Expert Financial Analysis and Reporting

Introduction

This is the latest in a series of updates on Portola and is prompted by information presented in the second quarter conference call. If this is your first encounter with the Company and you would like greater detail on the company’s technology, its products and clinical trial data, you may want to read my basic report of May 4, 2017 “Initiating Coverage with a Buy”. I would also suggest that you refer to my July 12, 2018 report “Update and Reiteration of Buy Recommendation” because this note will build on the July 12 report so that I am not going to repeat all of the comments made therein.

Key Investment Conclusions

Portola is one of my strongest buy recommendations based on the company’s approval and its initial efforts to commercialize two unique, new drugs-Bevyxxa and Andexxa. .Obtaining a drug approval is a difficult and indeed a rare event in biotechnology. I don’t have precise data, but probably 9 out of 10 (maybe more) biotechnology companies fail to ever get a drug approved for a medically and commercially significant indication. Companies fortunate enough to attain this goal almost always go on to become huge stock market successes. It is virtually unprecedented for an emerging company like Portola to have gained approval for two unique drugs addressing unmet medical needs with large commercial potential.

Here are some key conclusions:

• I believe that Andexxa has the potential to reach $1 billion of sales by 2023 and based only on Andexxa’s potential, my price target in 2023 for Portola is $110 to $136.
• Key to my Andexxa projections are that the Gen 2 manufacturing process is approved by the FDA in early 2019and that European approval of Andexxa using product manufactured by the Gen 2 process is gained in early 2019. These are the two major catalysts for the stock in the next six months to a year.
• Andexxa was launched in late May of 2018 and had sales of about $2 million in 2Q, 2018 or roughly a quarterly sales run rate of around $4 to $5 million. Demand for the product is greater than the ability to supply the drug because of the inefficient Gen 1 manufacturing process.
• Bevyxxa’ s disappointingly slow launch has been the major catalyst leading to recent weakness in the stock. Sales in the second quarter following its January 2018 launch were only $33,000. The Company says that this has not diminished their view of the ultimate commercial potential of the drug. I concur that Bevyexxa has significant commercial potential, but the market is much more skeptical.
• Investors seem to be assigning little commercial potential for Bevyxxa and have completely forgotten about Portola’s third product, the oncology drug cerdulatinib. Portola could begin a pivotal registration trial for cerdulatinib in late 2018 or early 2019.
• Portola ended 2Q, 2018 with $457 million of cash; management suggested that this can fund the Company into 2Q, 2019 including the launch of Gen 2 processed Andexxa in the US and Europe.
• In my price target thinking, I have factored in a $400 million equity offering at the current stock price sometime in 2018 or the first half of 2019 and no partnering deals
• I believe that the recent significant weakness in the stock price does not reflect the fundamental prospects of Portola. The weakness is importantly due to hedge fund manipulation and algorithmic computer trading activity, in my opinion.

Key Investment Issues for Andexxa

Background

Andexxa is a critically needed drug to reverse major, life threatening bleeding that is sometimes caused by the use of the new Factor Xa anticoagulants, principally Xarelto and Eliquis. The FDA in its regulatory review designated Andexxa a breakthrough drug. It was approved on May 3, 2018. A very powerful validation of the promise of the drug is that it is already included in the guidelines for treating severe bleeds caused by Factor Xa anticoagulants by the American Heart Association, American Society of Hematology and European Society of Cardiology. The recommendations of these societies shape medical practice in the US and Europe. With this type of backing, it seems highly probable that Andexxa will be almost universally incorporated into medical practice. If so, the size of the patient population addressed based on the sales price gives great promise that it will reach blockbuster status.

Portola is a Buy Based only on the Prospects for Andexxa

While nothing is a sure thing in biotechnology, I think that that the readily addressable market in the US for Andexxa is about $800 million and roughly the same in Europe. I would expect a quick and high rate of penetration of this market so that it is very possible that Andexxa could achieve sales of $1 billion by 2023. Applying a representative market valuation to sales ratio of 8 to 10 times for Andexxa would result in a market capitalization of $8 to $10 billion for Portola in 2023. Based on about 73 million outstanding shares (allows for a $400 million equity offering in 2018 or 2019 at current prices), the stock price target in 2023 would be $110 to $136 based solely only on prospects for Andexxa by these estimates.

Early Launch is Constrained by Lack of Drug Supply

The early part of this launch is constrained by lack of supply of product. The clinical trials of Andexxa and the initial launch used drug ingredients manufactured by a process that Portola has dubbed Gen 1. This is an inefficient process that is only able to produce small quantities of Andexxa so that initial demand substantially exceeds supply and Portola must ration the drug. Portola submitted a Prior Approval Supplement (“PAS”) to the FDA on August 31, 2018 seeking approval of another manufacturing process called Gen 2 that Portola states can meet all of the US and also European demand if Andexxa is approved in Europe. Portola is planning on a standard six-month review period so assuming the FDA grants approval, Gen 2 could be launched in early 2019. Gen 2 commercial manufacturing should provide sufficient supply to stock over 1000 hospitals in the U.S. and Europe.

Because of the supply constraints, Portola is initially targeting only 40 hospitals in the US. More than 90% of these hospitals selected chose to participate and a majority purchased Andexxa in the first month. Additionally, the company has received unsolicited calls from more than 200 hospitals seeking to purchase Andexxa or obtain product information to support their Pharmacy and Therapeutics Committee reviews prior to wider Gen 2 availability. With a Gen 2 approval, the US sales force will be expanded from 72 to about 130 reps. This provides sufficient resources to target 600 hospitals.

In early August, the Centers for Medicare and Medicaid (CMS) granted Andexxa a New Technology Add-On Payment (NTAP). This was in recognition that Andexxa is an innovative product with substantial clinical value. The NTAP will provide hospitals treating eligible Medicare patients with about $14,000 per claim, which is about 50% of the cost of a standard dose of Andexxa. This is extremely important in getting hospitals to use Andexxa before it is incorporated into DRGs. The NTAP will go into effect on October 1, 2018 and in place for the anticipated introduction of Gen 2 product early next year.

Potential for European Approval

The Committee for Medicinal Products for Human Use (CHMP) is the European Medicines Agency's (EMA) committee responsible for evaluating human medicines. In February 2018, the CHMP communicated a positive trend vote on the Marketing Authorization Application (MAA) for Andexxa and also requested additional data. This included additional data from ANNEXA-4 (an ongoing post marketing approval trial requested by FDA that is due to finish in 2022) and more information on the drug ingredient manufactured by the Gen 2 process.

Portola has already submitted the Gen 2 manufacturing and analytic regulatory module. They expect to submit remaining information in time for the CHMP to review the full submission in October and provide their final opinion on approval after a regularly scheduled meeting in November. Assuming a positive CHMP opinion PTLA would be positioned for potential European launch sometime in the first quarter of 2019.

Investment Issues for Bevyxxa

Background

Bevyxxa is a Factor Xa inhibitor like the huge blockbusters Eliquis and Xarelto. It was developed for the prevention of blood clots in hospitalized, acute medically ill patients. The APEX trial that led to FDA approval randomized 7,513 patients who were hospitalized with diseases such as heart failure, respiratory failure, infectious disease and rheumatic disease. Reduced mobility due to hospitalization of such patients increases the risk of blood clots during hospitalization and importantly for some days after release from the hospital. Bevyexxa is the only drug approved for this indication. Both Xarelto and Eliquis tried and failed to gain approval in this indication.

The intended use of Bevyexxa is as prophylaxis against blood clots, so that it is used with underlying conditions that span many disease states as previously listed. Getting Bevyxxa incorporated into hospital protocols requires multidisciplinary physicians to reach consensus. This is a complex process that is critical for routine use in the hospital and it takes time. Portola is working to create a paradigm shift in the hospital that requires significant behavior change by physicians. Currently, they use injectable heparin in the hospital to prevent clotting, but when the patient is discharged they are no longer treated. Bevyxxa is started in the hospital instead of heparin and then continued after discharge. Management acknowledges that it underestimated the extent of this challenge and initial sales results relative to expectations have been disappointing. They expect this slow sales build to continue over the next several quarters as they continue to lay the foundation for Bevyxxa adoption and use.

Addressable Market is Huge

Portola estimates that there are 8 million acute, medically ill patients hospitalized each year in the US and of these 100,000 die from blood clots. Worldwide, 24 million patients are hospitalized. Portola believes that the worldwide addressable market could be $3 to $4 billion.

Early Launch Results are Disappointing

Bevyxxa was launched in January 2018 and so far the launch has been slow and disappointing relative to expectations. In the second quarter, sales were only $33,000.In part, I attribute this to physicians not being familiar with the risk of blood clots forming after patient discharge. While treatment within the hospital is well established, post discharge treatment is a paradigm change. I think that the phase 3 APEX clinical trial conducted in 7,513 patients showed a clear and important medical benefit, but the physician universe has to be educated on this. The education process is complicated because treatment of acute medically ill patients crosses several major physician disciplines. There is also some inherent caution because Xarelto and Eliquis conducted clinical trials in this indication that failed. Why Bevyexxa succeeded and these drugs failed can be understood by looking at the superior pharmacokinetic profile of Bevyexxa, but again education is called for.

During the conference call, the question was asked of management about their degree of confidence that a meaningful upward sales inflection point will occur. The questioner noted that earlier the Company had suggested the end of the year and asked whether this timeframe has been pushed back. They went on to ask if management still had confidence in the ultimate market opportunity. Management answered that they absolutely believe in the ultimate potential of Bevyxxa. However, they now see the sales inflection point pushed out by perhaps a year or well into 2019. This statement was the catalyst for the sharp decline in stock price following the call. I concur with management that the slowness of the launch does not mean that the drug has failed commercially. I continue to see it as an important new drug with significant commercial potential.

Portola has indicated that the initial and continuing launch objectives of the 70 rep sales force were:

• Evaluating hospitalists’ role in Pharmacy and Therapeutics committees
• Understanding what tools have been successful in driving formulary reviews, expediting reviews and approvals, and education of hospitalists,
• Engaging consultants to develop an order set that identifies appropriate patients within the hospitalists’ service,
• Identify certain critical barriers to Bevyxxa computerized physician order entry implementation and determine if there is an early use path forward prior to order set completion,
• Evaluating educational needs to help hospitalists improve the overall transition of care process, and
• Class-of-trade specific contracting to promote access and uptake within the patient population.

European Approval in Next Few Years is Unlikely

In February 2018, the CHMP communicated a negative trend vote for the MAA for Bevyxxa for the prevention of VTE in adult patients hospitalized for an acute medical illness with risk factors for VTE. In March 2018, the CHMP issued a negative opinion for Bevyxxa.  Portola appealed this opinion, and the CHMP agreed to re-examine the MAA. In July 2018, the CHMP issued its final recommendation on Bevyxxa and maintained its negative opinion following its re-examination procedure. Major reasons in CHMP decision were that there was only a single phase 3 trial and that no other drugs are approved for this indication in which clinical trials of Eliquis and Xarelto failed.

Key Investment Issues for Cerdulatinib

Lost in the discussion and investment thinking on Portola is that its hematological cancer drug cerdulatinib could be entering a pivotal trial in peripheral T cell lymphoma in late 2018 or early 2019. Cerdulatinib is an oral SYK/JAK inhibitor that is currently in a Phase 2a study for the treatment of relapsed/refractory B-cell and T-cell malignancies in patients who have failed multiple therapies. It uniquely inhibits two key cell signaling pathways implicated in hematologic malignancies and autoimmune disease.

Portola is encouraged by the clinical trial data seen in T-cell lymphomas and particularly in peripheral T-cell lymphoma. There is a large unmet need for the treatment of patients with relapsed/refractory PTCL.  Current therapies are all given via IV infusion (cerdulatinib is an oral)and have limited activity with overall response rates of approximately 30% whereas phase 2a data suggest cerdulatinib can produce an overall response rate of 47%. Based on the unmet need and on the data seen so far with cerdulatinib, they have prioritized development in PTCL. They plan on meeting with the FDA following completion of our Phase 2a study around the end of the year and hope to initiate a pivotal trial in the United States thereafter

If we were to hypothesize that this was the lead and only drug of some unrelated biotech, that company might well sell at a $500 million market valuation (or $6 per share) based on a comparison to similar companies.

Why Has The Stock Been So Weak?

The stock closed at $37.72 on the day before the August 9, conference call and after the call it closed on that day at $30.81. It then proceeded to hit a low of $25.02 on August 21. What was said on the call to cause this 34% price decline? This was not due to anything relating to Andexxa. It all stemmed from the Company pushing out its guidance on when we might see an upward sales inflection for Bevyxxa.

I believe that the stock prices of emerging biotechnology companies as well as emerging companies in other industries can be totally out of whack from time to time. I believe that this is attributable in large part to two huge forces that are largely not driven by fundamentals. As those who have followed my writings know, I believe that there is a highly sophisticated conspiracy between hedge funds and market makers that can at times set the price of a stock. This usually occurs after some negative news such as pushing out the guidance for the time of upward sales inflection for Bevyxxa.

The second factor is the huge influence of computer trading that is driven by algorithms. I have seen some estimates that 75% of trading in both large and small stocks is done by computers although I don’t know if this is accurate. These programs can execute hundreds of trades in the blink of an eye on both the buy and sell side. No one can truly understand how the confluence of algorithmic trading effects stock. I don’t pretend in any way to understand this, but let me offer some thoughts.

The algorithms for most computer trading schemes probably include two key inputs. One of them is the momentum of a stock. If the stock is going up or down, the programs feed on each other and can create upward or downward spirals with little relationship to the fundamentals of the Company. The second is upward or downward revisions in analysts’ earnings estimates. It is my opinion that the cuts in earnings estimates caused by the disappointingly slow launch of Bevyexxa brought these factors into play. This set off a widespread round of selling that has led to the current depressed stock price. A sober fundamental assessment suggests to me that the promise of Andexxa alone should make this a strong buy. The stock price essentially contains nothing b for Bevyxxa which I believe has the potential to be a major commercial success. And of course, cerdulatinib is not even a tiny blip on the radar screens of investors.