Future Epilepsy Trial Costs And Financing Needs Will Pressure Long-Term Earnings Potential

Catalysts

About Praxis Precision Medicines

Praxis Precision Medicines is a clinical stage biotechnology company focused on developing targeted therapies for central nervous system disorders, with an emphasis on epilepsy and rare developmental epileptic encephalopathies.

What are the underlying business or industry changes driving this perspective?

• The concentration of value in a small number of late stage epilepsy assets, including vormatrigine and relutrigine, means any delay, mixed outcome or safety signal in the planned 5 clinical readouts over the next year could sharply reduce expected future revenue and push out the path to profitability, pressuring earnings trajectories.
• Although current RADIANT data suggest best in disease efficacy for refractory focal epilepsy, the shift toward earlier line, monotherapy and broader epilepsy use will likely require large, lengthy and expensive Phase 3 programs such as POWER1, POWER2 and POWER3. This would increase cash burn and dilute net margins even if peak sales fall short of optimistic assumptions.
• The broader move toward highly effective, once daily CNS therapies raises the regulatory and payer bar. As a result, additional mood and quality of life endpoints and monotherapy positioning may not translate into premium pricing or rapid formulary adoption, which could limit upside to revenue per patient and compress long run operating margins.
• Despite a cash runway that currently extends into 2028, the capital intensive nature of multiple parallel global epilepsy trials and commercialization build out may force dilutive equity or debt financing before sustainable cash generation, negatively affecting per share earnings even if topline revenue grows.
• As cenobamate and other modern antiseizure medications become more entrenched in treatment algorithms, convincing physicians to transition stable but polytreated patients into POWER3 type monotherapy strategies could be slower and more limited than projected. This could cap patient penetration, lower long term revenue growth and moderate operating leverage.

Assumptions

This narrative explores a more pessimistic perspective on Praxis Precision Medicines compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Praxis Precision Medicines's revenue will grow by 117.3% annually over the next 3 years.
• The bearish analysts are not forecasting that Praxis Precision Medicines will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Praxis Precision Medicines's profit margin will increase from -3658.5% to the average US Biotechs industry of 16.0% in 3 years.
• If Praxis Precision Medicines's profit margin were to converge on the industry average, you could expect earnings to reach $12.3 million (and earnings per share of $0.4) by about December 2028, up from $-273.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $34.3 million in earnings, and the most bearish expecting $-612.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 262.5x on those 2028 earnings, up from -25.3x today. This future PE is greater than the current PE for the US Biotechs industry at 19.0x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Vormatrigine has demonstrated best in disease efficacy with over 56% median seizure reduction, rapid onset of action, seizure freedom in more than 22% of patients and consistent benefit even on top of aggressive regimens like cenobamate, which could support strong long term pricing power and sustained revenue growth.
• The company has built a proven recruitment and execution engine that over enrolled RADIANT and is already driving rapid progress in POWER1, with a funded cash runway into 2028, which reduces development risk and could accelerate time to market, bringing forward any potential earnings inflection.
• The emerging signals on mood and quality of life benefits from vormatrigine and the decision to incorporate formal mood and depression endpoints in POWER2 and potentially into the label create scope for differentiated positioning, which could expand patient reach and lift both revenue per patient and long run net margins.
• The planned POWER3 monotherapy study aims to move vormatrigine earlier in the treatment algorithm where patient volumes are several times larger than the hyperrefractory segment, so successful data could unlock a larger commercial opportunity and influence long term revenue and operating leverage.
• Praxis has a diversified CNS pipeline with four late stage assets, including relutrigine which already has breakthrough designation in SCN2A and SCN8A developmental epileptic encephalopathies, so positive readouts across multiple programs could create several independent revenue streams and affect overall earnings resilience.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Praxis Precision Medicines is $85.76, which represents up to two standard deviations below the consensus price target of $419.13. This valuation is based on what can be assumed as the expectations of Praxis Precision Medicines's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $760.0, and the most bearish reporting a price target of just $83.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $76.6 million, earnings will come to $12.3 million, and it would be trading on a PE ratio of 262.5x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $276.4, the analyst price target of $85.76 is 222.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.