Provention Bio (PRVB): Downgrading To A Hold

Background

As we predicted in our previous article, since we published our article, Provention Bio, Inc. (NASDAQ:PRVB) has rallied close to 50% and now is trading around USD 7.47 dollars per share (as of March 31, 2022). The FDA has accepted the BLA re-submission, and we believe the short-term regulatory overhand is gone. However, we believe until the PDUFA date, there isn’t any fundamental catalyst that could move the needle. As such, we believe the stock could suffer from sell pressure (more short-sellers will target the company), and we see a potential public offering imminently on the horizon.

We continue to like Teplizumab long-term

As explained in our first initiation article, we like Teplizumab due to its attractive market size and high unmet need (without any approved candidate except for insulin). In this article, we will focus more on the short-term risks than re-iterating the clinical data as nothing has fundamentally changed since the previous publication.

More dilution may be on the horizon

Considering the current price of the stock (more than 100% higher than the 52 week low), previous track-record of dilution, and the limited cash runway of the company, we believe management may raise capital soon, diluting investors’ shares. As mentioned during the Nov 2021 conference call, the company has a cash runway until the end of 2022. We view cash runway <1 year as a red flag.

Valuation: we are re-iterating the target price of USD $10 (Assuming that dilution does not happen).

To recap my previous article, if the drug gets approved on the PDUFA date, using peak sales of USD $650M (consensus figure) and using Pharmaintelligence’s probability of success statistic, the drugs that file for BLA, for type 1 diabetes indication, would have approximately 80-90% of probability of success. Assuming 2022 approval, and commercialization of the drug in 2023, using a peaks sales multiple, we get a valuation of around USD $1-1.2 Bn. This mean that appropriate target price would be USD $10.

The bear case would be if the Teplizumab application fails to get approval from the FDA, the downside would be close to cash value (USD $150M), meaning a stock price around the $3 range.

Key catalysts to follow

As announced during the earnings conference call held on 24 February 2022, the company plans to hold an investor educational event in 2Q22 to provide:

“in-depth insight and details regarding teplizumab […] launch and commercialization.”

We believe this event may be a short-term catalyst, as the company may publish more information about the potential label discussion with the FDA. However, we do not see this event as a major catalyst that we can hang our hat on. The key date that we are looking forward to is 17 August 2022, which is the big day where the FDA will decide the fate of Teplizumab (FDA PDUFA date/FDA PDUFA date).

Risks: managing risk is key in a bear market

• For investors who took profits, the stock may rally, and investors may miss out on the gain.
• Investors may have to pay capital gains tax for selling earlier than expected.

Conclusion: sell now, get back in later

In conclusion, we remain bullish long-term and maintain our target price of USD $10 (provided that the company doesn’t clobber everyone by diluting again). However, we exited PRVB after the FDA accepted the company’s BLA, and we are planning to re-enter PRVB close to the PDUFA date (August 2022) due to potential dilution risk. We believe PRVB will temporarily go side-ways or slide downward until we get close to the PDUFA date.

Furthermore, as the stock price has appreciated more than 100% compared to the 2022 low, the risk-reward at this point is not as attractive due to the company’s well-known history of disappointing investors through dilution. In a bear market like what we are seeing today, where key biotech indices (such as the SPDR S&P Biotech ETF (XBI) and and the iShares Biotechnology ETF (IBB)) are trading down close to their 2018 levels, we believe it is wise to exercise caution and take profit when we can and trade in a nimble manner.