Expert Financial Analysis and Reporting

Full Year Sales of Andexxa were Impressive but there was a Troubling Drop in Sequential Sales in US in 4Q, 2019

Portola held a conference call on January 9, 2020 to pre-announce disappointing 4Q sales for Andexxa in the US. Following its launch in May of 2019, Andexxa recorded US sales of $24 million in 2018 and management is now projecting $107 million for 2019. Portola management states that it believes that this has been one of the top five hospital drug launches in the U.S. in the last 30 years. However, the Company said that 4Q. 2019 net revenues in the US were $24.0 million, which compares to $14.0 million in the same period a year ago and $33.0 million in third quarter 2019. The steep sequential decline in US sales from 3Q. 2019 to 4Q, 2019 triggered a 35% sell off of the shares to $15 per share.

The Company first recorded European sales for Ondexxa (the brand name in Europe) of $2.7 million in 3Q, 2019 and 4Q, 2019 sales rose sequentially to about $4 million. This looks to be a good start. Global revenues for Andexxa in 2019 are expected to come in at about $111 million.

Reasons for the Sequential Drop and How Management is Addressing the Issue

The 2019 full year results are quite impressive in the US and promising in Europe, but the sharp sequential decline in US sales in 4Q, 2019 raises the question of whether physician demand dropped in the 4Q and if so, why. In its press release, management singled out two causes for the 4Q disappointment:

• A $5 million gross to net adjustment due to a return reserve for short-dated product. The Company expects this to be largely mitigated going forward by its current longer-dated, 36-month product, which it began shipping in November 2019.
• A quarter over quarter demand decrease in tier 1 accounts. While management believes that physician demand remains strong, it said that in certain of these accounts, hospital pharmacies were instrumental in reducing use or purchase (the role of each is uncertain) of Andexxa following drug utilization reviews in an effort to manage pharmacy budgets. Following this 4Q reduction, management stated that re-ordering patterns are stabilizing in many of these accounts but didn’t put this in perspective as to what this might mean to sequential sales growth for 1Q, 2020 over 4Q, 2019.

In listening to the conference call, the explanation of these two causes and how they might affect future quarters was less than clear. The Company began shipping product with meaningfully longer dating in November of 2019 and feels that this should largely eliminate future returns although it did not totally rule out some modest future impact. They stated that much of returned product was replaced by longer dated product. I don’t see this as much of a factor going forward.

The second issue is more difficult to understand. The explanation of management suggests that the shortfall in demand was pharmacist (cost driven) and not physician (demand driven). This suggests that hospital pharmacies actions were motivated to reduce costs which could take the form of reducing inventory levels or restricting the use of the product to certain well defined situations. In this early phase of the launch, there is still limited data on clinical and health outcomes for Andexxa. Management is addressing this with three abstracts at the American College of Cardiology Annual meeting beginning on January 18, 2020 and then at the World Congress of Cardiology which begins on May 21, 2020. These abstracts show a favorable impact of Andexxa on in-patient mortality, burden of illness and pharmacy budget impact according to management.

On a parallel track, Portola will intensify work on helping pharmacies to understand how they can reduce acquisition costs and facilitate reimbursement through using New Technology Add-on Payment (NTAP) for Medicare beneficiaries in the inpatient setting; a pass through C-code for Medicare and commercial patients in the outpatient setting; participation in both Medicaid and the 340B drug pricing program; and consignment opportunities.

Is Product Demand an Issue? My Best Judgment is No

The product dating issue would seem to be largely behind us with the shipment of 36 month dated product. So, we are left with the issue of whether this is a demand problem or just a temporary roadblock resulting from pharmacy cost reduction efforts and reimbursement issues that will be smoothed out over time. The evidence to me suggests that it is the latter.

• There is no other product approved for addressing serious, life-threatening bleeds caused by the two dominant Factor Xa inhibitors, rivaroxaban and apixaban.
• In its regulatory review, the FDA recognized the therapeutic importance of Andexxa by designating it as a breakthrough product.
• Importantly, in the first quarter of 2019, Andexxa was incorporated into important new joint guidelines adopted by the American Heart Association, the American College of Cardiology, and the Heart Rhythm Society which recommended Andexxa as the only agent for the reversal of life-threatening bleeding associated with rivaroxaban or apixaban.
• Management indicated that Andexxa was used to treat about 4,000 patients in the US in 2019 and that it believes that the addressable market is 150,000 patients per year. If the latter estimate is roughly correct, Andexxa has barely scratched the surface in terms of potential use. The addressable US market in dollar terms could be as much as $4 billion.

Investment Thinking

My best judgment is that this is not an indication that Andexxa has hit a wall. I continue to believe that it will be a commercial blockbuster. There is a huge unmet need in a large patient population of Eliquis and Xarelto users who suffer life threatening bleeds. The strong endorsement of the FDA in its review of the drug and the strong support of key opinion leaders who write medical society guidelines is very encouraging. And, market penetration is very low.

Still, this remains to be seen. On the conference call, management did not do a good job of explaining either the return issue or the decrease in utilization in tier one accounts. They seemed to have put the call together hastily and perhaps they are still trying to figure out what went on in the fourth quarter. At this point in time, I don’t feel that I have a good sense of the 4Q issues and how they can be addressed and I don’t know if the impact is just a one quarter phenomenon or has implications for a meaningful part of 2020. There have been continual concerns among analysts that Andexxa sales in 2019 were importantly influenced by inventory building and not actual demand. The 4Q results support this hypothesis.

The decline in the stock was mind numbing and actually started a week or more before yesterday’s call suggesting that some investors knew something before then. I think that what I perceive as an extreme over reaction on he downside, was in part the result of the failure of Portola to successfully commercialize Bevyexxa. This has left a cloud over the stock. I also believe that the profound role that computer generated trading plays in the current market also exacerbated the sharp slide.

I think that many investors will take a wait and see attitude on Portola until they can gain a better understanding of the 4Q issues and/or upcoming quarterly results give a meaningful indication that Andexxa sales are on track for a major increase in 2020. This might take one or more quarters of encouraging sales gains. My intuition is to add significantly now to my position, but before doing that I would like to hear what Portola management will have to say on a conference call scheduled for 10:00 AM on Tuesday January 14, 2020. I would hope for a clearer explanation of what went on in the 4Q.

The Company has a strong cash position to continue to invest in the launch of Andexxa and Ondexxa. As of December 31, 2019, Portola had a cash position of $464 million. Even though it has a ferocious burn rate as shown by cash loss from operations of $64 million in 1Q, 2019, $54 million in 2Q and $47 million in 3Q, there appears to be no need for additional capital in 2020.

On a Positive Note, Urgent Surgery Could be a Major New Indication

A registrational study in urgent surgery is scheduled to start in 2020. Portola estimates that approximately 60,000 patients on rivaroxaban or apixaban in the United States must undergo urgent surgery each year and could benefit from the use of Andexxa. This represents a new addressable market opportunity of $1.7 billion at the current price. In listening to Portola’s Analyst Day presentation on November 14, 2019 I was very impressed by anecdotes from surgeons who were already using Andexxa for this indication. In one case, the surgeon noted that his hospital was being reimbursed even though this is currently an off-label use.