Pronova hit by short term worries, as long term value grows

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The stock market has punished Pronova heavily for investing in its future, with the stock down 18% since the Norwegian fish oil group revealed plans to accelerate the expansion of its manufacturing capacity, a move that will hurt profits this year.

Despite the short term hit, the decision, announced alongside annual results last week, looks like good business sense. Marketing partner GlaxoSmithKline is about to embark on a big sales push of Lovaza in the US, a triglyceride-lowering pill which Pronova manufactures, using its fish oil-derived, active pharmaceutical ingredient omega-3.

With Glaxo promising to triple the sales force promoting the drug to more than 1,500 reps, and extolling the medicine’s potential, the investment does not seem like a rash decision. Also, the expenditure was always on the cards, it is just happening sooner than expected.

Earnings growth

In fact, analysts believe Pronova’s earnings will accelerate from 2010. If the ramp up goes to plan, by the end of 2010 the company’s production capacity will have doubled.

With growing demand in the US and Europe, where the drug is marketed as Omacor by other partners, the company needs that capacity as it is already producing as much fish oil as capacity allows.

Pronova booked revenues of NKr1.01bn ($187m) in 2007, up 52% on the year before. Last year in the US, when the drug was marketed by Reliant Pharmaceuticals, in-market sales more than doubled to $300m.

Glaxo bought Reliant at the end of 2007 for $1.65bn for access to Lovaza, and with its greater marketing might, by 2012 analysts expect the drug to be generating $477m in the US. Those forecasts are likely to rise following news of the sales push.

Natural benefit

The British pharma giant is expecting great things, and at Glaxo’s own annual results presentation earlier this month, chief executive JP Garnier focused on the drug as a key growth driver.

Because Lovaza offers a natural way of lowering triglycerides dramatically, and the product has no warnings on the label, the company believes it could become very successful.

With safety scares such as Vioxx and Avandia fresh in the minds of many doctors and patients, a safe, natural product is likely to have a wide appeal, a fact that will not have escaped Glaxo.

Patent concerns

Despite the potential of the product, and the endorsement by Glaxo, shares in Pronova have lost 28% since they floated in Oslo on October 11 last year. Concern about the patent position in Europe has not helped.

The group lost an infringement case in Germany in November, causing the stock to drop 15%, and the outcome of a similar wrangle in Italy will be known this quarter.

But because of the manufacturing complexities, analysts do not expect the market to be prone to swift and painful generic competition anyway, and even if the outlook in Europe deteriorates, the benefit of having Glaxo on board in the US should outweigh those concerns.

Additionally, to pay out $1.65bn for Reliance, Glaxo must have been very comfortable with the IP position in the US.

Some commentators have speculated that a significant drop in the share price could prompt a bid from Glaxo. As well as Lovaza, Pronova does have a number of pipeline projects that it might be interested in. But considering big pharma companies are increasingly outsourcing manufacturing, it would be bucking the trend.

Fresh lows

Pronova shares tested fresh lows today, touching NKr16.50, valuing the company at NKr5.11bn ($950m). Investors have continued to focus on the fourth-quarter results announced last week, which missed forecasts, and the hit to earnings this year.

With jittery markets in a pessimistic mood, that sort of news is punished in the current climate. But the sell-off in Pronova seems to be ignoring the group’s longer-term potential, in particular its enthusiastic marketing partner, with deep pockets.

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