PFNX write up

*This is a writeup based on my own (limited) understanding of the subject (and I may be
wrong since I am not bio-trained), thus I apologize if I got any of the concepts wrong.

Understanding recombinant DNA technology:

https://www.youtube.com/watch?v=3Z5j0xl8knY

Understanding PFNX’s expression technology platform:

https://www.pfenex.com/technology/

The original business:

https://pdfs.semanticscholar.org/f193/b19993e78fb7279fcbf4f645407c4d778777.pdf

The repositioning: https://www.genengnews.com/magazine/139/expression-system-re-

targeted-to-discovery/

Thesis:
PFNX is a biotech expression technology platform that has multiple biosimilar candidates
under its pipeline and a strong cash balance which means that it is unlikely face dilution for
the next year or 2. Furthermore, it has a near term catalyst that could propel its revenue to
several times of its current revenue as it is waiting for its FDA approved biosimilar drug to
Forteo (which has a sales of 1.6 bil in 2018) to be given a AP rating by the FDA. If multiple
biosimilars are approved and commercialised with the help of the PFNX platform, this
company would likely be worth several times its current value.

The science part

The write up is separated into 2 parts, the science part and financial part. I recommend
watching the video about recombinant DNA in order to understand what this is all about.
From the Recombinant DNA technology video, the lecturer pointed out 3 problems of
molecular cloning.
1. How to cut the target gene of interest
2. How to insert the target gene into the vector
3. How to be sure that the vector cell took in the target DNA/gene properly (also called
screening)

These problems has led to a bottleneck in vaccine development because recombinant

protein expression is difficult and time-consuming, involving a large number of variables.
Proprietary platform:

PFNX’s expression technology platform is a Pseudomonas fluorescens–based Expression

Technology platform that is a complete and flexible bacterial expression platform thanks to
the development and application of a highly integrated, off-the-shelf toolbox of multiple
expression plasmids and host-cell phenotypes.

By applying a parallel-processing, combinatorial-biology–based methodology to strain

engineering, highly productive hosts can be constructed and subsequently identified by the
application of high-throughput (HTP) analytical methods for expressed protein titer and
activity. All the work — including strain construction, screening, and fermentation range-
finding — is accomplished in about eight weeks. Using this approach, rapid engineering of
strains for high-level vaccine antigen expression and production has become much more
reliable and precise.

Basically, the expression technology platform solves the problems of molecular cloning
mentioned above as seen from the picture below and speeds up the development of certain
drugs.
Competitive advantage
3 elements differentiates the expression technology from other companies.
• Robust Protein Production Organism
• Creation of Extensive Library of Protein Expression Variants
• Robotically Enabled High Throughput Screening

Taken from the 10k

“We believe our technology confers several important competitive advantages compared to
traditional techniques for protein production, including the ability to produce complex
proteins with higher accuracy and greater degree of protein purity, as well as speed and
cost advantages.

Our platform utilizes a proprietary high throughput robotically-enabled parallel approach,

which allows the construction and testing of thousands of unique protein production
variables in parallel, thereby allowing us to produce and characterize complex proteins
while reducing the time and cost of development and long-term production.

We have replaced the traditional, trial and error approach to protein production with a
simultaneous, parallel processing model that allows the construction and testing of
thousands of unique protein production variables in parallel. We believe our platform
delivers a significant competitive advantage for protein production, including higher
accuracy, greater degree of protein purity, speed and lower costs.”

(sales pitch on their website: https://www.pfenex.com/technology/)

History:
When the new CEO joined Pfenex in 2009, he looked at the company’s business model and
recognized that the protein-expression problems are not limited to clinical development,
but start back in the early drug discovery phase. Thus, he repositioned PFNX’s expression
technology to support early-stage challenges related to the discovery of large and small
molecules. Discovery scientists want to move programs forward rapidly to increase the
value of a company’s pipeline while minimizing costs.

An additional advantage of the Pfenex Expression Technology is scalability. Traditional

protein-expression systems, such as yeast or E. coli, sometimes produce small amounts of a
protein for discovery yet fail during scale-up to make larger batches for clinical trials. Once
Pfenex identifies a production strain, it can be used for discovery, preclinical and clinical
testing, and large-scale fermentation.

Current development:

*PF708 is now approved by the FDA

PFNX is now developing biosimilars of major drugs that are soon to be off-patent. It has
several programs under its pipeline as seen above.
Progress of some of the program:

1) Forteo (PF708)
• FDA approval in October
• Biosimilar called PF708 is now approved.
• 50% of gross profits in U.S. from generics firm Alvogen if AP rated (AP-rated means
the product in question is an injectable product that the FDA has assigned an “AP”
rating signifying that the FDA has classified the product as “therapeutically
equivalent” to a particular reference listed product)
• 60% ex U.S. pending geography
• Forteo achieved 1.6 bil in global sales in 2018.

More details on AP-rated

Just getting the FDA approval of PF708 is not enough, and in order to get 50% gross profits
from Alvogen, Pfenex also has to be considered as a therapeutic equivalent (or A-rated) to
Forteo. Thus, that is what it is doing. This which would permit PF708 to be automatically
substituted for Forteo in many states.

According to the management in the 2019 Q3 conference call,

“The TE rating is primarily based upon three distinct requirements: pharmaceutical
equivalence; bioequivalence; and comparative use [indiscernible] study data. We believe
the FDA now has the information it needs to evaluate PF708 for a therapeutic equivalence
rating based on bioequivalence being demonstrated in the PF708-101 study;
pharmaceutical equivalence being demonstrated by the PF-708 formulation being
specifically designed to meet the requirements of same active ingredient, same strength
concentration, same dosage form and same route of administration versus Forteo; and
our successful completion of the PF708 comparative human factor study which enrolled
102 patients and caregivers and compared the use of the Forteo pen to our PF708 pen.”

Needless to say, if successful, there is likely to be a huge uptick in revenue for Forteo and
little or no incremental cost.

2) Lucentis (PF582)
• Global Lucentis market was approximately $3.7 billion in 2018
• biosimilar candidate PF582
• Phase 1/2 first in human study completed: Met primary objective of demonstrating
similar safety and tolerability between PF582 and Lucentis. Demonstrated consistent
pharmacological activity between PF582 and Lucentis

3) Neulasta (PF529)
• Neulasta global sales in 2018 of $4.5 billion
• biosimilar Candidate PF529
• Production process developed and extensive analytical comparability to reference
product completed
• US FDA feedback for PF529 supports the feasibility of development under the 351(k)
biosimilar pathway
Various economic opportunities:
Because this is a platform technology, there are multiple shots available, in other words, this
company is not likely to be a binary story, but the combination of the potential success of
several potential biosimilar candidates that use this platform and go through the entire FDA
approval process.

Financial part:

A look at its recent 2019 Q3 financials would reveal that the company is expanding fast, and
given the recent approval of the PF708, and the impending commercialisation, it is likely
that there will be a huge uptick in revenue rather quickly. Of course, that would be
dependent on the sales of the actual drug and other variables that are out of the company’s
control.
It is worth noting that the company is in a strong cash position and the current cash position
is actually understated. As pointed out by the management team. “Cash and cash
equivalents as of September 30, 2019 were $32.7 million. I point out, this excludes $13.5
million from milestones earned under our agreements with Jazz and Alvogen of $11 million
and $2.5 million respectively. Pfenex believes that its existing cash and cash equivalents and
cash inflow from operations will be sufficient to meet Pfenex's anticipated cash needs for at
least the next 12 months”

Valuation:
I have no idea how to value this company, but looking at Forteo’s sales for the past year,
one can do a simple calculation and get to an assumption of how much revenue could be
generated from just 1 drug.

This is a fairly conservative estimate, but lets say that AP rating is given, and alvogen is able
to capture 1/3 of the market eventually and gross margin of the biosimilar drug for alvogen
is 20% (it should be higher than that). I do not know the exact gross margin of Forteo as it is
undisclosed, and the gross margin last year is also unlikely to be an accurate representation
of the actual gross margin once it goes off patent.

Sales = 533 mil

Gross profit = 106 mil
Revenue for PFNX from PF708 = 106 mil * 0.5 = 53 mil

53 mil is roughly twice its current revenue (15 mil in FY 2018, 32 mil FY2019 Q3 TTM), and
assuming that it is able to do this multiple times given the amount of candidates it has in its
pipeline currently. This company is likely to be a multi bagger.

Even if AP rating is not given, PFNX still have revenue sources from other programs that
would keep it afloat.

Catalyst:
• AP rating for PF708 given
• More collaborations announced or milestones achieved.