Muddy Waters is Short PeptiDream, Inc. (TYO:4587)Guest Post
When wooing retail investors, Chairman Kiichi Kubota likes to compare non-standard peptide drugs to a Jaguar sports coupe (while comparing other drug types to a dump truck and motor scooter). We believe this comparison would be more relevant to PeptiDream if the Jaguar were missing its wheels.
Peptidream Inc (TYO:4587) has really cool technology – it can put trillions of different peptides in a single test tube! But we believe the coolness of PeptiDream’s technology amounts to at best a very small business opportunity. In other words, the question investors need to ask the company is “So what?”
PeptiDream’s technology allows for the creation of vast libraries of peptides – but library size doesn’t necessarily correlate with drug development success. 1 The technology can aid in identifying hits to targets of interest, but these hits then need to be modified to produce compounds with drug-like properties, and we believe it is here PeptiDream’s peptides have problems. There is no way of knowing for certain why the rate of progression to the clinic is so low, but we heard from a drug discovery expert that translating peptide hits into viable drugs with desirable pharmacokinetic characteristics is challenging because of the specific chemical properties of peptides. (Note that the partner for whom this researcher works is still listed in PeptiDream’s materials, despite the researcher describing the partnership as inactive.) Therefore, we view PeptiDream’s recent partnerships, such as one with drug delivery technology company PharmaIN Corp, which aims to increase peptide stability and slow their degradation,2 as an indication that PeptiDream has encountered systemic limitations in advancing its drug candidates to the clinic.
In early 2019, Chairman Kubota told retail investors “PeptiDream cannot possibly fail as long as the projects that that you see here stay on track”.3 We believe that a substantial number of those projects and their corresponding partnerships are effectively dormant or dead. We assume Chairman Kubota knows this too. Meanwhile, senior management has spent the past six years cashing out ¥31.4 billion of stock,4 part of which likely funded CEO Patrick Reid’s ¥1.9 billion beachfront estate in Maui.5 And though co-founders Kiichi Kubota and Hiroaki Suga each speak glowingly about PeptiDream, they have sold ¥2.9 billion of stock in just the last six months.6 For these and other reasons, we think PeptiDream will fail to meet investors’ expectations by large margins.
Muddy Waters Capital is short PeptiDream, Inc. because we believe it is more stock story than substance, and the market is deluded as to its potential for commercializing drugs. PeptiDream touts its 19 major partnerships and 101 discovery programs, but half of its partnerships are likely effectively dormant or dead. We see it being highly unlikely that the company’s own development attempts ever yield significant revenue. PeptiDream’s recent shift in focus to developing its own pipeline recalls once-beloved Sosei Group Corporation (“Sosei”), which has lost significant market cap over the past three years. We forecast PeptiDream will have at most one drug commercialized by 2027, versus investor expectations of eight to 15 by then.
To even remotely justify investor expectations, PeptiDream would likely need to succeed in meeting drug development milestones at rates many times industry norms. But to date, PeptiDream has underperformed these industry norms, despite being in operation since 2006.
Even as the Company has struggled to commercialize drugs, Chairman Kiichi Kubota tours Japan ginning up retail investor interest in the stock in every prefecture in Japan.
Despite the “cool” factor of peptides, PeptiDream’s technology is not unique. Nor is the number of pharmaceutical companies with which it has at one time or another signed agreements noteworthy for a drug development platform. We have identified 13 other peptide drug development companies. Six of these companies have drugs in Phase 2 or beyond, compared to PeptiDream, which has failed to get a drug to Phase 2 after 13 years. To illustrate the greatly unrealistic expectations baked into PeptiDream’s share price, the market caps of the five publicly traded peptide drug development companies equal 46% of PeptiDream’s market cap…Combined!
Effectively Dead and Dormant Partnerships
In at least six English press releases since November 2018,7 PeptiDream states that it has established partnerships with 19 leading pharmaceutical companies, and that all of these partnerships are “active and ongoing.”8 This is misleading at best. We believe a significant number of these partnerships – possibly over half – are close to dormant or dead. PeptiDream’s drug discovery track record has been dismal. In 13 years, its platform has generated only two drugs that have entered clinical trials. Only two compounds have reached Phase I, one of which appears to have uncertain commercialization prospects; and, the other appears to be a diagnostic that will likely yield no revenue for PeptiDream. Our conclusions are based on our own research, as well as work done by two external research firms we engaged.
The activity level at PeptiDream’s partnerships is key to its ability to succeed. PeptiDream enters into research and development contracts with “Discovery Partners” to identify peptide drug molecules against defined targets that are a focus of drug development for the Discovery Partner. PeptiDream receives a small upfront fee, research funding, and the biological targets of interest from the Discovery Partner, and PeptiDream utilizes its PDPS platform to identify “hits” against the target. PeptiDream receives payments when development milestones are met on these programs (e.g. lead identification, entry into preclinical studies) and is eligible for royalties on drug sales if the compound reaches the market. Partners may also license PeptiDream’s platform, in which case the company receives payments over the course of implementation, as well as annual fee income. The total value of milestone payments for a product making it all the way from discovery to market has been disclosed by PeptiDream to be in the region of ¥5.4 billion, with low-single-digit royalties on product sales.9
PeptiDream investor relations confirmed that milestone announcements are key indicators of activity levels in partnerships. He conceded that if there has been no announcement, then generally, the partnership is not active. As shown below, there are 18 partnerships that were announced through the end of 2017.10 Only nine of them have announced milestones or activity since March 31, 2017. This implies that half of the partnerships currently have little to no activity.
Our external researchers’ work supports the view that a significant number of partnerships lack activity.
Technology does not necessarily equal a viable business. Peptide drug discovery experts with whom we have spoken acknowledged that PeptiDream’s technology finds “hits” against selected targets, but they appear not to translate into development of viable drug candidate molecules. A researcher at a partner speculated that the reason for the lack of drugs in clinic could be due to the difficulties in developing large macrocyclic peptides with the pharmacokinetic properties to be viable drugs. In any event, we believe that if no clinical candidates are produced in a discovery program within three to four years from starting screening, then that program should be considered a failure. Only one of the 14 partnerships that are at least four years old has led to a drug in clinical trials. We believe this broadbased lack of success is the primary reason for the inactive partnerships.
We speculate that partners do not formally terminate partnerships for reasons including a desire to save face for PeptiDream, and partners’ senior management not focusing on the state of the PeptiDream partnership due to its small size.
We engaged two research firms to investigate the state of PeptiDream’s various partnerships. One of the firms is a recognized leader in global pharmaceutical industry research. The research processes involved speaking with people at partners, sell-side analysts, and PeptiDream. It was difficult to get much detail on the partnerships, because they are generally not highly visible. (This is due in part to the size differences between PeptiDream and its partners, as opposed to partnership progress.)
On the whole, the investigators’ work supports our view that a significant number of the partnerships have low levels of activity. However, the firms’ assessments occasionally contradicted one another with respect to specific partnerships. Their work sometimes produced assessments of ongoing activity at partnerships at which there have been no recent milestone announcements. We therefore feel it is fair to say that while we lack conviction with respect to assessments of some particular partnerships, on the whole, it is clear that the company has not made it clear to investors that many of the partnerships have stalled.
Research firm A is a global pharmaceutical research firm. It assessed the activity level of 12 of PeptiDream’s partnerships and graded confidence in its assessments as low, low-medium, medium, or medium-high. Firm A had confidence of medium or higher for 10 of the partnerships. Four of the 12 partnerships were assessed as low activity (each with medium-high confidence). Six of the 12 partnerships were assessed as high activity, but generally without high confidence levels. The assessed partnership activity levels are as follows:
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