A Look At Palatin's FSD Drug

It’s been an overall positive year for investors that are holding a stake in Palatin Technologies (PTN), which has risen almost 70% on developments in its pipeline.

The company currently has seven projects, with two in preclinical studies and four in phase I trials. Their flagship product bremelanotide, which is a treatment for female sexual dysfunction. Women who have FSD, also called Female Sexual Arousal Disorder (FSAD) have certain symptoms that are described in the DSM-IV as follows:

Inability to attain or maintain until completion of sexual activity adequate lubrication in response to sexual excitement. Must result in significant distress and not better accounted for by another disorder or the use of a substance.

Note: The Diagnostic and Statistical Manual of Mental Disorders is the encyclopedia of all official mental disorders according to the American Psychiatric Association

The official symptoms of FSD/FSAD were included to give an idea of just how broad the diagnosis of this particular disorder could be. As one might expect, this means that there is a very large pool of patients in the United States that is affected. Recent studies suggest that over half of menopausal women exhibit FSD/FSAD symptoms, which equates to roughly 16 million that doesn’t include women that are outside this age range. Some studies suggests the total number to be north of 40 million now, due to rapid increases in ethnic groups that have exhibited higher likelihood of FSD/FSAD. This number could, of course, be even higher due to the embarrassment over seeking treatment for the disorder. The key point is that Palatin’s bremelanotide is targeting an enormous patient population indeed.

Past Efforts
The drug industry has tried to find a way to boost female libido for a very long time, but has yet to find anything worthwhile. Consider Boehringer Ingelheim’s flibanserin, which was hyped up to become the “female viagra”, but fell flat on its face in phase III trials due to efficacy and saw termination of development in late 2010. Another is the infamous BioSante Pharmaceuticals (BPAX) with their program for Libigel. BioSante reported incredibly poor phase III trial results for Libigel in December 2011 – so poor that we saw the placebo arm outperform the libigel arm in BLOOM-2. BioSante stock crashed, and was headed towards bankruptcy until it was saved by a merger agreement announced on October 4, 2012.

After so much disappointment, it’s hard to keep your faith in drug development programs that are aiming for FDA approval in the treatment of FSD/FSAD. Still, Palatin investors are clearly seeing some potential in the pipeline based on the financial data. Palatin is valued at $26.1 million, which is cheap relative to most biotech stocks but does factor in the company’s rapidly shrinking cash and rising expenses. Research and development costs are becoming particularly high. In their most recent quarterly release, R&D jumped to $4,130,264 per quarter, bringing total operational losses to $5.7 million per quarter (net losses were only lessened due to one-time events.) Also worrisome is the company’s pile of cash, which shrunk from $18.9 million on June 30, 2011 to $3.8 million on June 30, 2012.

Palatin's Cash Position
It would seem like Palatin is on the verge of running out of cash (a nightmare scenario for any biotech company), but do remember that the company received proceeds of approximately $34.5 million on July 2 from share dilution that got bought up by QVT Financial LP. This buys the company a lot of time, but also shows that the market is giving the company a lot less credit than we thought. Assuming that the company has roughly $30 million remaining, the market cap implies that Wall Street is (in a way) valuing Palatin’s pipeline at zero.

While Palatin could sell everything it has to end up with a higher net worth than it currently does on the stock market, the market fully expects Palatin to continue with the development of its FSD/FSAD drug (along with the others).

To give Palatin investors some credit, phase IIb results for bremelanotide from November 8th did show the drug meeting primary and secondary endpoints. Shares rocketed up to $.9/share (an immediate upward swing of 36%) but gave back ground the next day.

Patience Required
It will be a long wait before we see the NDA submission for this program, but we cannot discredit a drug development program that has yet to make a mistake. Going forward, investors may view Palatin as a value play, even ignoring the likely disappointment built into bremelanotide. Also note that there is virtually no short interest – brokerage firms aren’t holding this stock. The strange situation makes PTN a stock for a very particular type of investor who has faith in bremelanotide and is willing to wait for years to see a chance at potential gains.