Expert Financial Analysis and Reporting

Investment Opinion

Based on assumptions made in this report, I estimate that AndexXa could be valued by investors at $114 to $ 200 per Portola share by 2023. This makes Portola a very attractive investment opportunity without taking into account any contribution from Bevyxxa which was recently launched in the US and potential pipeline contributions, both of which could provide substantial further upside.

The initial reaction to the approval of this breakthrough product has been muted. I think that this is partially due to anticipation of an equity offering. In my estimates, I have assumed that Portola will issue 10 million shares sometime this year at a price of $40 or more per share.

The muted reaction may also be due to limited supply of AndexXa that will limit marketing to 30 to 40 hospitals in 2H, 2018. By early 2019, this supply issue should be resolved by a new manufacturing process that will enable Portola to expand marketing to 1000 US hospitals. I expect that sales will be modest in 2H, 2018. We should then begin to see a rapid uptake in 2019.

I obviously am reiterating my Buy recommendation.

Introduction

After some drama, AndexXa was approved right on schedule. Recall that on March 1, 2018, management reported that they had received a communication from the FDA indicating that the agency “may” want data on some patients in a randomized study. If the FDA required this as a condition for approval, the approval date for AndexXa in the US could have been set back three years or so. The stock plummeted from $42.30 on February 28, 2018 to $31.56 on March 1, 2018. For a further discussion see my report entitled Portola: Uncertainty on AndexXa Approval Leads to 30% Decline in Stock Price (PTLA, Buy, $31.16). The FDA approved AndexXa on the scheduled PDUFA date, but interestingly, the stock is selling at a lower price than the $42.30 of February 28, 2018, before investors were alerted to the communication from the FDA.

The Addressable Market for AndexXa

In 2016, there were there were approximately 117,000 hospital admissions and 24,000 deaths per year attributable to bleeding caused by anti-coagulant drugs that inhibit Factor Xa. Portola says that it believes that the most medically urgent need for AndexXa is in patients with intracranial hemorrhage which account for 15% of admissions and for a number of other urgent needs that account for another 10%. This suggests that AndexXa should be rapidly employed in approximately 25% of or 29,000 patients per year. On average, patients in the clinical trials, received about one gram of AndexXa. The WAC price of AndexXa is $27,500 per gram. Hence, the addressable market in this very high need segment is about $800 million in the US. The European potential is about the same.

Even before approval, the American Society of Hematology has issued guidelines that recommend that AndexXa be used as first line therapy for reversing bleeds caused by the use of Factor Xa inhibitors such as Eliquis, Xarelto enoxaparin and other low molecular weight heparins. The initial label only covers use in Eliquis and Xarelto patients which is a majority part of this Factor Xa inhibitor market. I don’t have any good estimate on this, but I would guess it is well over 50%. I think that the label will be expanded to include enoxaparin, probably in 2019. I think that use will over time expand so that AndexXa will be used extensively beyond the immediate part of the market (25% of 117,000) that Portola will be targeting.

The Launch: In Contrast to Most Recent New Product Launches, I Am Looking for a Rapid Uptake in 2019

Portola states that the mortality rate in AndexXa treated patients has been 14% versus an estimated 40% for standard of care. The cost of treating a patient with standard of care is estimated at $100,000 which compares to $27,500 for AndexXa. As previously mentioned the American Society of Hematology has issued guidelines that recommend that AndexXa be used as first line therapy for reversing bleeds caused by the use of Factor Xa inhibitors such as Eliquis and Xarelto. The European counterpart, European Society of Cardiology, has done the same. We are all accustomed to seeing slow launches of new products in the US due to medical uncertainty or cautiousness on including new products into standard of care. More importantly, managed care erects enormous hurdles to gain reimbursement. I don’t see either of these issues as being impediments to a rapid uptake of AndexXa in the US and Europe (after approval).

As I have discussed in previous notes, the approval of AndexXa is initially based on a manufacturing process called Gen1. This is a relatively inefficient and low yield process. Portola is moving rapidly to change manufacturing to a Gen2 process in early 2019. The Gen1 process and inventory built under Gen1 can only support AndexXa demand in 30-40 hospitals. Thus Portola will initially only provide product to centers that participated in the AndexXa trial or highly expert centers. While this will limit initial sales, it does have the advantage that the product will be used correctly in the initial part of the launch and provide valuable learnings that can be communicated to subsequent hospital users.

Portola estimates that the Gen2 process will be approved in early 2019 or possibly before. At the time of this approval, they will have sufficient inventory of Gen2 manufactured product to address 1000 of the leading hospitals in the US, which is the overwhelming part of the market.

Importance of AndexXa Approval to Portola Sales and Stock Price

Portola will begin to market AndexXa through its existing sales force in June 2018. Because of limited supply I expect that sales will be modest in 2H, 2018. We should then begin to see a rapid uptake following the approval of the Gen2 process in 2019. I think that the US addressable market which I estimate to be $800+ million could be rapidly penetrated and that peak sales of $500 to $700 million could be reached in the 2023 time frame. I would estimate equivalent European sales in the same time frame. Hence, I believe worldwide sales of AndexXa could be $1.0 to $1.4 billion by 2023.

As a rule of thumb, the market can value sales of a breakthrough product such as AndexXa at 8 to 10 times revenues. This suggests that AndexXa could lead to a market capitalization of $8 to $10 billion in 2023.

Portola currently has 59.5 million shares outstanding. I estimate that it ended 1Q, 2018 with about $350 million of cash. On February 3, 2017 Portola announced that it signed a $150 million royalty agreement with HealthCare Royalty Partners. Under the terms of the agreement, Portola received $50 million at closing and will now receive another $100 million upon AndexXa approval. Health Care will receive a mid-single-digit royalty based on worldwide sales of AndexXa. The agreement is subject to a maximum total royalty payment of 195 percent of the $150 million ($293 million) funded by HCR, at which time the agreement will expire.

I think that the quarterly burn rate for Portola in the next three quarters of 2018 could be $80 million so that based on the estimated current cash position of $450 million ($350 million plus $100), it could end the year with about $200 million of cash. I think that the Company will choose to issue more equity in order to adequately fund the launch of AndexXa and don’t forget that Bevyxxa was also recently approved and is in its initial launch phase. I am guessing that Portola might want to raise another $400 million. At the current price of $40, this would require issuing 10 million shares and would bring the share count to 70 million.

My assumptions lead to the estimate that AndexXa will achieve sales of $1.0 to $1.4 billion by 2023 and that the market will value these sales at a multiple of 8.0 to 10.0. This would mean that AndexXa alone could contribute $8.0 to 14.0 billion to the market capitalization in 2023. Then dividing by the estimated 70 million shares that I estimate to be outstanding at that time, the contribution to Portola’s share price in 2023 could be $114 to $200 per share.