Via SeekingAlpha.com

Provention Bio (PRVB) is a small-cap biotech company focused on developing drugs to combat autoimmune diseases – in particular, Type 1 diabetes (T1D).

At the time of writing, it trades at a share price of $9.85, giving a market cap of $470m and an enterprise value of roughly $385m. I believe this market valuation greatly undervalues the true potential of the company – in fact, I’d go as far as to say it’s the best risk/reward play I have come across in my recent research – and will explain why below.

Type 1 Diabetes

The company at present is focused on its lead drug, Teplizumab, which is a humanized monoclonal antibody intended to delay the onset of T1D.

T1D is a devastating chronic autoimmune disease, generally well-known by the public, that requires lifelong medical management including daily insulin injections. PRVB pointed out that over 75% of T1D patients are poorly controlled, which leads to many complications (Cardiovascular disease, kidney disease, amongst others), and a life expectancy of roughly 16 years shorter than average if diagnosed by age 10.

Clearly, T1D is a dreadful disease – but there are currently no preventative or disease-modifying treatments, and there have been no new therapies since 1922. There is an enormous medical need.

Provention is attempting to tackle this with Teplizumab, and appears to be on the right track.

Teplizumab for “At Risk” T1D patients

I will begin by its most advanced indication – the use of Teplizumab for the delay or prevention of T1D in “At Risk” patients.

A Phase 2 trial was undertaken, conducted by TrialNet, to investigate whether Teplizumab could affect the onset of T1D in a group of 76 patients. The trial design can be seen below:

Source – Company presentation

The results were striking. Teplizumab significantly delayed a T1D diagnosis by a median time of 2 years vs. placebo – and some patients were yet to develop T1D over 7.5 years from start of treatment (P=0.006). Annualized rates of T1D were 14.9% vs. 35.9% in placebo. The drug was tolerated well – which is also backed up by data from previous, separate trials in which over 800 newly diagnosed patients also received the drug. More on this later.

Source – Company Presentation

These results, to my eye, were an absolute home run, and the FDA appears to agree. Provention received the coveted Breakthrough Therapy Designation from the FDA in August 2019, and EMA PRIME Designation in October 2019. Further to discussions with the FDA, Provention intends to file a rolling BLA submission without a Phase 3 trial, solely relying on the Phase 2 results, as well as safety data from the aforementioned >800 patients in other trials.

The fact that the FDA has agreed that this is a suitable approach, in my opinion, is very promising for the approval chances of Teplizumab for at-risk patients, and this is about as de-risked as it could be. The company recently reiterated it remains on track for submission by the end of this year, leading to likely US approval in 2021 (and possibly the year after in the EU).

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The main risk here, in my opinion, is Provention’s manufacturing process – and submission of CMC module – could be disrupted or delayed by COVID-19. I am hopeful that this will not be an issue – but it is worth keeping an eye on.

Market Potential

It is extremely exciting that Teplizumab could shortly become the first approved treatment for T1D in 100 years, and the first ever to actually delay onset. The potential relief this could bring to patients and families is incredible. I feel the below passage – taken from a report of a recent Provention investor call – brings home the impact this drug could have:

[Andrew Deschler, CFO] has 4 children and 3 of them have T1D. He described having to get up several times a night to check levels and the constant battle to keep a child’s system in balance and when it went out of balance the days it would take to get it back in balance. He mentioned he would have given a limb just to delay the diseases onset by just 2 years when his 2 year old was diagnosed.”

Clearly, this drug, if approved, will be in high demand from families of children at risk of the disease. Let us consider the market size:

Source – Company Presentation

Source – Company Presentation

As you can see, Provention will initially be targeting the ~30,000 familial direct relatives of T1D patients. However, the at-risk population is significantly higher and therefore future market potential could eclipse what the company is now targeting.

A key point is the current drive to implement wider T1D screening. The more children screened, the more at-risk patients are picked up who could benefit from earlier intervention with Teplizumab. The combination of more screening, and the approval of Teplizumab, could truly transform the treatment of T1D across the world and delay and/or prevent so much suffering.

However, to attempt a fundamental analysis of the potential market size for Provention, let us assume the base case of 30,000 addressable patients. If we assume a 25% uptake (7,500 patients), priced at $100,000, this leads to a $750m peak revenue estimate for US alone. We must remember, however, a higher market penetration could be possible, due to the potential benefit and the drug’s efficacy. In addition, there is the potential for ongoing dosing to prolong the period before T1D is developed – the company intends to investigate this further but is hopeful for positive results. This again would increase potential revenues.

To counter my estimate, a recent Cantor Fitzgerald research note estimated $450m peak sales for at-risk patients. It also estimates $350m in overseas sales (the company is looking to partner for non-US sales).

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Applying the industry standard 3-5 times peak revenues multiplier for valuation (I will err on the side of caution and use 3), it is clear that a market cap in excess of $2B could be justified. As a reminder, current market cap is just $470m!

Again, I reiterate that with a drive to more widespread screening, this at-risk population could increase and these estimates could be wildly conservative.

In terms of cash, the company states a cash runway through to mid-2021. It ended 2019 with $85m in cash. Clearly, if it chooses to go it alone, at some point it would need to raise further funds. I believe the chances of some kind of partnership (or whisper quietly, a buy-out) are fairly high due to the lack of competition in the space, the excellent results and the future potential of the drug (see below).

For a largely de-risked drug such as Teplizumab, I like these odds.

Newly-Diagnosed

The above is the base case. Now let us consider the further potential of Provention.

Source – Company Presentation

Provention is committed to treating and/or preventing T1D at every stage.

We have only so far covered Stage 2 in the above graphic. Stage three – newly diagnosed patients – is a patient population with 64,000 new diagnoses each year in the US alone. There is reason to believe Teplizumab can help many of these patients, too.

Source – Company Presentation

I mentioned prior studies into this newly-diagnosed designation earlier. These are summarised below.

Source – Company Presentation

The primary end-point, difference in C-Peptide, did not show enough of a change in the Phase 3 Protégé study to be seen as a success. However, analysis of the results showed that in younger patients (8-17 year old), the drug had a more significant effect (shown in the sub-group above). This is what drove the Provention team to acquire the asset in the first place.

Provention seeks to investigate this further with its upcoming Protect Phase 3 trial, Protect. Unfortunately, this trial has been disrupted by COVID-19 and enrolment is currently delayed. However, when it does go ahead, I believe it has an excellent chance of success in its target age range (8-17 year old) which could increase Teplizumab’s market substantially.

There are further avenues of expansion, which I believe also have good chances of success, summarised below:

Source – Company Presentation

Overall, when it comes to T1D, Teplizumab seems to have the potential to help many patients – whether that’s in the initially targeted at-risk category, the newly-diagnosed category, further age ranges in both, and even in other autoimmune diseases.

It is a potential blockbuster drug.

Provention have other irons in the fire, including an intriguing Coxsackievirus B vaccine, which could tackle T1D (and celiac disease) progression at an even earlier stage. There is too much for me to cover in this single article, but suffice to say, these other pipeline drugs are not in any way reflected in the market cap.

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Hedge Fund Interest

Perceptive Advisors, a top hedge fund, is the largest institutional holder of Provention stock, having recently made a large purchase in Q1 2020. Its estimated average price was $13.09 – above the price today. This is a rare chance to buy in at a lower price than the big boys.

Overall, institutional ownership is in the region of 39%, and insider ownership in the region of 12%.

Risks

One risk to the thesis is unforeseen disruption due to COVID-19. However, the company has stated that, even though its Phase 3 trial for newly-diagnosed patients is delayed, its main submission (at-risk patients) is on track and it is not anticipating a problem. Of course, this could change, depending on the progression of the pandemic, which could delay the commencement of sales and trigger a shortage of cash to get through to commercialisation.

Even if things remain on track, it is unlikely Provention has enough cash to commercialise as it is. However, I am anticipating announcement of a partnership for foreign sales which may bring in a large cash injection. However, a dilutive cash raise remains a possibility.

There is also the possibility the FDA does not grant approval to the drug. However, due to such positive feedback from the FDA, including not requiring a Phase 3 trial, and granting Breakthrough therapy designation, I believe the approval process is very de-risked.

Conclusion

I believe Provention is worth multiples of its current valuation. Considering the current, mostly de-risked route to market for at-risk patients alone, I give an initial price target of $30. I feel this should play out within a year.

I believe the true value is even higher than this – Teplizumab could be a true blockbuster drug as additional indications are added. Repeat doses to prolong prevention (indefinitely?) of T1D are also possible and I do not believe these are built into analyst models. I believe there could even be a place for the drug in patients already living with T1D. The company’s other pipeline drugs are an added bonus, as is the possibility that Teplizumab could be used for other autoimmune diseases such as rheumatoid arthritis. It is difficult to imagine what a reasonable market cap would be if some of these work out over the next few years.

This is my highest conviction biotech pick – and one I intend to hold for a long time.

Disclosure: I am/we are long PRVB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.