Though we're anywhere but in a high growth market presently, there are groups that may provide big upsides based on growth potential, especially in light of major recent pull-backs. One industry that interests us is biotech, so Zacks senior analyst
Jason Napodano, CFA helped us with some notable suggestions in the space.
What's new in the world of biopharmaceuticals these days?
Arena Pharmaceuticals (ARNA) reported financial results for the third quarter 2008. Although results were largely in-line with expectations, investors are starting to take notice of Arena's cash position. Despite the $212.1 million still on the books at the end of September 2008, management has reduced its year-end cash balance guidance from $160 million to $115 million due to the planned redemption of $55.8 million in Series B1 and B2 convertible preferred stock in November 2008.
This is an unfortunate use of funds, in our view, because it puts Arena's cash position in danger of running out late in 2009 unless the company either signs a development partner for pipeline candidates lorcaserin or APD-125, or undertakes a significant dilutive offering. Management does have some additional cash-generating opportunities with its early-stage pipeline and research capabilities, but nothing that would be meaningful enough to put off raising funds to support lorcaserin in 2010.
On the third-quarter call, CEO Jack Lief noted "a number of companies doing pre-diligence" on lorcaserin. He also noted "no apparent pattern" from the blinded data that would prohibit the approvability or commercialization of the drug.
The ideal situation is a bidding war between large-cap pharmaceutical companies over lorcaserin. We are not quite ready to jump into that camp -- hence the ?Hold' rating -- but it is clear obesity is something big pharma is very interested in.
Have you reached a verdict on lorcaserin yet, based on the data you've reviewed?
Our stance on lorcaserin is that the drug looks safe, with no major cardio, CNS, or metabolic concerns to speak of; but, the phase IIb efficacy data fails to impress. The efficacy of lorcaserin demonstrated in the phase IIb trial (~8 lbs at 12-weeks) falls short of some of the other candidates currently in late-stage trials (~20 to 25 lbs after 24 weeks for Qnexa, Contrave, and pramlintide/metreleptin).
However, safety remains a chief concern of all interested parties (partners, patients, physicians, and the FDA), and we note that the real long-term efficacy of the drug will not be known until BLOOM offers data in March 2009. So the stock remains in a holding pattern while we wait for the data in March 2009.
Interesting. Any recent news elsewhere worth reporting?
On October 24, Acusphere (ACUS) and Cephalon (CEPH) signed a definitive agreement whereby Cephalon will provide $20 million in upfront financing to Acusphere in the form of $5M in cash and $15M in a senior secured convertible note.
The deal is very positive for Acusphere shareholders, as the company exited the third quarter with only $4.1 million in cash on the books and was going to run out of operating funds by mid-November 2008. The financing avoids any near-term bankruptcy risk or the need for a massive dilutive offering.
We also note that should Cephalon decide to license Imagify, Acusphere was able to maintain a significant portion of the economics. The deal entitles Acusphere to a sizable approval milestone of $40M and royalties -- which is 20% -- on U.S. sales of the drug.
What's your particular take on this deal?
There seems significant, and perplexing, confusion around it. We are surprised at the stock price decline in the past few days. Perhaps this is profit-taking after the run-up last week on the news that the FDA would hold an advisory panel meeting in December 2008 to review Imagify. We discuss this panel meeting and our prediction for the outcome in our October 13, 2008 report. This report also has our analysis of the RAMP-1 and RAMP-2 data, and our forecasts for Imagify sales.
Nevertheless, this is a very good deal for Acusphere. The current market conditions and financing opportunities for small-cap biotechnology companies are extremely challenging. The fact that Acusphere was able to secure $20M in financing and still maintain significant upside on its intellectual property for shareholders so close to bankruptcy is fantastic news. We think it is a testament to Imagify and potential billion-dollar opportunity it offers.
How about for Cephalon?
Cephalon will most likely choose Option No. 1 (Imagify License) if Imagify is approved. However, even if Cephalon chooses Option No. 2 (51% Ownership), Acusphere shareholders can still reap significant financial rewards if the drug is approved. A post-approval deal on Imagify is most likely worth more than twice what the company will get with option No. 1, so investors, while disappointed with the 51% dilution, will still come out ahead.
Investment in Acusphere still represents a risky and speculative play. However, in our view, odds favor a positive panel recommendation in December 2008, and the stock represents a very attractive "call option" at this level.
Any other noteworthy items to help give us an update on the pharma sector overall?
ViroPharma (VPHM) posted very strong financial results for the third quarter. Vancocin sales blew away expectations, coming in at $65.9 million, up 29%. Vancocin continues to benefit from impending treatment guideline changes and ViroPharma's new specialty salesforce. The acquisition and approval of Cinryze greatly strengthens the company's future prospects.
We are excited to hear about the commercialization plans in early November. We expect management to be in position to launch the product before the end of the year. Besides strong Vancocin sales and the Cinryze approval, both phase III trials on maribavir are progressing on plan.
Do you remain bullish on ViroPharma shares?
I do. ViroPharma's business fundamentals are strong. Sales and earnings are outpacing expectations and the company should exit the year with over $300 million in cash on hand. We are maintaining our Buy rating with a price target of $16.
One more stock I'll cite here is Auxilium Pharmaceuticals (AUXL). Its lead product, Testim, a 1% testosterone gel indicated for the treatment of hypogonadism, continues to gain market share and post solid sales growth.
Plus, Auxilium's late-stage candidate, Xiaflex, under development for Dupuytren's Contracture, just completed a successful phase III program. Xiaflex is also under development for Peyronie's Disease and Frozen Shoulder Syndrome.
Thus, the business fundamentals at Auxilium are strong. The stock has had a significant pull-back based on the volatile stock market and significant under-performance of biotech names. Auxilium shares are looking very attractive at this level.
However, we are admittedly risk adverse, and thus only maintaining our Hold rating. Our near-term target is $20 per share.
Jason Napodano, CFA is a senior analyst covering the Big Pharma and biotech markets for Zacks Equity Research.
