Paratek Pharmaceuticals, Inc. (NASDAQ:PRTK)

CAPS Rating: 5 out of 5

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Top PRTK Bull/Bear Pitches

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MarkBiotech (27.10)
Submitted October 20, 2017

Although the numbers of antibiotic(AB) blockbusters have dwindled, from facing patent expiry and increased competition, Omadacycline(OMC) isn’t prevailed by such elements. In a era where AB resistance has reached new heights, the rise of alternative… More

NHWeston (36.16)
Submitted July 24, 2012

I'm not sure exactly what is wrong with this company. They have a number of good products but can't seem to make a market and are bleeding cash. Under other circumstances, you might see them as buy-out bait, but something just pushes the big boys… More

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Member Avatar TMFTypeoh (85.74) Submitted: 10/23/2017 1:20:22 PM : Outperform Start Price: $22.75 PRTK Score: -10.69

Next-generation antibiotics play. Approaching this as a basket.

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2
Member Avatar MarkBiotech (27.10) Submitted: 10/20/2017 1:29:49 PM : Outperform Start Price: $21.15 PRTK Score: -12.65

Although the numbers of antibiotic(AB) blockbusters have dwindled, from facing patent expiry and increased competition, Omadacycline(OMC) isn’t prevailed by such elements. In a era where AB resistance has reached new heights, the rise of alternative treatments become more vital. OMC is the first of a new class known as the aminomethylcycline, which is a subclass of the tetracyclines(TTC). TTC was launched in the 1950’s and was widely used for multiple indications but became limited as strains began manifesting resistance. Two types of resistance mechanisms are on the rise for TTC: efflux and ribosomal protection. What sets TTC and OMC apart is that OMC has proven in assay to overcome both of these mechanisms. The introduction of OMC to the market will replace 1st &2nd generation TTC and retain the broad indications TTC once had.

Paratek’s p3 optic results were robust as it is shown to be NI to quinolone class, Moxifloxacin(MFA) with a 95% CI. ECR for OMC vs MFA was 81.1% vs 82.7% and for clinical success PTE-ITT population was 88.4% vs 85.2% respectively. In a PTE perspective, OMC outperformed MFA. OMC will replace quinolones for SOC in pneumonia in port risk I-IV patients, as it offers NI efficacy and superior safety. Quinolones are falling out of favor since its updated black box label that revealed potential permanent disabling of the CNS. Below I have listed the main AB classes that are used for CABP to demonstrate why physicians would prefer OMC over other classes of AB.

Aminoglycosides -
Gram Negative mostly
Black Label, ototoxicity, nephrotoxicity, neuromuscular

Chloramphenicol- black label, bone marrow suppression, irreversible aplastic anemia, toxic,
Gram positive and some gram negative

Oxazolidinone’s- gram positive & some gram negative
Narrow use | as second line for gram positive strains
Specifically, S. Aureus & S.pneumoniae
Omadacycline > linezolid in ABSSSI

Glycopeptide- gram positive only,
Narrow use for pneumonia strains
used as 2nd line , notably S.Aureus & S.pneumoniae

Tetracycline- Both gram positive&negative, rise of tetracycline resistance -resistant mechanism efflux and ribosomal protection
Lower risk of CDI with TTC regimen
Omadacycline shown effective against efflux and ribosomal protection mechanism

Sulfonamides- higher SAE, higher mortality rates vs tetracycline
No longer included in most pneumonia treatment guidelines
Both gram negative&positive

Cephalosporins- mostly gram positive, & less effective against risk II+

Quinolone- Black box label, disabling CNS, increase risk of tendonitis and tendon rupture, gram negative mostly. Falling out of favor-

Macrolide- less effective for risk II+ pneumonia. 34% resistance to s.pneumoniae strain. Mostly gram positive & some gram negative

Penicillin- was once highly used, until increased concerns for penicillin resistance against S.pneumoniae strain. Unclear consensus dosage.
Gram positive only. Less effective against risk II+

ABSSSI omadacycline>linezolid (2013 peak sales 1.4B)
Omnicycline( 750m peak sales)

OMC contains all the components of becoming the next blockbuster AB. It will be the first oral antibiotic approved within the last decade. It is active against both gram positive& negative bacteria and will be approved for 3+ indications: CUTI, CABP, and ABSSSI. The decreased popularity of the use of quinolones& aminoglycosides & the high resistance profiles for macrolides and penicillin will pave way for blockbuster OMC.

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Member Avatar MichaelSeeleyCPA (< 20) Submitted: 1/20/2017 11:31:13 AM : Outperform Start Price: $14.70 PRTK Score: +24.85

In this article we merely seek to use Paratek Pharmaceuticals, Inc. (PRTK) to illustrate (in real time) the benefits of including special situations within a broader portfolio as one means of hedging systematic/market risk and achieving absolute portfolio returns.

Discovering an Opportunity

How did we discover PRTK? Well, the truth is, we didn’t. Although we always seek to follow the great investors’ investing principles, sometimes we literally follow them into stocks, by piggy-backing on their investments. This blatant and shameless means of investment plagiarism isn’t (always) intentional, but when we happen across a situation that looks attractive, only to find out that one or more great investors are already there, and have already laid down much of the investment groundwork for us, we tend to pay particular attention. As Warren Buffett often repeated of his Control situations “Everything else being equal, I would much rather let others do the work.” Of course, we are being cheeky because we always have to do our own work. Sometimes, that work is just made easier when a pathway for our efforts has already been paved for us. [In addition, we are more than happy for the great investors to piggy-back off our hard work and analysis and the fact that none have yet taken us up on our offer does not discourage us at all.]

For reasons we won’t go into here (but which involve our research into potential spinoff investments converging, quite surprisingly, with the due diligence we were conducting into a possible birthday present for one or our significant others who is a native speaker of a foreign language), we found ourselves visiting the website of Roumell Asset Management (RAM) found here where we reviewed Jim Roumell’s 4th Quarter 2014 Report, found here , in which Paratek was highlighted as one of RAM’s Top Three Purchases for that particular quarter. If the Reader wishes to discover how Jim Roumell discovered Paratek, and gain further appreciation of the benefits sharing good company in an investment can bring, the above links contain the story. We found it reassuring to know, that if the worst case scenario were to materialize, as minority shareholders we may benefit from effectual institutions.

Several items struck us as important when we began reviewing Mr. Roumell’s publicly available analysis into PRTK:

First, any time one can follow Jim Roumell and Seth Klarman into an investment thesis, and can do so potentially at a similar or even lower average cost , and can further do so years after the fact when the investment thesis has become even more compelling (given the subsequent time lapse to maturity), and has been incrementally and significantly de-risked from the levels where even the investors we seek to emulate entered; well, that strikes us as a compelling potential opportunity, and is certainly one worth analyzing.

Second, like Seth Klarman, Jim Roumell has the reputation of a deep-value, balance-sheet focused investment analyst, and a cautious portfolio manager that most often invests in (relatively) safe, Benjamin Graham cigar butt-type stocks; so it (initially) surprised us to find him advocating shares in a late-stage, bio-pharmaceutical company. This alone was worth a look.

Third, we read (and watched) everything we could that Mr. Roumell and others had posted on the Company, and we commenced independently confirming as much of what was published about the business, its competitors, the industry, and the FDA approval process as we could find readily available. In every instance where confirmation was possible, Mr. Roumell’s analysis checked out, from market demand, to average probabilities of successful Phase 3 trials for various indications, to the average probabilities of successfully navigating the FDA approval process, to comparables yielded by the take-outs of recent competitors’ antibiotics, to the transparency and competence of Management.

In short, we really liked what we saw in the story, namely: the assets, Management, the investment thesis, and the risk/reward profile. So let’s take a look.

Brief Summary Investment Thesis

The Company

Paratek Pharmaceuticals, Inc. is in late-stage development for a broad-spectrum, bacterial-resistant, effective, well-tolerated, thus-far-safe, antibiotic drug (Omadacycline), available in both IV-to-oral, and oral-only forms. [These are the characteristics for a commercially successful blockbuster antibiotic; meaning these are indicative of commercially successful blockbuster antibiotics currently on the market. Please refer to Slide #s 25, 43, 45, and 47 of the “Paratek Corporate Presentation 1-9-17”, available here, for example.] At last report the Company had over $100M of net cash, an Enterprise Value of $250M, and a Market Capitalization of roughly $350M with shares trading up to nearly $16. We will not review the Company’s history here, but it is worth noting that $400M+ has already been invested in the drugs’ development, so the present time is actually a better opportunity to initiate an investment than has generally existed previously.

[Catalysts - Please refer to Slide #s 39 of the Paratek Corporate Presentation 1-9-17, available here.]

Catalyst(s) - Phase 3 Trials Underway: Six Months to Completion

If one of the two Phase 3 registration trials currently underway - in this case, Oral-only for a skin indication (ABSSSI) - is successful, and is paired with the already successful Phase 3 trial (IV-to-Oral, ABSSSI); the drug could be worth as much as $700M-$800M , more or less.

If the second of the Phase 3 registration trials (CABP) currently underway is successful, and is paired with the previously successful Phase 3 trial (IV-to-Oral, ABSSSI); the drug could quickly be worth perhaps $1B (at the low end) to as much as $1.5B (at perhaps the mid-point) .

The results of the CABP registration trial are anticipated in Q2 2017, and the results of the Oral-only, ABSSSI trial are anticipated in mid-2017 (perhaps as early as Q2 2017); so our time-frame for this portion of the special situation is approximately six months.

Catalyst - New Drug Application (NDA) Submission: Approximately Twelve Months from Here

If/when another successful Phase 3 trial is in hand; Paratek can begin drafting the NDA, which should take 6-8 months, as it can involve the submission of over 2 million pages of data. At least one of these trials must be successful in order for Paratek to submit a new drug application (NDA) with the FDA. The existing ABSSSI IV-to-Oral top-line results, on its own, are not sufficient for drug approval. Under the agreement with the FDA, two successful Phase 3 trials are required. This may be comprised of two successful ABSSSI trials (IV-to-Oral and Oral-only) or the existing ABSSSI study (IV-to-Oral) and a successful CABP trial. The various possible combinations will impact the value considerably.

Catalyst - Prospects for Additional Capital Raise/Monetization: Six-to-Twelve Months Out

Paratek has enough cash on-hand to complete the Phase 3 trials it is undertaking (each of which requires approximately $30M) and to bring it through mid-2017, but not enough for commercialization. It is important to note, that at this stage (i.e. drafting the NDA post-successful Phase 3 registration trials), Paratek will require additional capital for development and commercialization. The good news is, that if/when this stage arrives (and we believe this to be probable, as discussed in Part III below), the share price should be much higher, and the opportunities for monetization should be both broader and more numerous. We would not be opposed to an additional capital raise at such a stage, if the share issue price is high enough, but we may prefer that Management first look at monetizing its secondary asset, the non-U.S. rights to Sarecycline, its acne drug in development with Allergan PLC (AGN) via either a sell or licensing arrangement. In addition, there are bound to be opportunities at this stage to either license the non-U.S. development and marketing rights to Omadacycline, or to be outright acquired; though the value assigned at such a stage would likely fall short of the value that may be obtained subsequent to drug approval.

Catalyst - FDA Approval: Eighteen-to-Twenty-Four Months Out

If an NDA is submitted to the FDA by the first half of 2018, and if Omadacycline receives FDA approval in the second half of 2018, the Company is likely to be worth anywhere between $1B and $2B (that is an estimate), and we believe the value could settle in at the top-half of this range if both the Phase 3 CABP trial and the ABSSSI Oral-only trial is successful. The time-frame for this is believed to be 18-24 months, given the FDA fast-track status which results in a six-to-eight month response time from the filing of the NDA.

Potential Catalysts - Speculative Prospects

If the Company is acquired, or announces strategic partnerships or licensing arrangements with a larger pharmaceutical company, the time-frames for the maturity of our special situation investment may be pulled forward, and although such a possibility may meet Benjamin Graham’s broad definition of a special situation, it does not meet his narrow definition, so we will set that eventuality aside for the time being. Suffice it to say, we very often substantially underestimate the potential returns on special situation investments, but when these pleasant surprises occur, we take them in stride.

Risks: Ongoing

Lastly, and this is the most important part, if any or all of the above fail to occur (e.g. a second Phase 3 trial isn’t successful, the NDA is rejected by the FDA, or serious adverse events (e.g. safety concerns or restrictive labeling restrictions, etc.) were to arise, the Company’s share value would decline drastically. Although we believe there is far more than $15 of value existing currently, there is always a risk of a serious adverse event, no matter how small. The

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Score Leader

PrestonCheek

PrestonCheek (31.03) Score: +191.25

The Score Leader is the player with the highest score across all their picks in PRTK.

Top
Pick
Member Name Member
Rating
Start
Date
Call Time
Frame
Start
Price
Stock
Gain
Index
Gain
Score Commentary
PrestonCheek 31.03 12/14/2009 Underperform 5Y $51.97 -60.75% +130.50% +191.25 0 Comment
empreinte 33.61 11/25/2011 Underperform 3M $51.26 -60.20% +121.57% +181.77 0 Comment
IvegotCanines 79.21 10/17/2011 Underperform 3Y $53.17 -61.63% +112.97% +174.60 0 Comment
YurBoyG 52.01 11/21/2011 Underperform 3W $46.01 -55.66% +114.53% +170.19 0 Comment
Vermichelle < 20 9/15/2011 Underperform 3W $46.58 -56.20% +113.25% +169.45 0 Comment
Oddodd 58.00 9/15/2011 Underperform 1Y $45.94 -55.59% +113.48% +169.07 0 Comment
HedgeFund007 93.17 10/27/2011 Underperform 5Y $58.06 -64.86% +103.17% +168.03 0 Comment
cecamadocv4 99.95 9/15/2011 Underperform 5Y $43.39 -52.98% +114.44% +167.42 0 Comment
cvdynasty2 98.84 9/15/2011 Underperform 5Y $43.39 -52.98% +114.01% +166.99 0 Comment
RipeStocksFool 64.85 11/16/2011 Underperform 3M $45.66 -55.32% +105.84% +161.16 0 Comment

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TrackCowenandCo 86.32 5/15/2012 Outperform NS $57.85 -64.74% +92.40% -157.14 0 Comment
TrackUltraLong < 20 11/2/2011 Underperform NS $61.82 -67.00% +108.24% +175.24 1 Comment
trackmlvcapital 24.95 7/18/2011 Outperform NS $33.32 -38.77% +96.72% -135.49 0 Comment
TrackZacks < 20 8/10/2009 Outperform 3M $103.44 -12.18% +8.41% -20.59 7/13/2010 @ $90.84 1 Comment

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