As mentioned in the introduction, a significant contributor to this month’s stellar performance was our holding in Paradigm (PAR) which has now increased >400% from our average entry price. We have done a lot of research on the company and firmly believe this stock could eventually trade into the hundreds of dollars per share. Yes, you have read that correctly – pending several things going in their favour.
While there are a few years before that happens, however, should Paradigm pass their phase 3 trial and register their drug to treat Osteoarthritis (OA), we believe the company valuation will ultimately trade based on the opportunity ahead. Not to mention the revenue and profits they will generate from being a first-line treatment for this disease.
If Paradigm's forthcoming secondary endpoints (likely any day now) show positive results, in particular, stopping the progression of the disease demonstrated via MRI scans, and that the durability against placebo continues into the later days post the trial endpoints - this will be a major medical breakthrough.
Given they have already accumulated a huge data set with the SAS cases, we anticipate these results will show what we've always believed and heard from doctors, patients, and experts while undertaking our research - that this drug is like nothing else on the market. Not only does it reduce pain, but it also improves function and treats the underlying cause of the disease. In our view, this is the holy grail and ultimately it could transform into a blockbuster revenue opportunity for the company.
A lot of people suffer from OA around the world, and Paradigms drug could be the frontline treatment.
To put this opportunity into perspective, there are over 630 million people around the world suffering from various stages of OA, with no treatment that effectively manages the disease. If Paradigm can demonstrate that their drug not only reduces pain, but it also stops the progression of the disease, and improves quality of life then it would likely become the first line treatment for this disease.
With an excellent safety profile, it would likely command a premium price when it finally comes to market. But for simplicity and conservatism, if a course of 12 injections cost only $1,000, with just 10 million people treated (1.5% of addressable market of 630m people), this would generate over 10 billion dollars in revenue.
Any company that can trade as a monopoly, with a superior product will see sales ramp up very quickly. This, along with extremely high gross margins (>80%) and the requirement for repeat treatment, should appeal to investors. As our latest research note detailed (available on our website), the company may even have this monopolistic position beyond its patent life.
Regardless, any company with the qualities described above would likely trade at a valuation representative of the quality of that business. Some examples we illustrate below are averages of pharmaceutical companies trading in the developed world.
Note: We used 175m shares on issue for Paradigm with the share price equivalent calculations.
Please note: we aren’t saying that Paradigm should be valued at this price now, but we do want to stress the point that should they successfully commercialise their drug, and they achieve sales in the range of these other developed market companies, then is it unreasonable to expect valuations in this range? While the company has a number of hurdles to pass before first revenue, if they do pass a phase 3 trial and ramp up sales, then this could be where the company is ultimately valued.
Given the pipeline of other indications that Paradigm can also go after, we are confident in the future earning capacity of the company outside of OA. So while we have made good gains so far, we can forsee a lot more potential gains ahead. It is for this reason that we decided to split the shares away from the main series of the fund. Not only does it minimise the volatility for incoming investors going forward, but allows us to maximise our potential gains for our existing investors.
So while we have been pleased with the primary results released so far, we do want to review the secondary endpoints closely, as well as the ultimate design of the phase 3 trial. We believe these are the next major risk/value catalysts for the company. We asses our investment in terms of risk/reward and pending the release of this information, will allow us to make a more informed decision about the potential future valuation of the company.
There is also the other indications - such as MPS - which are likely to progress over the next 12-18 months, so we are excited to see how things play out. A big pharma company may also do a deal with Paradigm, which we have indicated would need to be in the US$2b range to make sense for the OA indication, and potentially a US$1b size deal for MPS.
We expect that should the company post successful phase 2 secondary results; these discussions will begin to ramp up significantly. As we have shown, it is a huge opportunity for a big pharma to seize, and we expect that they will want to partner given the significant revenue it could generate for them. Given that Johnson & Johnson already use PPS for their drug Elmiron, we would think the logical partner would be JNJ, but we will need to wait and see.
PAR Price at posting:
$1.51 Sentiment: Buy Disclosure: Held
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