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Stock Review: Pain Therapeutics (PTIE)

Pain Therapeutics (PITE) is a branded pharmaceutical development concern. The company is essentially hitched to King Pharmaceuticals (KG), and even more specifically to the success or failure of a single drug - Remoxy, a form of Oxycontin designed to resist chemical and physical manipulation. Let's take a look at PTIE's business model.

The company receives revenues in three categories: collaboration, program fees, and milestones. All of these payments are coming from King in a joint-venture development program for Remoxy, as well as two other earlier stage candidates who's indications are not yet known. Collaboration revenues are reimbursements from King for R&D expenses. Program fee revenues are a pro-rated accounting of a $150 million up-front payment from King at the outset of the collaboration in 2005. They amount to about $3.6 million in revenue a quarter, and will be recorded through 2014, but do not provide ongoing free cash flow. Finally, milestone payments are one-time payments from King for reaching a critical milestone, such as submission to the FDA, which PTIE received a $20 million payment for in the middle of last year.

Remoxy is a very important drug for King, potentially representing anywhere from $500 million to $1 billion in annual sales. Oxycontin is a widely used pain management drug, and at over $2.5 billion in sales in 2008, one of the top 10 selling pharmaceuticals in the world. However, due to its euphoric effects, it is also a very popular recreational drug. The standard long-release delivery method of Oxycontin is easily tampered with by recreational users, who break open the capsule to prevent the long-release method and to maximize the desired effect. The ease of tampering can also lead to accidental overdoses from those using the drug for pain, as any breaking of the capsule can lead to accidental overdose. Remoxy is designed to prevent these kinds of uses of oxycodone, the active ingredient.

Pain Therapeutics stands to collect a large financial windfall if Remoxy becomes commercially successful. The agreement with King stipulates a 15% royalty rate for the first $1 billion in sales, and 20% thereafter. At $500 million a year in sales, that amounts to $150 million in revenue for Pain Therapeutics, a 3-fold increase from current revenue levels. Additionally, PTIE still stands to collect another $125 million in milestone payments related to Remoxy's successful development.

There is a major risk, however. Remoxy was rejected by the FDA last December, and currently King does not expect to re-submit the New Drug Application (NDA) to the FDA until the middle of next year, giving them time to collect stability data. Also, approval could be pushed out even farther due to an ongoing patent dispute with Purdue Pharma, creator of the original Oxycontin. The ultimate approval of Remoxy has been handicapped at about 60-70%, not real encouraging odds. And in any case, it's a sure thing that no royalty or milestone revenues will be collected by Pain Therapeutics in the next year. Plenty of other pharmaceutical companies are developing a similar tamper-proof Oxycontin, which will push margins lower on Remoxy.

Pain Therapeutics is also one of those misleading MFI stocks. Sure, in the past 12 months the company is profitable, but only because of that one-time $20 million milestone payment last year. Without any milestone payments on the horizon, this is a company that is not profitable on an operating basis. The company has plenty of cash ($186 million) and no debt, but aside from Remoxy, there is nothing in the near term pipeline to prop up revenues. It's also possible that the collaboration agreement with King could be terminated if Remoxy is not approved, which would make it difficult for Pain Therapeutics to even operate.

With a whole slew of major risks and serious questions about the future of Remoxy, Pain Therapeutics is a lottery ticket and should probably be avoided by MFI investors.

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