Surprise Ruling Disappoints NBIX
Neurocrine Biosciences, Inc. (NBIX) received a very surprising second approvable letter from the FDA on Indiplon after the market closed on December 12, 2007. The letter outlined three requests from the FDA, asking Neurocrine for preclinical data in third trimester pregnant women, asking for PSG data with the 5mg dose in the elderly, and asking for an active comparitor (head-to-head) trial to assess the safety of Indiplon vs. a marketed product.
The last request, in our view, essentially creates an endgame for the development of the drug. Disappointing, considering the company had secured and was ready to announce a major partnership with a large-cap pharma. Given the significant questions remaining around Indiplon, we downgraded our rating back to Hold in December 2007 and lowered our price target to $6. The company exited 2007 with $179 million in cash.
Burn for 2008 should be $65 to $70 million, meaning management should still have over $100 million on hand by 2009. And, this does not include a deal for GnRH. The current cash on hand is nearly $5 per share. The stock is currently trading at just above cash levels.
Our sum of parts analysis, including cash, yields a price of $8+ per share. However, confidence in management, even with a new CEO, is low and it will take some time for shareholders to return to the name. Neurocrine's stock is probably dead money for the next few months. We rate the shares a Hold, with a $6 target.
Fair Current Levels on Humana
Humana (HUM) is one of the largest publicly traded health benefit companies in the U.S. and Puerto Rico. The company reported better-than-expected net income of $243M (up 57% y/y) or EPS of $1.43, and a medical expense ratio (MER) of 80.3% (down 290 basis points y/y).
Consolidated 4Q07 revenue was $6,339M, up 12% y/y, buoyed by a 12% y/y increase in total premium and administrative services fees, a lower than previously anticipated income tax rate, and a gain from the sale of a venture capital investment during 4Q07.
We retain our Hold recommendation on the stock at current levels. We have valued HUM on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the managed care sector. Our $77 price target represents a P/E multiple of 13.9x FY08 EPS of $5.55 and underpins our Hold rating.
OPNET Upside Still Intriguing
OPNET (OPNT) posted results in-line with guidance for the third quarter of fiscal 2008. Although slightly below our expectations, we are encouraged that new license revenue has grown sequentially for the second consecutive quarter and revenue from the enterprise market is growing, offsetting weaker government business.
We reiterate our Buy rating on OPNT with a and reduced price target of $14.00 to reflect a subdued market for tech stocks. If we exclude amortization of acquired technology, a non-cash charge, the company should generate approximately EPS of $0.45 in fiscal 2009. On this basis, the stock is currently trading at 19.3x our EPS estimate. We maintain a six month price target of $14. Also, its P/S [price-to-sales] multiple roughly in line with its peer group.
Although we believe investors will likely be somewhat restrained until the company demonstrates some operating leverage in the business model by growing new license revenue and working through dilution from Network Physics, we do believe that the stock should approach the mean of its peer group.
