to past buyouts provide significant upside. 2012 is likely to be a favorable inflection point for PROLOR and opening a long position is recommended sooner rather than later.

Disclosure: I may open a long position in PBTH. Writing is paid, but research is independent. All views expressed herein are my own.