Expert Financial Analysis and Reporting

Key Conclusion

The outlook for Portola’s stock price in 2019 and 2020 will almost certainly driven by the sales progress of Andexxa. At this early stage in the launch, there is considerable uncertainty and guesswork involved in projecting sales. My preliminary estimates are that sales increase from $24 million in 2019 to $120 million in 2019 and $224 million in 2020. If these numbers are achieved, I would expect explosive upside for the stock.

Background on Andexxa

In my opinion and more importantly the FDA’s, Andexxa is a breakthrough drug for the reversal of the anti-coagulant effects of Factor Xa inhibitors, most notably Xarelto and Eliquis. These are life saving drugs that are used by several millions of patients throughout the world, but sometimes their mechanism of action (preventing strokes by making it more difficult for blood to clot) can cause life threatening bleeds. Andexxa is the only approved treatment if this occurs. It was approved by the FDA in May 2018, under its Accelerated Approval Program.

The FDA designated Andexxa as a breakthrough drug and its approval was based on a non-randomized study conducted in healthy adults which used the biomarker Factor Xa inhibition as an endpoint. As a condition of approval, Portola was required to do an ongoing, post approval study in patients who were actually suffering from severe or life threatening bleeds resulting from the use of Factor Xa inhibitors; this is the ANEXXA-4 study. So far, a series of interim reports from this trial have been encouraging. Please refer to this link if you would like to see the most recent data from ANNEXA-4.

Key Investment Points

• Andexxa (andexanet) is the only approved treatment for reversal of anticoagulant effects of Factor Xa inhibitor drugs like Xarelto and Eliquis whose use can cause life threatening bleeding in a small but meaningful percentage of patients. These drugs are currently being prescribed to several million patients worldwide which makes Andexxa potentially one of the most medically important drugs introduced in recent years.
• Because of the urgent medical need, the FDA was willing to approve Andexxa on the basis of a relatively small, non-randomized trial in healthy volunteers supplemented by data from an ongoing open label trial in patients with bleeds that is called ANNEXA. The lack of data from a large, randomized trial in patients who actually incurred bleeding while on Factor Xa anticoagulant therapy has produced some uncertainty in evaluating Andexxa.
• The February 7, 2019 issue of the New England Journal of Medicine reported encouraging outcomes in the ANNEXA-4 trial which was undertaken in patients who suffered serious bleeds after receiving a Factor Xa anticoagulant, primarily either Eliquis or Xarelto. The publication of this encouraging article in the prestigious NEJM should significantly lessen concerns with the limited clinical data on Andexxa and increase its rate and depth of penetration in the market.
• Portola’s market research suggests that there are 140,000 hospital admissions each year in the US for excessive bleeding due to Factor Xa anti-coagulants of which 80% are treated. A significant potential future market is the 28,000 patients who are on anti-coagulants and must undergo emergency surgery. At an estimated price of $28,000 per treatment this suggests an addressable market of $4 billion in the US. The foreign opportunity should be roughly the same.
• Management estimates that in the US the number of patients most urgently in need and that should be immediately targeted is about 27,000 which translates into about $750 million of sales. The European market again has about the same potential.
• I think that Andexxa has blockbuster potential so that at peak sales, it could achieve US sales of $1-2 or more billion dollars and a like amount overseas. Peak sales could occur in five or so years.
• In terms of valuation, based on looking at multiples of sales that investors often place on emerging biotechnology companies, I think that Portola could be valued at 8 to 10 times peak revenues which would suggest a market capitalization of $8 billion a few years in the future.  I was anticipating an equity offering in 1H, 2019, but management opted for $150 million of debt instead. This gives a cash runway into 2020. There may be additional capital from partnerships for Andexxa in Europe, cerdulatinib and Bevyexxa that bring in more cash. There does not seem to be a need for an equity offering in the next year or two and perhaps longer. If we then divide the potential $8 billion market capitalization by the current 66 million outstanding shares, we can calculate a potential share price of $121 per share based only on Andexxa.

Sales Projections for Andexxa in 2018 and 2019

The stock price of Andexxa in 2019 and 2020 almost certainly will be driven by the sales progress of Andexxa. The US commercial launch of Andexxa began in May of 2018. Increasingly over the last decade, managed care and Medicare have implemented measures related to reimbursement and formulary acceptance that create significant utilization hurdles. Also, these hurdles are much higher for hospital targeted products like Andexxa. As a result, it seems that each new product launch is more disappointing than the last in the initial phase of introduction. Of course, over time important new products will gain wide acceptance as deserved. In addition to these launch issues, investors also are trying to determine the ultimate commercial potential of the drug. Breakthrough status suggests that it will be a blockbuster, but nothing is for certain. I believe that Andexxa will be a blockbuster, but some leading analysts are less convinced. The Wall Street jury is still out.

Investors are asking whether the Andexxa launch as it continues into 2019 and 2020 will be slow and perhaps disappointing or will its breakthrough characteristics result in a more successful launch. This is a generic concern that applies to all new product launches. On the other hand, the very early stage of the launch from May to December of 2018 was constrained by a limited supply of drug. The product that was rolled out in May 2018 was approved under the Gen 1 manufacturing process which used an inefficient process that could only supply limited quantities of the drug. This meant that marketing could only be focused on a small part of the potential market and even in this segment the drug may have been reserved for the most serious cases. In December 2018, the Gen 2 manufacturing process was approved. Portola has stated that it has already produced enough Gen 2 product to supply anticipated demand for several years. Obviously, drug supply is no longer an issue.

Sales for Andexxa were $2.2 million in 2Q, 2018, $7.7 million in 3Q, 2018 and $14.0 million in 4Q, 2018. Given the Gen 1/ Gen 2 situation and the usual issues with a new product launch, these numbers seem pretty impressive. However, some analysts are concerned that stockpiling of the product (building inventories) by hospitals could mean that there numbers are not reflective of and overstate demand. I think that this concern is overblown, but at this point in time there is not enough data to clearly refute it and this concern remains a drag on the stock.

I think there are some major forces that point to Andexxa revenues in 2019 and 2020 showing impressive or even explosive growth:

• It is the only approved product for a life threatening condition,
• In 1Q, 2019, there were important new joint guidelines adopted by the American Heart Association, the American College of Cardiology, and the Heart Rhythm Society. They recommended Andexxa as the only agent for the reversal of life-threatening bleeding associated with rivaroxaban or apixaban-Xarelto and Eliquis.
• An update on the ANNEXA trial published in the February 7, 2019 issue of the prestigious New England Journal of Medicine was quite positive and should be a significant benefit to marketing efforts,
• Usage was supply constrained through 2018; with the approval of the Gen 2 manufacturing process there is now unlimited supply,
• Portola is targeting 1600 hospitals in the US, but by year end 2018 had only sold product to 200,
• Portola estimates that there are 140,000 hospitalization for bleeds from Eliquis and Xarelto each year and 27,000 are extremely serious. At a price of about $26,000 per treatment, I calculate that the product was only used in 580 patients in 4Q, 2018. On annualized basis, this is 9% of the potential market for extremely serious bleeds and 2% of the total addressable market.
• The sales force has been expanded from about 90 to 130 reps
• Portola believes that the initial countries targeted in Europe have the same market potential as the US and it expects to record the first sales in late 2019.
• The Company has NTAP status for Andexxa and it will be given a C-code in April. These make it much easier for hospitals to gain reimbursement.
• Portola says that it is fully funded to support the sales of Andexxa in both the US and Europe through 2020.

Here is my thinking on sales for Andexxa in 2019.

• My best judgment is that 4Q sales of 2018 were largely reflective of demand. If so, sales of $15 million in 4Q would point to a run rate of $60 million at year end 2018.
• The sequential gain in sales for 4Q, 2018 over 3Q, and 2018 was $6.3 million and for 3Q, 2018 over 2Q, 2018 was $5.5 million. If Portola can achieve a similar sequential sales increase of $6 million in each quarter of 2019, sales would be as follows: 1Q ($20 million), 2Q ($26 million), 3Q ($32 million) and 4Q ($42 million).
• This leads to 2019 sales of $120 million and is my initial estimate.
• Using the same methodology, my 2020 sales estimate is $224 million.

As more data comes in, I will adjust these estimates. If these numbers are achieved, I think there is explosive upside potential for the stock. This next section of the report provides further update on Andexxa based on the 4Q, 2018 conference call. During that call, management announced that they expected to begin marketing and achieve sales of Andexxa in Europe in late 2019. This adds an important new leg to the story.

Highlights of Management Conference Call Discussing FY 2018 Results

Comments on Andexxa Sales Effort

Portola states that it will be targeting 1500 hospitals in the US which are comprised of 600 level 1 and 2 trauma centers and 900 advanced care stroke centers. Approximately 200 hospitals were stocking Andexxa by the end of 4Q, 2018 and that 50% had reordered the reorder rate of approximately 50%. That is double the roughly 100 hospitals that were restocking Andexxa at the end of the third quarter and for which the reorder rate was approximately 40%.

The current sales force which was just expanded from roughly 90 to 130 reps, will be able to reach these 1,500 although there is no expectation that all 1500 will be up and running this year. The sales force expansion is now complete and PTLA expects all 40 of the new reps be trained and seeing customers in early Q2, 2019. Analysts have pressed management for more details on reordering and usage rate per hospital. However, management is reluctant to provide some of this detail at this early state of the launch. They may provide more in the 1Q, conference call in April.

Management states that its sales force has made good progress so far. Getting Andexxa used at a hospital is more complicated than just getting a doctor to prescribe the drug. Usually the first step is to get the drug added to the pharmacy and therapeutics list. Without P&T approval is it very hard to get any meaningful use of the drug. Then after gaining P&T approval there are still requirements for physicians and staff training on the proper use of the drug and managing inventory. It is still early but Portola says that it is pleased and happy with the signs the execution of the sales force and early signs of adoption.

Andexxa Reimbursement Issues in US

Investors have learned the hard way over the last few years that access and reimbursement are as critical to success as product attributes in the early stages of a launch. Portola feels they are making good progress on this front. They previously reported that Andexxa was given NTAP status by CMS in October 2018.

They have also applied for a C-code, which is a temporary code given in advance of a permanent J-code. This will allow community-based hospitals that initiate Andexxa and then transfer a patient to another hospital to receive reimbursement through Medicare Part B. It can be difficult for them to get reimbursed. The C-code allows them to be reimbursed at an ASP-based reimbursement grade under Medicare Part D. Portola thinks this will have a meaningful impact on these smaller hospitals in terms of their willingness and desire to use Andexxa before they transfer that patient to a larger hospital. They expect this code to go into effect on April 1.

New Andexxa Clinical Data

ANNEXA-4 is a phase 3b-4 study that is designed to give an insight into the real life experience with Andexxa. Portola presented data from this trial at the International Stroke Conference in February 2019 and the data was simultaneously published in the New England Journal of Medicine. The presentation and publication included full results from 352 patients, of whom 64% were treated for intracranial hemorrhage and 26% for a gastrointestinal bleeds which was consistent with previously released ANNEXA-4 data presentations, Andexxa rapidly and significantly reversed anti-factor Xa activity. Of the 249 patients, who were evaluated for hemostatic efficacy, 82% achieved excellent or good hemostasis, which is the stoppage of bleeding. Most of these were excellent in their response.

The authors of the study noted a durable response among patients, who experienced an intracranial hemorrhage. Among the 71 patients with a non-traumatic single compartment intraparenchymal hematoma, 56 had excellent or good hemostasis at one hour post Andexxa. Of these, 98% maintained excellent or good hemostasis at the 12-hour mark. This is important because it supports the durability of the response to Andexxa in the most critical, life threatening types of bleed.

The safety data was also encouraging as within 30 days of enrollment, the mortality rate was 13.9% which was consistent with previous ANNEXA-4 trial results. Thrombotic events occurred in 9.7% of patients, in line with the background thrombotic risk of the enrolled patient population. Data for unapproved treatments previously used to treat bleeds are sketchy and unreliable, but when compared to historical results for unapproved therapies, this suggests that Andexxa may have a mortality benefit. Importantly, no thrombotic events were observed among the 100 patients, who restarted oral anticoagulation. This is a significant finding given the clinical importance of restarting NOAC therapy as soon as possible.

With these data in hand, Portola plans to begin discussions with the FDA on a number of potential label expansion opportunities, including the addition of the ANNEXA-4 efficacy data, the inclusion of edoxaban and enoxaparin and the potential initiation of a study in urgent surgery. This should be an important booster to growth. There are other factors that are also positive for future growth.

Andexxa’s Inclusion in Medical Society Guidelines is a Big Plus

In the first quarter of 2019, there were important new joint guidelines adopted by the American Heart Association, the American College of Cardiology, and the Heart Rhythm Society. They recommended Andexxa as the only agent for the reversal of life-threatening bleeding associated with rivaroxaban or apixaban.

These societies also updated guidelines for treatment of atrial fibrillation. They now recommend Xarelto and Eliquis and other new oral anticoagulants (NOACs) over warfarin. This may result in a significant increase in NOAC use as warfarin is still being used by approximately 35% to 40% of patients in the United States. Along with the ANNEXA-4 data, sales reps have important new information to provide during their sales calls.

Andexxa Approval in Europe

The CHMP has just issued a positive opinion on Ondexxya which is the European brand name for Andexxa. The Company believes that this will lead to EMA approval in May 2019 and it expects some sales in late 2019. The recommendation as in the US is conditional but the conditions are quite reasonable and much the same as in the US. The EMA timeline has not been released, but Portola expects European regulatory approval in early May. The data that Portola is required to provide is the final study design for the ANNEXA-4 trial which is nearly complete and then the final study results when the trial is completed in 2023. The European are also are asking for some additional pharmacokinetic data relating to dosing with Gen 2 product just as the FDA has.

Portola doesn’t think that the conditional approval will have any meaningful impact on adoption and utilization nor on the potential for a partnership deal in Europe.  They are getting very positive feedback from European thought leaders about the need for the drug. The fact that Andexxa was approved on a conditional basis can be taken as an indication that there is a high unmet need.

The commercialization plan for Europe is to stage introduction with the first focus being in Wave 1 countries which are Germany, the UK, Austria and the Nordic countries. Portola says that there is about 50% greater per capital usage of factor Xa inhibitors in these countries and estimates that the overall usage in Wave 1 countries is about the same or perhaps greater than in the US. Presumably the 140,000 hospital admissions due to Factor Xa-related bleeds in 2017 in the US is roughly the same in these Wave 1 countries. German sites are part of the ANEXXA-4 trial which should help uptake in Wave 1 countries.

The approach to pricing in Europe is different than in the United States and varies country-by-country. Generally Xarelto and Eliquis are priced much lower than in the US. How this will affect Andexxa pricing is not yet clear. In any event, the market opportunity is very significant. Pending final regulatory approval and the time it takes to complete pricing negotiations, Portola anticipates reporting its first European sales late in the second half of 2019. In parallel, they will continue to evaluate partnership opportunities in Europe and beyond.

Wall Street Analysts’ Questions on Stocking

One of the points of greatest interest and uncertainty for stock analysts is how much of the sales reported in 4Q, 2018 represented real demand and how much was due to stocking. During the fourth quarter, Portola shifted from drop shipping Andexxa upon a request from a hospital to using a specialty pharmacy company for distribution. This which might lead to more inventory building at the distributor level.

Portola actually doesn’t have clear data on hospital usage, at least in real time. They have a lot of anecdotal information and they can somewhat assess hospital demand by looking at reorders. Analysts questioned whether Portola had a sense of the size of reorders relative to initial orders, i.e. whether they are larger or smaller than the initial order. Initial orders were said in the past to be not excessively large. With that said, the reorders do seem to be slightly smaller.

In terms of stocking, management says that it will provide more information on hospital demand and stocking in its Q1, 2019 conference call.

Cerdulatinib

Portola’s lead pipeline product is as an oncology drug that is a combined Syk/JAK inhibitor. PTLA has conducted phase 2 trials with this drug and reported that in January 2019, it had a very productive end of phase 2 meeting with FDA. Portola believes that an agreement has been reached on a potential path forward for accelerated approval peripheral T-cell lymphoma (PTCL). The agency agreed that the single-arm study design is reasonable and would support accelerated approval. Before they can begin this registrational trial, the FDA has requested additional data supporting the proposed dose and Portola is in the process of submitting. Pending the outcome of discussions with the FDA, PTLA anticipates starting the registrational study before year end 2019.

Portola estimates that there are about 3,600 relapsed/refractory PTCL patients in the United States and about another 2,000 relapsed/refractory CTCL patients. The PTCL patients will be the first target closely followed by CTCL. There are multiple subtypes for each of these cancers. Portola claims that cerdulatinib has shown stunning efficacy with a 50% complete response rate in the r/r PTCL patients. The first target of PTCL is aimed at gaining approval or a beachhead from which they will pursue other larger opportunities. The Company singles out combination with Rituxan in follicular lymphoma as a potentially big indication. They see PTCL and CTCL as a way of demonstrating the really powerful efficacy of this drug, getting an accelerated approval path forward and then broadening its usage into combination with Rituxan.

Portola is very likely to partner cerdulatinib but hasn’t given any specifics on the type of partnership it might be seeking.  

Bevyexxa

Almost all of the marketing focus and spending is now focused on Andexxa. For Bevyexxa, they have narrowed the marketing focus down to just a few centers of excellence. It is a very minor part of overall spend. They are continuing to evaluate potential partnership opportunities for Bevyxxa.

Financial Position

Portola ended 2018 with a cash balance of $317 million, compared to $534 million at December 31, 2017. They just announced that they have secured $125 million in a non-dilutive senior secured loan from its long-term partners, HealthCare Royalty Partners and Athyrium Capital Management. They now have cash to fund the ongoing commercialization of Andexxa in the US and launch preparations in Europe. With this transaction, they have extended their cash runway to the end of 2020.

2019 Guidance

The Company has issued guidance that R&D expenses for 2019 will be in the range of $125 to $140 million. This includes an estimated non-cash expense for stock-based compensation of $22 million so the approximate cash outlay will be about $100 to $120 million. The guidance for SG&A is for $200 to $215 million with stock based compensation of $36 million so that cash expense will be about $165 to $180 million. The combined cash outlay attributable to the combination of research and SG&A is then $265 million to $300 million.

The Company has given no guidance on cost of goods sold for 2019. The longer term goal, perhaps for 2020 or 2021, is for COGS to be 15% to 25% that is a blended rate for Europe and the US. So for in 2020 and 2021, For FY 2018 COGS was 88% based on $14 million of Andexxa sales. 

The 2019 spend includes initiation of the randomized controlled trial for a surgical study and other label-enhancing plans for Andexxa as well as the ongoing validation of a second manufacturing site at Lonza. It also includes the expansion of the sales force and marketing efforts in the U.S., including medical affairs activities as well as preparations for the commercial launch of Ondexxya in Europe.

They have manufactured and expensed through R&D enough Gen 2 product that they believe will meet the anticipated demand for the next few years. For 2019, cost of sales will include the remaining Gen 1 product that they have on hand and plan to sell during the transition to Gen 2.

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