Originally posted on https://financhill.com/blog/investing/catalyst-pharmaceuticals-stock-prediction

Investing is often a matter of choosing the companies that make or sell the next big thing. The concept is simple enough in premise, but its successful execution is more difficult – especially when you are referring to the next big thing in the world of medicine.

It is difficult for companies to get approval for new medications. Less than 14% of all drugs being developed ever receive FDA approval and that figure is even less in certain treatment areas. For instance, cancer drugs get approved less than 3.4% of the time.

The cost of developing and testing the drugs that fail has to be amortized. If the company you are considering has a large stable of drugs under development, this may not be a problem. In fact, some companies like Merck [NYSE: MRK] are big enough to choose to tank their own drugs (in this case, anacetrapib) when they think the risk is too great – even with positive clinical trials.

The profits from a successful drug can go to fund future development, but it doesn’t always work out that way. A failed drug trial can cause smaller firms to fail.

Plus, even getting approval is no guarantee of profitability. Whether you choose to invest in pharmaceuticals or biopharmaceutical stocks, those companies are still businesses at the end of the day.

They need to work to convince doctors to prescribe their medicines and insurance companies to cover the cost. Not every pharmaceutical has the chops to handle all of these job functions well enough to profitable.

Then, on top of everything, these companies have to convince their investors that they are worth the risk, even if their drugs do fail or they haven’t had a profitable year yet.

It is a tough order. Some companies, even young ones, are better suited than others to the challenge, but you have to do your homework. Let’s take a deeper look at Catalyst Pharmaceuticals [NASDAQ: CPRX].

Catalyst Pharmaceuticals [NASDAQ: CPRX] specializes in developing biopharmaceutical treatments for neurological diseases and conditions, including chronic neuromuscular problems.

In January 2019, the company started selling Firdapse® in the US. The product contains amifampridine phosphate and is used to treat the autoimmune disease Lambert-Eaton Myasthenic Syndrome (LEMS) – and that’s important. 

“Because amifampridine phosphate (Firdapse®) had previously been granted Orphan Drug designation for the treatment of LEMS, we have received seven years of marketing exclusivity for this indication,” explains Catalyst in its 2018 Annual Report.

“Further, since we were the first pharmaceutical company to obtain approval for a product containing amifampridine, we have also received five years of marketing exclusivity with respect to the use of this product for all indications, running concurrently with the seven years of orphan marketing exclusivity described above.”

Firdapse® is unique because it is the only drug that has been approved to treat LEMS in the EU and it is currently being used in trials to test its use in congenital myasthenic syndromes (CMS) and MuSK antibody positive myasthenia gravis (MuSK-MG) as well as spinal muscular atrophy (SMA) Type 3.

One problem with Catalyst [CPRX] is its pricing model.

As explained in its annual report, the company “established pricing for Firdapse® at an annual list price of $375,000 for a typical LEMS patient who remains 100% persistent and compliant with therapy for an entire year” – and that resulted in some bad press.

Even Senator Bernie Sanders got involved and accused Catalyst of fleecing its customers and the American people by pricing its drug so high.

The company defended itself by saying that the needs of LEMS patients had been largely unmet until the introduction of Firdapse®.

There are around 3,000 people in the US with LEMS and only 200 of them had been receiving a product that contained amifampridine.

In order to develop the drug, Catalyst had to submit over 70 clinical trials to the FDA and the price tag to do all of that was well into the millions.

Basically, it priced the drug so high to amortize its costs to develop Firdapse®.

While Catalyst has said that its “goal is to ensure that no LEMS patient is ever denied access to Firdapse® for financial reasons,” the jury is still out on how this pricing gamble will go.

If Catalyst is able to prove that Firdapse® is successful in treating other diseases and conditions, it may be able to spread its costs over more patients and get the cost of treatment to a more palpable state.

There are roughly 1,000 to 1,500 people in the US with CMS, 3,000 to 4,800 with MuSK-MG, and 2,500 to 3,500 people with SMA Type 3.

That said, the damage may have already been done. It could cost the company some goodwill and there is always the issue that the market size for the drug is very small. Many people will not be able to afford the drug.

Further, Catalyst doesn’t have many feelers out there to spread the word. The company has just 20 people working in the field as account managers and insurance support and only six people working with doctors to inform them about Firdapse®.

While the stock is not a loser, it does deserve caution.

Catalyst has enough cash on its books to keep the lights on for another year, but there are many reasons to think that the company won’t get there.

Plus, even if everything works out – Firdapse® gets approved for everything and the bad press fizzles out – Catalyst may not treat a large enough client base for the share price to see the sort of bump that is going to make the investment worth the risk.