How to build a company in the pharmaceutical industry: Three principles of small-cap Citius Pharma

The pharmaceutical industry is one of the most challenging sectors, as bringing a drug to market takes 10-15 years and costs billions of dollars. However, the founders of Citius Pharmaceuticals seem to have found a shortcut. Its first drug is set to hit the market before the end of the year, and analysts believe that the company’s stock is massively undervalued.

Turning point

Citius Pharma, in its current form, has been operating in the pharmaceutical market since 2016, developing drugs for catheter-related bloodstream infections, lymphoma, and hemorrhoids.

The company’s name comes from the Olympic motto “Citius, Altius, Fortius” – “faster, higher, stronger,” cofounder Myron Holubiak told financial news outlet Benzinga in an interview. He, like the other founder, Leonard Mazur, is a seasoned veteran of the pharmaceutical industry. For decades, Holubiak worked at Roche and infusion services provider BioScrip, and Mazur at Cooper Laboratories (now Cooper Companies) and ICN Pharmaceuticals (now Valeant Pharmaceuticals), the developer of the respiratory infection drug Ribavirin. “Biopharma and pharmaceuticals flow in my veins. That’s… my blood,” Mazur said on the podcast of business coach and author Steve Preda.

The next few months could be pivotal for Citius Pharma with their first drug expected to launch commercially before the end of 2024. The drug is LYMPHIR, a treatment for adults with relapsed or refractory (i.e., treatment-resistant) cutaneous T-cell lymphoma when at least one systemic therapy has failed. The U.S. Food and Drug Administration (FDA) approved it in this capacity earlier in August.

On average, developing a new drug takes 10-15 years and costs $2.6 billion, according to the Pharmaceutical Research and Manufacturers of America. Only 12% of new molecular entities that enter clinical trials eventually receive FDA approval. Citius Pharma, however, has a strategy that drastically shortens this cycle. What is it?

Three principles guiding Citius Pharma

The first principle is to not start from scratch. It’s much more efficient to license the discoveries that result from somebody else’s work, as Mazur puts it.

This was the case with LYMPHIR. Citius Pharma acquired it during phase III clinical trials in 2021 from India’s Dr. Reddy’s Laboratories while signing a licensing agreement with Japan’s Eisai, the company noted in its prospectus. Mazur estimated potential sales revenue from the drug at $400 million a year on a recent investor call.

The same approach was used with Mino-Lok, an antibiotic for treating catheter-related bloodstream infections. According to Mazur, it was invented by Dr Issam Raad, the chair of the Infectious Diseases Department at the University of Texas MD Anderson Cancer Center. Currently, if a catheter gets infected, it is removed and replaced with a new one, which involves two painful surgical procedures for the patient. Raad’s idea was to sterilize the catheter with a new drug, leaving it in the catheter for two hours to prevent it from entering the bloodstream and then aspirating out the contents — repeating this for at least five days until the infection goes away.

Citius Pharma began funding Mino-Lok research during phase II trials. Upon their completion, it “committed to funding some additional work.” To do that, however, the company had to go public to bring in more capital, Mazur said. Now, Mino-Lok has wrapped up phase III clinical trials, and the next step is to prepare an application for approval by the FDA. The company expects Mino-Lok to generate $1.8 billion annually.

The second principle is to look for developments in low-competition areas. “We realized that this [Mino-Lok antibiotic] was unique. It was unique because no one else was there. There was no other product there. No one else was doing any research on that end at that time,” Mazur said.

Finally, the third principle is to be prepared to invest your own capital. In the early days of Citius Pharma, the founders contributed a total of $26.5 million, according to the company website. This is critical for attracting investors, Mazur believes: “They saw that we had confidence in what we were doing.”

Now, the company is again going to the stock market for a capital raise: in August, it announced the spinoff of its oncology subsidiary and its listing on the Nasdaq stock exchange through a merger with the SPAC TenX Keane Acquisition. Citius Pharma will hold a stake of about 90% in the merged company, named Citius Oncology.

“We are beginning the transition from being a development-stage company to becoming a profitable biopharmaceutical company,” Mazur said on the August conference call with investors.

Citius Oncology will handle the commercialization of LYMPHIR. Mazur claims that the goal of spinning off the oncology division is to raise capital to launch the drug without diluting existing Citius Pharma shareholders. This should also provide Citius Pharma with “strategic flexibility to advance its late-stage assets,” Mazur said.

When will Citius Pharma turn profitable?

The company has yet to make a profit. In the 2023 fiscal year (ended September 30, 2023), the net loss came to $32.5 million amid R&D expenses of $14.8 million. Meanwhile, there is low visibility on when the company will get out of the red. The pharmaceutical industry is a high-risk business and a long-term game, and Citius did warn investors in its prospectus that there is no guarantee that LYMPHIR will be successfully commercialized.

In addition to LYMPHIR and the Mino-Lok antibiotic, Citius Pharma’s portfolio includes Halo-Lido. The industry news outlet HealthLeaders writes that Halo-Lido could become the first FDA-approved prescription drug to treat hemorrhoids in the U.S. Another licensing agreement with Novellus Therapeutics (later acquired by Brooklyn ImmunoTherapeutics) entails Citius developing therapies using mesenchymal stem cells to treat acute respiratory diseases.

According to MarketWatch, the three analysts who cover Citius Pharma recommend buying its stock. The average target price is $4.67 per share, more than seven times current levels.

The company is close to breakeven now, reported Simply Wall Street, citing three pharmaceutical industry analysts who believe that by 2025 Citius could generate its first profit of $15 million. However, to get there, the company would need to grow 63% year over year, which the Simply Wall Street team sees as “extremely buoyant.” It warns that if the annual growth rate proves too aggressive, the company may become profitable much later than the analysts expect. It adds that pharmaceutical companies, depending on the stage of product development, tend to have irregular cash flows. This means that a high growth rate is not unusual, especially if companies are in an investment period.

In the near term, the company may even be delisted. Currently, Citius Pharma is trading at $0.60 per share, in violation of the Nasdaq rule requiring all companies to maintain a minimum bid price of at least $1.00 per share. The exchange has given the company 180 days, until September 9, to remedy the issue. Delisting may mean difficulties in raising capital and even retaining employees, the company wrote in its prospectus. Mazur previously mentioned that every one of them has stock options.