Penwest Pharmaceuticals Co Co (NASDAQ:PPCO)

Significant development

The GeoTeam is intrigued by the Penwest Pharmacutical story:

• After three years of losses the company finally posted a profit in the final two quarter of 2009
• Company has issued 2010 revenue guidance of $43 million to $45 million vs. $23.8 in 2009.  
• Analyst estimates peg 2010 EPS at $0.79 ($0.51 tax adjusted) followed by EPS of $1.02 ($0.65 tax adjusted) in 2011. We still need to verify if these estimates are taxed, but as the company has lost money for several years we will assume that taxes won't be an issue for the next few years.

Along with revenue guidance the company also has estimated:

• SG&A expense to be in the range of $6.5 million to $7.5 million
• R&D expense to be in the range of $10.5 million to $11.5 million.

The company did not provide any other cost inputs. We used the above expense assumptions along with cost relationships in the 2009 fourth quarter to derive a 2010 EPS estimate.

Doing this gave us a 2010 EPS estimate of $0.60 ($0.39 taxed), which is lower than analyst estimates, but still impressive coming of a loss in 2009 and does not take into account cost savings PPCO is banking on.  Note that PPCO has been meeting analyst estimates. Of course, our estimate could be off as we have not interviewed the company.

There are some caveats:

• We are curious if estimates include 4,070,301 warrants with an exercise price of $3.62 per share.
  
• PPCO currently derives the majority of its revenues from royalty payments from Endo Pharmaceuticals Inc.  From our 20+ years experience this type of revenue stream often leads to discounted valuation multiples due to the inconsistent nature of royalty revenues. In the case of PPCO, the revenue stream may be consistent, which could eventually persuade investors to assign shares more of a premium multiple.

"Opana® ER is an extended release formulation of oxymorphone hydrochloride that we developed with Endo Pharmaceuticals Inc., using the Company’s proprietary extended release TIMERx® drug delivery technology. Opana ER was approved by the United States Food and Drug Administration, (“FDA”), in June 2006 for twice-a-day dosing in patients with moderate to severe pain requiring continuous, around-the-clock opioid therapy for an extended period of time, and is being marketed by Endo in the United States. In 2009 and 2008, the Company recognized $19.3 million and $5.0 million, respectively, in royalties from Endo related to sales of Opana ER. In June 2009, Endo signed an agreement with Valeant Pharmaceuticals International, (“Valeant”), to develop and commercialize Opana ER in Canada, Australia and New Zealand. Opana ER is not approved for sale in any country other than the United States."

• PPCO has not been clear on the magnitude of profitability which is why it may have not provided full cost guidance assumptions"

"The Company expects to be profitable for the full year 2010. This guidance for revenues and profitability is dependent upon projections that Penwest has received from End"o for 2010 net sales of Opana ER."

"As we look forward to 2010, we expect to generate increasing levels of profitability and cash, to obtain results from the two Phase IIa trials that will enable us to make a 'go/no-go' decision on A0001, and to further grow our drug delivery business."

• There are always regulatory risks when dealing with the FDA.

With a forward P/E range of 7.11 to 9.3 based on a tax adjusted EPS range of $0.39 to $0.51, PPCO seems worth tracking and may attract risk tolerant investors. Will code as a Rrsky GeoSpecial.