Cyberonics Worth Looking Into: A Low-Risk Stock With Decent Upside

Houston, Texas, -based Cyberonics (CYBX), a medical instruments company engaged in the design, development, marketing, and sale of implantable medical devices to hospitals and ambulatory surgery centers, has been witnessing surging demand for its VNS Therapy for the treatment of refractory epilepsy. Moreover, the company has been rewarding its shareholders with attractive share repurchases. I am bullish about the company's potential in VNS Therapy in an under-penetrated epilepsy market, where Cyberonics has strong untapped opportunities.

The company's stock made a 52-week low at $42.31 earlier this year and currently it is hovering around $52. I feel that the stock has the potential to touch $70 within the next twelve to eighteen months due to the company's strong emphasis on product development and international expansion. In this article I will focus on the company's potential growth drivers, while making a bullish case for the stock.

Cyberonics: Company Overview

Cyberonics offers VNS (vagus nerve stimulation) therapeutic systems that provide neuromodulation therapy for the treatment of refractory epilepsy and TRD (treatment-resistant depression). VNS Therapy is delivered through a small pacemaker like generator implanted in the chest that sends preprogrammed, intermittent, mild electrical pulses through the vagus nerve in the neck to the brain. The company is also investigating the use of VNS for other indications, such as CHF (chronic heart failure) and management of epilepsy without implantation.

Why You Need to Take a Closer Look at Cyberonics

The global market for epilepsy is ~80% under-penetrated and offers an incredible investing opportunity. I believe Cyberonics could be an excellent proxy play for investing in the epilepsy market. The primary reason for considering Cyberonics as an investment option is that the company is currently actively focusing on research and development in the field of VNS Therapy for patients with refractory epilepsy, particularly seizure detection, responsive stimulation and associated technologies.

For increasing its market share Cyberonics is emphasizing on developing a robust pipeline. The company is currently developing VNS Therapy Systems utilizing heart and brain-induced seizure detection technology, rechargeable battery technology and wireless communication technology. I feel these new technologies will help the company significantly penetrate the epilepsy market.

According to recent data from the U.S. Centers for Disease Control and the National Epilepsy Foundation, ~2.7 million people in the U.S. suffer from epilepsy, which translates into ~0.4 million potential patients (with drug-resistant epilepsy) for the company's VNS Therapy. Furthermore, a minimum of 125,000 epilepsy patients are detected every year, leading to 15,000-24,000 new patients for Cyberonics on an annual basis.

In the last three years, the company has invested heavily in developing two new VNS Therapy generators, the AspireHC (High Capacity) and the AspireSR (Seizure Response), with the intention of replacing the older models. The AspireHC has been generating strong momentum in the U.S. with an improving ASP. It addresses the need among some patients for a device with a higher capacity battery and also provides a platform for the AspireSR generator. I expect the replacement business model will drive significant growth for the company on a sustainable basis.

Cyberonics' Product Development Activities

For maintaining its leadership position in the VNS Therapy market, the company is focusing on developing some unique products, which are listed below:

AspireSR: For the AspireSR generator, Cyberonics initiated the E-36, EU clinical study to support CE Mark submission. The company completed enrollment in the clinical study in the first quarter of the current fiscal. Cyberonics plans to submit AspireSR for European regulatory approval no later than the end of fiscal 2014. For the E-37 clinical study of AspireSR in the U.S., the company started enrolling patients and expects to complete enrollment of the first phase of the trial in the current fiscal year.ProGuardian: The company's ProGuardian system is its in-home monitoring system that is designed to aid the detection, recording and notification of epileptic seizures accompanied by heart rate variations or movement. The company's aim is to submit the first product of the ProGuardian platform for regulatory approval in Europe by the end of the fiscal year 2014.Relay Generator: The development of Cyberonics' Relay Generator, a wireless-enabled VNS Therapy generator, has continued to progress as the company advances towards regulatory submissions.Programming Tablets: For the programming tablets, the company is transitioning from the handheld PDA programmer to a new tablet computer programmer. Shipments of the new tablets have already begun.

Apart from the products listed above, the company completed enrollment and implant activity in the ANTHEM pilot study for the Neural Autonomic Regulation Therapy for chronic heart failure. Further activities in this area remain contingent on the results from this pilot study.

Positive Catalysts for the Stock

Strong FY14 Guidance: Cyberonics provided strong outlook for fiscal 2014. The company expects revenues in the range of $279 - $283 million. Income from operations is expected in the range of $85 - $88 million resulting in net income of $53 - $56 million and adjusted EPS of $1.93 - $2.01 for fiscal 2014.

International Markets Focus: Cyberonics has a strong international presence and it sells its products directly, as well as through independent distributors in the U.S., Europe, Latin America (including Brazil), Russia and Asia (including Japan, China and India). The company has already made implants in 68,000 patients internationally.

Epilepsy is the second most prevalent neurological disorder in the world. The recent World Health Organization study on epilepsy showed that there are over 3.0 million individuals with epilepsy in Western Europe with over 150,000 new cases diagnosed each year. In Japan, these numbers are 1.0 million and 50,000, respectively. Cyberonics is focused on physician training, fulfilling patient registry requirements and initiatives to secure reimbursement to expand globally. The company seeks to increase top-line from its international operations by deploying senior sales and marketing teams overseas, particularly in Europe and Japan. Cyberonics plans to build a second manufacturing facility in Costa Rica, which the company believes, after being fully operational by fiscal 2015, will provide faster global market access.

Collaborative Initiatives: In September 2012, Cyberonics invested $2 million in Germany-based Cerbomed GmbH. Cerbomed manufactures the Nemos t-VNS Device for the treatment of epilepsy, pain and depression. Cyberonics has plans to invest further in the company up to $5.5 million if it achieves some significant clinical landmarks. The company has the option to conduct a clinical trial in the U.S. to gain the FDA approval.

In June 2012, Cyberonics inked a deal with Magnetic Resonance Imaging ("MRI") electrophysiology tools developer Imricor Medical Systems to develop MRI-safe VNS Therapy System. The company has commenced several clinical studies on VNS therapy for patients with refractory epilepsy.

Valuation and Projected Stock Price

Cyberonics is a cash-rich company with cash and equivalents of $106.32 million on the balance sheet as of quarter ending June 2013, against a debt to equity ratio of zero.

CYBX Cash and Equivalents data by YCharts

However, the company's gross margin being under pressure, the stock witnessed significant correction from its 52-week high at $56.73. Beginning from 2012, the company witnessed its gross margin has contracted on a consistent basis. The margin pressure was primarily due to the expansion of the company's marketing team, higher expenses associated with the E-36 clinical study and costs related to establishing the new facility in Costa Rica. Cyberonics management expects that in FY2014 margin pressure will remain an overhang. The company expects gross margin to hover around 89.5% in FY2014.

CYBX Gross Profit Margin Quarterly data by YCharts

Despite the margin pressure I remain bullish on the stock and consider the correction as an opportunity to buy. I believe that the reasons for margin compression will lead to higher revenues and profitability from the next fiscal. Moreover, an expanding book value per share coupled with a steady ROE around 20% is pretty impressive. Since 2012, the stock traded in a Price/Book range between 5.2x and 7.75x. I expect the company's book value per share to reach $9.50 within the next twelve months. Assigning a Price/Book of 7.5x on that value I get $71.25, the company's projected stock price for FY2015.

CYBX Price / Book Value data by YCharts

Cyberonics is currently trading at a P/E of ~31x on a trailing twelve months basis, slightly above the peer group average of 29x. Among its peers, Techne (TECH) is trading at ~25x, Given Imaging (GIVN) at ~36x and St. Jude Medical (STJ) at ~24x. The company guided that its adjusted EPS will be in the range between $1.93 and $2.01 for FY2014, which I feel has already been factored in the current price of the stock. However, the company's EPS is expected to rise at a CAGR of 20% and for FY2015 I expect the EPS will be in the range between $2.30 and $2.45. On average the FY2015 EPS would be $2.38. Assigning the peer group average P/E of 29x on that EPS, I arrive at my one-year target price of $69 for Cyberonics, which broadly tallies with the projected price based on Price/Book ratio.

CYBX PE Ratio TTM data by YCharts

Summary: Reasons to Buy

The global market for epilepsy is under-penetrated by a huge margin and Cyberonics offers an excellent investing opportunity in this space.Cyberonics is emphasizing on developing a robust pipeline for maintaining its leadership position in the field of epilepsy treatment.The AspireHC has been generating strong momentum in the U.S. with an improving average selling price.The AspireSR is undergoing clinical trials in the EU (E-36), which upon successful completion would lead to commercialization of the product that would boost the company's top- and bottom-line significantly.The company's international focus and collaborative efforts should be EPS accretive on a sustainable basis going ahead.The company is cheaply valued in terms of FY2015 earnings, and therefore has limited downside in corrective phases.

Potential Risks

Cyberonics is currently working hard to obtain coverage for VNS Therapy for treatment-resistant depression. However, its recent request to the Centers for Medicare and Medicaid Services ("CMS") to reconsider the non-coverage decision taken in 2007 has been declined in May this year. It came as a major setback for Cyberonics.Depressing gross margin is a bit worrying in the near term due to higher short-term expenses. However, if the expenses remain at an elevated level for a prolonged time period, the stock could see significant correction.Cyberonics faces stiff competition from players like Medtronic (MDT), St. Jude Medical etc. Medtronic obtained FDA approval for its deep brain stimulation ("DBS") device for controlling the tremor in Parkinson's disease, which is slightly negative for Cyberonics.

The Bottom Line

Cyberonics is a shareholder-friendly company, which consistently returns values to its shareholders through share repurchase programs. In January 2013, the company approved a new share repurchase program with authorization to repurchase up to one million shares of the company's outstanding common stock. This indicates that the company is confident in expanding its horizon, both geographically as well as product wise. The stock is certainly worth considering for a long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Sunshine Heart Stock Offering: Why Now?

After all, the company is presently quite well funded and the share price has risen considerably on the back of recent announcements.

There are a number of key announcements expected through 1st quarter 2014. These announcements could quite easily be catalysts for significant increases in the share price as each announcement is made. Holding off on a stock offering could avoid unnecessary dilution.

Some possible reasons for a stock offering now:

I would be confident that SSH Management will have very sound reasons for the timing of this stock offering.

The reasons will be strategic, rather than a need for cash right now. They might include:

Positioning to adopt a more aggressive approach to developing the market for C-Pulse;Providing a means for institutional investors to get on board;Taking money because it is presently on offer and available; andPreserving control and independence into the future.

I will address each of the above in more detail below, explaining why they are important considerations.

But first some background information on Sunshine Heart for those readers not familiar with this company.

Sunshine Heart's C-Pulse system:

The Sunshine Heart C-Pulse system is a medical device to treat congestive heart failure by assisting the natural heart's pumping function. To further explain:

The C-Pulse system is not blood-contacting and does not take over from the heart. It employs proven counter-pulsation technology, to reduce the workload of the heart, and to create additional blood flow to the heart muscle. This provides ongoing permanent support and allows a tired heart muscle some opportunity to rest and recover, in a measurable way (NYHA Heart Failure class improvement). For further information see here and here.

Some results from the C-Pulse 20-person feasibility study (Data sources: Prospectus filed with SEC August 10, 2012 and Sunshine Heart Corporate Presentation October 2012):

NYHA Heart Failure Class improvement - 12 patients (60%) at 6 months. (Subsequent to completion of the feasibility study 2 patients became asymptomatic and were weaned off the device and another 2 are being considered for weaning);Re-hospitalizations at 6 months 5% (compares to recent trial published control group re-hospitalization rate of over 40% with similar patient population at 6 months);Medication Reduction: Diuretics -discontinued, reduced or unchanged for all patients; Inotropes - 4/4 patents successfully weaned (within 48 hours).

Following on the successful completion of the feasibility trial, the FDA has approved a 388-patient pivotal trial with targeted marketing approval in early 2017. The C-Pulse already has CE Mark approval for commercial sale in the EU.

Sunshine Heart's financial metrics compared to Heartware:

In considering reasons for the current stock offering, it is useful to draw some comparisons with Heartware (HTWR). Heartware also operates in the heart assist device space and has been very successful in raising large amounts of capital while minimizing dilution.

Sunshine Heart, in pursuing its objectives, had accumulated losses through end of 2012 of ~$79M. Additional losses of ~$9M were incurred in the six months through 30 June 2013. Cash balance at end of June 2013 was $21.5M. Issued shares increased by ~33% to 12.4M in the six months ended 30 June 2013. Market cap at 13 September 2013 was $137M.

Below are comparative figures for Heartware, whose product is the MVAD, a Left Ventricular Device (LVAD), which addresses the late stage NYHA Class IV CHF market.

Heartware, in pursuing its objectives, had accumulated losses through end of 2012 of ~$270M. Additional losses of ~$26M were incurred in the six months through 30 June 2013. Cash balance at end of June 2013 was $190M. Issued shares increased by ~12.4% to 16.4M in the six months ended 30 June 2013. Market cap at 13 September 2013 was $1.278bn.

Sunshine Heart's target market is over 15 times HTWR's target market. Both have CE Mark for their devices, allowing commercial sales in the EU and other countries accepting the CE Mark. Both have ongoing trials targeting Destination Therapy (DT) approval for their devices in the USA by early 2017. HTWR does have Bridge To Transplant (BTT) approval in the US, but revenue from these sales is insufficient to date to offset the huge and ongoing R&D and trial costs it is incurring.

More comprehensive detail on reasons for a Sunshine Heart stock offering:

1. Positioning to adopt a more aggressive approach to developing the market for C-Pulse:

In 2014, Sunshine Heart will be in a very similar position to Heartware in 2009.

In 2009 Heartware commenced commercial sales in Europe and was heavily involved in its clinical trial for Bridge To Transplant approval in the USA.

Table 1 below shows just how cash hungry Heartware has been in developing its markets, conducting clinical trials, and researching and developing next generation LVADs to compete with Thoratec (THOR).

To date, Sunshine Heart has adopted a conservative approach. But this stock offering could be a sign it is about to aggressively launch its development of the EU market, where it has approval for commercial sales, and perhaps accelerate its enrollments in its US Pivotal trial.

Sunshine Heart should be able to do this with a far lesser level of expenditure than Heartware because it does not have the R&D costs of HTWR and THOR in developing entirely new and different next generation devices (devices that require new trials with risk of failure).

But Sunshine Heart will need to increase expenditures well above past levels to aggressively promote in the EU market and to accelerate its US trial.

Table 1 - Heartware - Loss From Operations 2009 to 2012 and 1st Half 2013

2. Providing a means for institutional investors to get on board:

The importance of this cannot be overstated.

Once institutions are on board, the company has a group of shareholders with a commitment and the means to fund the company to its end objectives.

This can be seen with Heartware when it recently had no difficulty at all in raising in excess of $200M with minimal dilution.

In my recent article, "HeartWare Might Have Missed The Boat: A Hedging Strategy," I described how shareholders in Heartware might hedge their positions in the mechanical heart assist device space by also acquiring some shares in Sunshine Heart.

I described the difficulty for institutional shareholders in carrying out such a hedging strategy as follows:

There are 147 institutional shareholders in HeartWare holding 98.33% of the issued shares.

Only 10 of these institutions already have shares in Sunshine Heart. The value of their combined holdings in Sunshine Heart is roughly 5% of the value of their combined HeartWare and Sunshine Heart shareholdings. So they already have a hedge in place.

The remainder of the institutions would have to acquire between 2.6M and 10.4M shares in Sunshine Heart to implement the above strategy.

So for the majority of these institutions, who are not quick enough to buy on market, the only way to achieve this hedging strategy might be to participate in a capital raising for Sunshine Heart.

If enabling more institutional shareholders to get on board was the sole reason for the current stock offering, it would be a very good reason by itself.

3. Taking money because it is presently on offer and available:

It is a truism in the capital markets that when you need money, no one wants to give it to you. But there will be no shortage of offers of money when you do not need it.

Dave Rosa, CEO of Sunshine Heart, referred to this counter intuitive situation in a recent interview organized by PropThink.

It is, of course, not only a matter of not needing the money, but also being perceived as not needing the money.

4. Preserving control and independence into the future -

In the PropThink interview referred to above, Dave Rosa discussed the desirability or otherwise of sourcing funding through a partnership.

He said, in part:

My own personal philosophy is you control your own fate.

While partnership arrangements are apparently available, the stock offering is obviously the preferred option going forward. It will certainly keep things simpler if there is an acceptable buyout offer in the future.

Other considerations:

If the stock offering takes away any investor concerns of SSH running out of cash, that is likely to have a positive effect on the share price.

Additional shares on issue plus a higher share price might lift SSH's market cap from micro cap to small cap level. That in itself could in turn be a further positive for the share price.

Caution: As always, please do your own research before any buy or sell decisions. Use of information and research in the article above is at your own risk.

Investing in micro cap companies is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks. Due to illiquidity, share prices can fall despite strong fundamentals and possible inability to raise sufficient additional cash to continue to fund ongoing operations is always a serious concern. Fuller details of risks associated with Sunshine Heart as identified by the company may be found with their form 10-12B/A registration filing with the SEC and their other SEC filings.

Disclosure: I am long SSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Medgenics: Overlooked Biotech Stock Could Be Good Risk/Reward Investment

Investors in the biotechnology sector probably don't need any antidepressants. Many biotechnology stocks are namely among the best performing across the stock market. Over the last 5 years, the biotechnology index trackers tripled in price. But did all biotechnology companies flourish? We discovered a small company that Wall Street has forgotten about but in fact is well positioned to become one of the greatest developers of medical technology that allows patients to produce, within their bodies and on a long-term basis, their own natural human protein therapy for the treatment of a range of chronic diseases such as anemia and hepatitis C. The industry in which they operate is worth billions of dollars. The company is Medgenics (MDGN) and this article explains why this stock is a must have for investors who are searching for a highly skewed risk/reward investment.

Company overview

Medgenics was founded in 2000 in San Francisco as a medical technology and therapeutics company which engages in the research and development of products in the field of biotechnology and associated medical equipment in the United States. The company develops and commercializes Biopump, a groundbreaking tissue-based platform technology for the production and delivery of therapeutic proteins using the patient's own tissue for the treatment of a range of chronic diseases, including anemia, hepatitis, hemophilia, and other chronic diseases. This pump technology is a platform for endless indications. Therefore the company plans to develop a pipeline of products based on this technology to target the broader large and rapidly growing global protein therapy market. R&D and manufacturing operates in Misgav, Israel and U.S. manufacturing operates in San Francisco.

Medgenics is managed by a team of biotechnology and biomedical device experts that include highly experienced figures in the healthcare industry, in healthcare finance, as well as influential figures from the medical community and academia.

Last week the company announced that its executive team has been replaced. Andrew L. Pearlman, PhD., the company's Founder and previously the company's President and Chief Executive Officer, has retired as of September 13, 2013 but is continuing to serve on the Board of Directors and as a senior advisor to the company.

The new executives are:

- Michael Cola, President and Chief Executive Officer

- John Leaman, M.D., Chief Financial Officer

- Garry Neil, M.D., Global Head of Research and Development.

In addition Mr. Cola joined the Medgenics Board of Directors.

Investors welcomed the replacement as the stock price rose upon the news.

What is Biopump?

So the company develops the so called 'Biopump' technology. It's a combination biological/device product, split in three different product candidates called EPODURE, INFRADURE and HEMODURE. How does it work? The next chart clarifies.

(A)

The first stage is the removal (harvesting) of a sliver of dermal tissue, called a micro-organ (2-3mm diameter x 30-40mm length), from beneath the patient's skin. This procedure is performed under a local anesthetic, is intended to be performed in a physician's office and is minimally invasive, so as to encourage rapid healing with little or no scarring. Generally, more than one micro-organ will be harvested from the patient (typically 4-5).

(b-e)

The micro-organ is processed outside the body using a non-immunogenic adenoviral vector to introduce the appropriate gene into the tissue's cells and cause the cells to produce the desired protein, thus converting it into a sustained-action Biopump.

(f-i)

Tests are performed during processing to determine the daily protein production from each Biopump. The appropriate number of Biopumps is thereby determined and then subcutaneously implanted back into the patient after one to two weeks. After implantation, Biopumps are designed to maintain protein levels in the blood within the therapeutic window for up to six months or more.

Management estimates that the Biopump technology could potentially be applied to many elements of the market, as the next overview explains.

Medgenics is not the only company though working on self healing medical technology. Competition in this area is fierce. But in our view this should not be a major hurdle for investors. Firstly the Biopump technology is unique in the sense that it addresses the key limitations of regular gene therapies, in knowing the dose, in the ability to increase or reduce it, and most importantly, in being able to effectively stop it if needed. The Biopump uses intact tissue at all times, so that the cells in the tissue never leave their natural matrix.

Secondly the growing protein therapy industry is worth approximately $120 billion as we speak. And according to RCNOS, a leading research company in this field, the growth is all but over. Even if Medgenics only is able to obtain a tiny percentage of the market, the company could be worth billions.

FDA product approval

Dealing with the FDA can be a lengthy and complex procedure. The following chart shows a brief overview of the necessary steps.

procedure regulatory approval from secfilings.nasdaq.com

What are the chances their 3 product candidates are allowed to be sold? Let's assess:

EPODURE:

The companies announced last month this product candidate continues to be on target to carry out its first US clinical trial of its Biopump technology. This is according to step 7 from the chart above after it attained clearance from the FDA for the phase II trail in treating dialysis patients in the United States. Earlier this year, Medgenics reported interim data from its Israeli phase IIa clinical study of EPODURE to treat anemia in end stage renal disease patients, and the US trial will be thus the phase II study of the technology in similar patients. Former CEO Andrew Pearlman said the first half had seen progress and Medgenics was now positioned for "important near term milestones".

Our assessment is that EPODURE indeed is near important milestones and we think it is likely that Medgenics is allowed to proceed with phase III testing. Historically, products that have successfully passed the phase II stage have namely a 60% chance of actually being approved to go on to the market. Medgenics could commence next year as Phase III trials are an important turning point in general (step 8). The purpose of phase III trials is to gather even more information about the effectiveness and safety of the new medicine from large numbers of patients (likely to be several hundred to several thousand patients), comparing the medicine's effectiveness with standard treatments. At this point the product has better than a 70% chance of being approved and getting on to the market.

INFRADURE:

This one stands for sustained production and delivery of interferon-alpha for use in the treatment of hepatitis, which has received approval for two Phase I/II trials in hepatitis C from the Israeli Ministry of Health with the first slated to commence in Q4 2012; and has received Orphan Drug Designation from the FDA in June 2012 for the treatment of hepatitis D. Orphan Drug Designation carries multiple benefits, including the availability of grant money, certain tax credits and seven years of market exclusivity, as well as the possibility of an expedited regulatory process.

According to management:

"....We will continue to evaluate and update our plans for the regulatory and clinical pathway for the INFRADURE Biopump with a view to determine whether there would be an advantage to seek regulatory approval of one of those product candidates in the United States, or possibly first in markets outside the United States, in light of the fact that hepatitis D is a relatively rare disease in the United States, but is more widespread internationally, with an estimated 15 million patients or more worldwide with the disease. In addition, we plan to identify other rare diseases with orphan designation which affect less than 10,000 people worldwide, in which the sustained therapy potentially offered by our Biopump Platform Technology could represent a major clinical advantage. According to the National Organization of Rare Diseases, there are thousands of such diseases, and we are exploring these to identify those most promising for our Biopump technology...."

An important validation of this product was given by renowned experts during the recent annual conference of the American Association for the Study of Liver Disease (AASDL) in Boston late November 2012.

Based upon this information, we think it is more likely than not that this product will reach the last step (9) in a few years from now.

HEMODURE:

This product is now being developed to produce and deliver clotting Factor VIII therapy for the sustained prophylactic treatment of hemophilia. The company was granted $4 million by pharmaceutical company Baxter to co-develop this product. In November 2010, Medgenics took control of the preclinical development as part of an extension to the agreement, while yields were improved. Although the agreement expired in September 2011, Medgenics has confirmed that Baxter remains interested in HEMODURE and indicates it will seek to move forward with the next stages of collaboration once further technical performance improvements are demonstrated by HEMODURE Biopumps in vitro and in animal models. Once target levels are reached, Medgenics could commence a phase I/II trail in humans.

Given this information, we think this product is still in its early stages. Therefore it is too early to tell whether it's likely this product will reach the last step.

Summarizing: We conclude that Medgenics appears to be far advanced in the process of getting final approval for product sales of EPODURE and INFRADURE. Given the historical rates of success and validation by experts in the industry, we think it is likely that a final approval will be obtained. We cannot say the same for HEMODURE (yet), as this product is still in its early stages of development.

Insider trading

source: nasdaq.com

The insiders seem to have a significant stake in the company and are on the buy side since the stock hit the $4 mark. No insider selling, so no red flag here.

Financials

Let's look at some basic financials. Medgenics is still in a pre-revenue and pre-profit stage, so it is important to analyze, just like with other biotech companies in their early stages, whether the cash balance can cover the cash burn for a long period.

source: finance.yahoo.com

Given the net cash available and low cash burn, they can fund their operating activities without an urgent need for a dilutive stock offering in the near future. This is mainly thanks to a large public stock offering of $32 million completed in February this year.

According to management:

"...Without taking into account any revenue we may receive as a result of licensing or other commercialization agreements we are pursuing, we believe that cash on hand, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through 2014..."

But what about revenue?

"..Although we have not yet generated revenues from product sales, we have generated income from partnering on development programs and we expect to continue to pursue partnering activity... If our product development efforts result in clinical success, regulatory approval and successful commercialization of any of our products, we would expect to generate revenue from sales or licenses of any such products....We do not anticipate that we will generate revenue from the sale of products for at least five years; however, we do intend to seek licensing or other commercialization agreements similar to our agreement relating to the development of our HEMODURE Biopump. We anticipate that the funds received as a result of such agreements may be sufficient to fund our operations in the future...".

Because direct product sales are not to be expected in a few years from now Medgenics focuses on a diverse mix of income streams so that the company attracts cash inflow till their physical products can hit the market. A few months back the Israeli government awarded a $1.9 million grant. Other grants like these could follow in the near future.

Summarizing: we regard the current financial situation as very healthy and although the foreseeable future of income is (of course) uncertain, we expect management being capable enough acquiring even more non-dilutive funding till product sales start.

Valuation

So what could Medgenics be worth tomorrow?

Experts forecast that the protein therapy market will be worth about $150 billion in 2017. To be very conservative, let us assume that Medgenics will obtain a 0.5% market share. That makes $750 million. Biotech stocks are generally valued at high price-to-sales ratios but again let's be conservative so no multiplier. We set the discount rate, since this is a risky business, at 15%. Discounting gives 750/1,15^4 = $429 million.

Shares outstanding totals 18.4 million so a stock price of 429/18.4 = $23 can be derived.

The stock market currently values Medgenics at just above $6.

Technical analysis

source: stockcharts.com

The stock price just broke through the resistance of MA200 on high volume. This MA200 is now a short-term support level. Medgenics is a buy from a technical point of view.

Risks

This is a biotech small cap. Investing in this stock is obviously not without risks. Investors should bear in mind:

- A new dilutive stock offering is a (remote) possibility. We do not expect this in the short term, considering the sizeable war chest and low cash burn. However, we won't rule this out completely in the long-term since investing in biotech stocks brings an above average dilution risk.

- The whole process with the FDA is lengthy and complicated. A setback in the timeline is not unthinkable. We think however this is not likely, given the diverse portfolio mix and advanced status in the FDA timeline.

- Expectations set by management do not necessarily have to materialize. As management themselves indicate, the nature of the business is highly uncertain and forecasting is therefore complicated.

Conclusion

Medgenics offers a very attractive risk/reward ratio. Left aside by WallStreet for a long period, investors are just starting to notice the potential value.

Insiders are on the buy side. Medgenics is cash-rich while cash burn is low. The company is able to generate other streams of income such as licensing, royalties and grants before their products will hit the market. This makes downside risk very slim while upside potential is huge. Based on this alone the stock should be trading much higher. Their Biopump technology is unique and likely to enter a massive multi-billion industry. The FDA timeline goes according to plan and any step forwards could drive the stock price up significantly. As soon as product sales start, the market capitalization could be a multifold of what it is today.

Recommendation: Speculative Buy, Price target $23.

Ticker code: MDGN

Listing: AMEX

Market capitalization: $116 million

Average daily volume: 49K

Next earnings date: November 2013, no exact date planned yet

Disclosure: I am long MDGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Acadia Stock Report: Business Overview And Revenue Projection

Investment Summary

Acadia Pharmaceuticals (ACAD) is a mid-cap biopharmaceutical company focusing on the development of drugs for neurological and central nervous system disorders. Its stock is currently trading at $23.5 (as of 9/18/13), placing its market cap at $2B.

Acadia's leading drug candidate, pimavanserin, is in Phase III development as a potential first-in-class drug for Pakinson's disease psychosis (PDP). Pimavanserin is a small molecular inhibitor of the serotonin receptor 5-HT2A and has potential applications for psychosis in patients with other neurological diseases, including Alzheimer's and schizophrenia. Acadia plans to file for a new drug application (NDA) for FDA approval toward the end of 2014 for Pimavanserin for Parkinson's disease. If approved, the drug could be in the market by 2015.

The company has had a long-term partnership with Allergan (AGN) to co-develop treatments for chronic pain and glaucoma. The drug candidates are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. The alpha-adrenergic receptor agonist program is in Phase II. Allergan is looking for a partner to conduct Phase III trials. Acadia's R&D pipeline also includes a preclinical program developing inhibitors for ER-Beta and Nurr-1.

In this report, we will address the following questions. First, what is the probability of pimavanaserin approval by the FDA based on its clinical trial results? How big is the market for psychosis and the neurological space? Who are the competitors for Acadia's product?

Second, Acadia has a partnership with Allergan to develop pain-related products. Does the partnership sufficiently pay for the development costs? Or will Acadia need to raise more money through public or private capital markets? More equity offerings will certainly dilute existing shareholders' holdings.

Finally, we will review ACAD's financial status, forecast its revenues and earnings for the next 5 years and derive an intrinsic value for the stock.

This report contains three parts. Part 1 is an overview of ACAD's business model, its key products, and risk factors associated with the company. In Part 2, we will review its partnership agreements with Allergan and point out relevant royalty payments and liabilities that ACAD will incur. A 5-year revenue projection for ACAD will be presented. In Part 3, we will analyze its financials and derive an intrinsic value for ACAD. Our analysis suggests that the intrinsic value for ACAD is ~$31.

Part1: Business Overview

Acadia Pharmaceuticals is a mid-cap biopharmaceutical company that develops serotonin receptor inhibitors with applications for psychosis in patients with neurological diseases, including Parkinson's disease, Alzheimer's disease and schizophrenia. The company currently has a market cap of ~$2.1B with a stock price of $23.5 per share and about 83 million weighted average shares outstanding.

Its leading drug candidate is pimavanserin, which is in Phase III development as a potential first-in-class treatment for Parkinson's disease psychosis (ACAD 10K 2012). Acadia plans to file an NDA toward the end of 2014 for Pimavanserin for Parkinson's disease. Pimavanserin also has potential application for the treatment of psychosis associated with Alzheimer's and schizophrenia.

The company has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. These programs are based on alpha-adrenergic receptor and muscarinic agonists discovered at Acadia.

Key issues

When evaluating a company like ACAD, we need to consider several key issues (or potential risk factors) uniquely associated with the company.

First and foremost, what are the future growth rates for its product revenues and product royalty revenues paid by its corporate partners? When will the company turn profitable? What is the competitive landscape for its drugs? Obviously, the company's profitability is closely tied to its drug sales. ACAD has collaborated with Allergan to develop drugs for chronic pain and glaucoma. How much in milestone payments and royalty from sales will Acadia expect to receive over the next 5 years?

A second issue is related to the expansion of its clinical trials on various fronts. While the company intends to expand its drug franchises to as many indications as possible, there are significant costs associated with each clinical trial. Does the company make wise investments on this front? What is a likelihood of success for these trials? We will review its late-stage clinical programs.

A third issue is related to the company's financial strength or weakness. Due to mostly non-profitable quarters in the past, ACAD's accumulated deficit is $382M as of June 30, 2013 (ACAD 10Q2013). With over $564M additional paid-in capital, Shareholder equity is $181M as of June 2013. In the financial projection section, we will discuss when the company will turn profitable.

As of June 2013, ACAD had $205M cash and cash-equivalent securities. It has no long-term debt nor convertible notes. However, the company has continuously funded its development through stock offerings in both private and public capital markets. These activities have led to significant expansion of stock shares and dilution of shareholders' equity for years. Going forward, the company will need to raise additional funds for Phase III trials in schizophrenia and Phase II trials in Alzheimer's associated psychosis (ADP). It is inevitable that further stock offerings are anticipated. We will discuss the impact of its equity offerings during stock valuation.

Part 2: Product Sales and Revenues from Partnership Agreements

Pimavanserin

Pimavanserin is an inhibitor of the serotonin receptor (5-HT2A), and is currently in Phase III clinical development for Parkinson's disease psychosis. At present, there is no drug approved for PDP. Therefore, pimavanserin could be the first drug approved for this indication. It is estimated that 60% of patients with Parkinson's disease have psychosis that require medical assistance. The potential market for PDP is estimated to be $1B.

Acadia announced pimavanserin Phase III data in March 2013 (Pimavaserine phase III data March2013). The data indicated that the drug is safe and well-tolerated. In addition, it reached statistical significance when meeting primary and secondary endpoints, which include improved motor control and sleep, and reduced delusions and hallucinations. Based on the data, Acadia received a green light from the FDA to file for a new drug application (NDA) for the treatment of PDP scheduled at the end of 2014 (Pimavaserin expediated NDA filing April2013). The expedited progress means that Acadia does not need to conduct an expanded phase III trial, thus speeding up commercialization of the drug to market by 2015.

Psychosis is also frequently associated with other neurological disorders, including schizophrenia and Alzheimer's disease patients. The combined market for antipsychotic medicines was estimated at $28B in 2011, so there is a large unmet need in this space (ACAD 10K 2012).

Therefore, Acadia's strategy is to further expand the potential use of pimavaserin to these indications. The company is currently conducting pimavaserin Phase II clinical trials for schizophrenia (Pimavanserin with risperidone schizophrenia Phase II data 2012). The published Phase II indicated that pimavaserin co-treatment with current anti-psychotic medicine (risperidone) enhanced efficacy and reduced side effects associated with existing medicine. Acadia is considering further studies (Phase III) to pursue this indication, but has not specified whether the company will go alone or seek a corporate partner.

About 20%-50% of patients with Alzheimer's disease suffer from psychosis. Acadia plans to initiate Phase II trials for ADP by 2H 2013. There are around 5 million people with Alzheimer's disease in the United States alone. So, the potential market for ADP is ~$3B.

The competition in the anti-psychotic (PDP and ADP) markets includes Seroquel marketed by AstraZeneca (AZN) and the generic drug clozapine. These drugs are used off-label as they are not officially approved in the US for PDP and ADP.

For schizophrenia, competition includes Zyprexa made by Eli Lilly (LLY), Risperdal by Johnson & Johnson (JNJ) and Ability by Bristol-Myers-Squibb (BMY). The first two drugs are already generic.

We estimate that pimavaserin sales will be about $100M (2015), $200M (2016), and $360M (2017). With an 80% probability of approval, the revenues for Acadia are estimated to be $80M (2015), $160M (2016) and $288M (2017). The slow ramp-up of sales reflects that Acadia is a small company without an existing sales force. In addition, the sales numbers account for the PDP indication only, because an expansion of pimavaserin to ADP and schizophrenia will require completion of Phase III trials and approval of the drug for these indications, which is unlikely to happen before 2017.

Alpha Adrenergic Agonist

Acadia is collaborating with Allergan to develop drugs (alpha adrenergic agonist) for the treatment of chronic pain. Allergan reported preliminary proof-of-concept data in Phase II for visceral pain, fibromyalgia and irritable bowel syndrome. Further studies in Phase III will be needed before regulatory approval and commercialization. Acadia did not disclose the royalty rate that Allergan will pay to Acadia under the partnership agreement. We estimate that it is around 10%-25% of net sales, based on comparable transactions in the industry.

Chronic pain treatment has a big market but also many players. For chronic pain treatment, competition includes Lyrica and Neurontin marketed by Pfizer (PFE) and Cymbalta by LLY. Lyrica and Cymbalta have sales of $4.2B and $5B in 2012, respectively.

Assuming Allergan completes Phase III in 2014, receives the FDA approval in 2015, and launches the drug in 2016, we estimate that revenues will be about $80M (2016) and $144M (2017). With a 70% probability of approval, it will be $56M and $100M, respectively. However, Acadia will only receive a fraction of the royalty from the net sales. If we assume the royalty rate is 15%, the royalty revenues for Acadia will be $8M (2016) and $15M (2017). So, the bottom line is that the royalty revenues from its corporate partnership have a very modest contribution to Acadia's earnings.

Muscarinic Agonist

Acadia is also collaborating with Allergan to develop a drug for glaucoma, based on the muscarinic agonist discovered by Acadia. The program is still in Phase I development, and will thus have little impact on revenues over the next 5 years.

Partnership with Allergan

Acadia has collaborated with Allergan to develop drugs for chronic pain, glaucoma and other indications. The drugs are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. There are separate collaborative agreements between these two companies signed in 1997, 1999 and 2003. The upfront payments and partial development milestones have already been paid out. So, here we only look at future potential payments.

The remaining development milestone payments that Acadia is potentially entitled to receive are $10M, $15M and $13.5M for the three agreements, respectively. Thus, the combined potential milestone payments are $38.5M. We assume that it will be paid out over the next 4 years. This translates to an average of $9.6M in milestone payments each year from 2013 to 2016. The numbers are included in our financial forecasts.

Projected revenues for Acadia

Adding together the product revenues from pimavaserin and the royalty revenues from the Allergan collaboration, we estimate that total revenues for ACAD will be $9.6M (2013), $9.6M (2014), $89M (2015), $178M (2016) and $300M (2017). These revenue numbers will be used for stock valuation.

References:

ACAD 10K 2012

ACAD 10Q2013

Pimavaserine phase III data March2013

Pimavaserin met Phase III endpoints Nov2012

Pimavanserin with risperidone schizophrenia Phase II data 2012

Pimavaserin expediated NDA filing April2013

Disclosure: I am long ACAD, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Hanger: A Cheap Stock In The O&P Space With Significant Upside

Austin, Texas, -based Hanger (HGR), the nation's leading provider of orthotic and prosthetic (O&P) patient care services, has seen its stock appreciate by more than 65% in the last one year. However, in the last few weeks the stock corrected almost 20% from the top at $37.39, and currently it is hovering around $31. Hanger is currently focusing on expanding its geographical footprint through complementary acquisitions. I believe that the recent correction offers an excellent buying opportunity with ~30% upside in the near-term.

Company Overview

Hanger is a leading distributor of O&P devices in the U.S. Effective from January 2013, the company has realigned its reporting segments into two groups, which are: 1) Patient Care and 2) Products and Services. Hanger owns and operates O&P patient care clinics. The company proactively partners with suppliers in the design and development of new and proprietary components, clinical processes, tools and products.

As the leading provider of prosthetics, orthopedic supports and braces in the U.S., Hanger serves more than 650,000 people each year. Its nationwide network of over 640 patient care centers spans 45 states and the District of Columbia. A group of more than 1,000 skilled practitioners supports Hanger's entire operation.

Why Hanger Is Worth Looking Into

I feel Hanger is worth considering primarily because of two reasons. First, Hanger accounts for 19% of the estimated $4.3 billion spent each year in the U.S. on O&P products and services. Second, being the leading player in O&P products and services, the company enjoys economies of scale its competitors can't match. To take advantage of the economies of scale, Hanger is looking to expand its geographical footprint outside the U.S. through complementary acquisitions.

Hanger's top-line has been growing on a consistent basis, supported by healthy contributions from both reporting segments of the company. Going ahead, I believe Hanger's top-line and market share will increase further due to the company's policy to build strong patient relationships by offering comprehensive total care packages that physicians can rely upon.

Hanger's Growth Drivers

Hanger's Patient Care segment is its primary growth driver. Hanger's superior offerings coupled with unmatched technology ensure steady revenue generation, which is expected to continue going ahead. Moreover, the company's high-margin Accelerated Care Plus ("ACP") business seems to be turning around as it is delivering increasing returns. Hanger generates revenue primarily from two sources, orthotic care and prosthetic care.

Orthotic Care: Hanger's orthotic care business comprises of designing and fabrication of a range of custom-made braces and other devices, such as spinal, knee, and sports-medicine braces that provide external support to patients suffering from musculoskeletal disorders, including ailments of the back, extremities or joints, and injuries from sports or other activities. Hanger's Insignia laser scanning, a completely noninvasive technology, ensures a precise fit for many orthotic devices. Using a hand-held scanner and a computer, a practitioner can capture and store three-dimensional images of the affected area. Insignia images are perfect within one millimeter and the scanning process is quick, easy and painless.

Hanger's National Orthotics Program is the largest provider of orthotic patient services in the U.S. Under the program Hanger offers some specialty orthotic services with high margins, which are described below:

Diabetic Foot Care: People with diabetes often experience medical issues with their feet and legs. The associated neuropathy, loss of sensation and poor vision present significant challenges to proper care. Diabetic Foot Care is a comprehensive approach to maintain healthy feet.Pediatric Orthotics: Hanger has a special pediatrics orthotics program that includes all types of orthoses for infants and older children as well as cranial helmets and cranial bands for the treatment of plagiocephaly.Burn Treatments: Burns create scars physically and emotionally. Hanger's innovative technology, coupled with advancements in medical procedures, has made it possible to get rid of scars. Hanger's approach to comprehensive wound care, from acute in-patient management to out-patient rehabilitation and reintroduction of the patient to their daily life helps build patient's self esteem.Postmastectomy Services: Mastectomy products and postmastectomy services are Hanger's specialized offerings within its orthotics program. These include mastectomy forms, custom mastectomy prostheses, and mastectomy bras/undergarments. The practitioners who specialize in mastectomy products are sensitive and discreet in providing patient care services.

Prosthetic Care: In prosthetic care, Hanger offers custom-made artificial limbs to patients with loss of limbs due to vascular diseases, diabetes, and cancer or congenital disorders. Traumatic limb injury can also lead to amputation of limbs. Most of these injuries occur due to motor accidents, through on-the-job or recreational injuries, and during military service in combat zones. In all of the above situations, the removal of a limb is usually a life-saving procedure.

There are approximately 1.7 million people in the U.S. living with limb loss. Each year more than 150,000 people face the amputation of a limb, among which about 70% are older adults. Hanger offers specialized programs, such as Upper Extremity Prosthetics Program ("UEPP") and Lower Extremity Prosthetics Program ("LEPP") that are part of its prosthetic care business line.

International Expansion to Fuel Future Growth

As I mentioned above, Hanger is seeking to expand its geographical footprint and international revenues through complementary acquisitions. Smaller companies often approach Hanger to help them grow as Hanger's associates, because they find it difficult to progress alone due to administrative and regulatory obstacles. If Hanger sees synergy with such companies, it acquires them. Hanger made many small tuck-in acquisitions in 2012 worth $60 million, which exceeded the company's previously announced goal to generate revenues of $20 million by year-end.

Although merger and acquisition have some inherent risks, I believe Hanger's case is different, as it is consistent with its merger and acquisition policy. Its acquisitions are based on location, quality of practitioners, and efficient product/service mix. In future Hanger is expected to acquire more companies outside the U.S. for expanding revenues and bottom line. The company's strong cash position will help it penetrate further in the overseas O&P market.

More Positive Catalysts for the Stock

Hanger has a robust pipeline. Its upcoming vacuum solutions used to hold prosthetics in place more securely should help capture market share from rivals going ahead. Furthermore, its virtual reality based therapeutic solutions provided by ACP are expected to boost future revenues and profitability significantly.Janus, Hanger's new clinic management system would considerably enhance patient satisfaction, clinical effectiveness and billing efficiency. Linkia, one of Hanger's subsidiaries, helps the company maintain balance between volume and fair pricing for services offered to customers. Linkia is a network management company in the orthotics and prosthetics industry, which tries to seek contracts with national and regional insurance companies.In 2012, Hanger completed its WalkAide INSTRIDE clinical trial. The company said that it expects to submit the results to the Centers for Medicare and Medicaid ("CMS") for coverage decision in the second half of 2013.Hanger's strong sales trajectory in Patient Care combined with the continued execution on its cost savings and efficiency initiatives will help the company offset a good portion of its recent cost increases. This will enable the company to deliver margin expansion and earnings growth going ahead.

Valuation and Projected Stock Price

Hanger is a cash rich company with cash and equivalents of $5.77 million as of quarter ending June 2013 against a little debt on the balance sheet. Although the cash position has weakened due to the acquisitions the company made in 2012, the debt to equity ratio has also decreased at the same time, which implies the company remains neutral in terms of net cash. What's encouraging is that the company's revenue per share has been rising steadily. The recent acquisitions coupled with an efficient product-mix helped the company register solid revenue growth.

HGR Cash and Equivalents data by YCharts

Hanger is currently trading at a P/E of 17.04x, far below the peer group average of 26x. Among its peers, Integra LifeSciences (IART) is trading at 45.80x, ResMed (RMD) at 23.48x and Hill-Rom Holdings (HRC) at 19.22x. Perhaps Hanger's acquisition related uncertainties are responsible for this discount in valuation. However, I believe that the discount will be narrowed significantly going forward, once the overhang related to the company's recent acquisitions subsides and earnings start beating analysts' estimates.

HGR PE Ratio TTM data by YCharts

Hanger's management guided that its EPS would be in the range of $2.02 to $2.09 (up 11.6% to 15.5%) in 2013. I believe in the company's guidance as I am impressed with Hanger's recent initiatives to boost top- and bottom-line performance. Moreover, its realignment plan to report in two separate segments is also an impressive move. On an average I expect that the company will deliver an EPS of $2.05 in the current fiscal. In the last five years, the company's stock has traded in a P/E range between 9.9x and 21.9x based on trailing twelve month earnings. Assigning a P/E of 20x on the expected EPS of $2.05, I arrive at $41, Hanger's projected stock price for the current fiscal. That's ~30% upside from the current level around $31. I feel it will play out within the next six months.

Summary: Reasons to Buy the Stock

Hanger is expanding its business by investing in complementary tuck-in acquisitions, which I believe is quite encouraging.The company enjoys enormous economies of scale that's beyond the reach of its competitors.I feel Hanger's realignment plan to report in two separate segments on the basis of separate end markets is exciting.The company's efficient product-mix in both orthotic and prosthetic segments will lead to significant revenue growth.Hanger has a robust pipeline containing vacuum solutions and therapeutic solutions provided by ACP.The company's shares are trading at a significant discount relative to the peer group average, and hence deserve buying at the current price.

Potential Downsides

Hanger's financial performance could be negatively impacted due to sequestration, healthcare reform and measures including Medicare and Medicaid reimbursement cuts.Hanger operates in an extremely fragmented industry, which needs to be consolidated. Until that happens, Hanger may have to face fiercely uncompetitive price, especially from small regional players.Hanger's growth predominantly depends on acquisitions with usual uncertainties and risks. In 2012, Hanger acquired some independent O&P companies that made substantial purchases from Hanger's distribution businesses. After acquisition, those purchases became Hanger's internal inter-company sales on a consolidated basis and therefore negatively impacted the external sales figures of the company's distribution businesses.The Recovery Audit Contractor ("RAC") program run by the Centers for Medicare and Medicaid ("CMS") coupled with the 2.3% medical devices excise tax under Obamacare is putting extra pressure on individual O&P customers, which Hanger should try to offset by offering more efficient product-mix and flexible pricing policy.

Conclusion

Hanger's products and services will see robust demand due to an aging population growth, increased incidents of chronic diseases like diabetes due to obesity and other health risk factors, and last but not the least, technological advancements that help live a better life even in difficult situations related to one's health. I would recommend accumulating Hanger's stock at the current price as well as in corrective phases.

Disclosure: I am long IART. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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GTx: 4 Reasons Why This $1 Biotech Stock Could Be Poised For A Big Rebound

I don't like to invest in the biotechnology sector unless I see potential for major upside and limited downside risk. For example, when beaten-down shares of Chelsea Therapeutics were trading for just around $1 several months ago, I wrote an article suggesting it had limited downside risk and "huge reward potential," it now trades for over $3 per share.

In another article, I suggested that investors should buy Catalyst Pharmaceuticals (CPRX) in April 2013, when it was depressed and trading for just around 45 cents, it now trades for about $2 per share. In that same article I said Acadia Pharmaceuticals, Inc. (ACAD) was a buy when it was trading around $12, and now it is over $20.

These examples show how quickly investor sentiment can change and that can lead to huge percentage gains for savvy investors. One of the best strategies I have found is to buy stocks in this sector after a setback causes an exaggerated plunge in the share price. That was the strategy that worked so well in stocks like Chelsea Therapeutics and Catalyst Pharmaceuticals. Recently another setback and stock plunge occurred which appears to be a significant buying opportunity for investors seeking either short-term gains from what could be a near-term rebound, or even bigger gains from the long-term potential it holds:

GTx, Inc. (GTXI) shares were trading for about $7 in July, but the stock recently plunged after this biotech firm announced disappointing Phase III results for "Enobosarm" which was being developed to treat muscle wasting in cancer patients. Just take a look at the huge decline in the share price below along with a number of reasons why this could be a significant buying opportunity:

(Click to enlarge)

As the chart shows, this stock was up to about $7 in July in anticipation of positive results for Enobosarm. It appears that investors became a little too optimistic when bidding up the shares to that level but it also now seems like investors are being overly bearish by selling the shares for just around $1.40. Biotech stocks can be very volatile and highly susceptible to investor sentiment. Therefore, it can be extremely rewarding to buy when investors have "given up" on a stock, which leads to emotion-based selling. However, this type of buying strategy only makes sense when there are sound fundamental reasons as to why a biotech company can still move on from setbacks and eventually become a successful player in the industry. There are a number of indicators that suggest this stock is very undervalued now and possibly due for a sharp rebound:

1. One insider has made repeated and significant buys of this stock in the past few days. This insider buying appears to be driven by the desire to take advantage of the sharp decline in the share price, which is otherwise known as "bargain-hunting." On August 20, 2013, Jack W. Schuler (a beneficial owner of 10% or more of this company) purchased 110,005 shares at $1.45 each in a transaction valued at $159,518. On August 21, 2013, he purchased 199,586 shares at $1.40 each in a transaction valued at $278,961. Then on August 22, 2013, he bought another 93,777 shares at $1.36 each in a deal valued at $127,565. This is a total of roughly $640,000 worth of new insider buying in just a few days.

What makes this even more significant is that Mr. Schuler already had a significant stake in the company and now owns more than 7 million shares. In addition, it is worth noting that Mr. Schuler appears to be a savvy investor in this industry and he serves on the board of other biotechnology firms and has many millions of dollars invested in this sector. Mr. Schuler has extensive experience in this industry. He served as the President and Chief Operating Officer of Abbott Laboratories' (ABT) healthcare products, from January 1987 to August 1989 and he has over 30 years of experience in the pharmaceutical industry. The fact that Mr. Schuler is making significant new buys at this time seems to indicate that he believes the stock is very undervalued and that he remains confident in this company and its pipeline.

2. Investing in biotechnology can be a high risk and high reward proposition. This sector is full of stocks that have seen incredible gains, huge declines and even many stocks that have once again surged after pipeline setbacks. One way to minimize risks is to make sure the company has a strong balance sheet so that it can continue to operate and develop its pipeline. This company has a strong balance sheet with about $31.64 million in cash and no debt. This is equivalent to about 50 cents per share in cash. This financial strength reduces downside risks and it gives the company time to continue developing the pipeline.

3. Another way to reduce risks is to invest in companies that have multiple candidates in the pipeline and fortunately, GTx has two candidates in development, Enobosarm and Capesaris. Even though Enobosarm results did not meet the pre-specified responder analyses, the company stated:

"...we are encouraged by the unambiguous effect of enobosarm on muscle and we are confident that it will translate to clinical benefit and potentially increase survival in patients with non-small cell lung cancer," said Mitchell Steiner, M.D., CEO of GTx. "We look forward to sharing our clinical data from these and previous trials with FDA and European authorities to discuss the path forward."

While it might be off the front burner for some investors now, the company clearly still sees potential in Enobosarm. Investors are likely to take a wait and see attitude on Enobosarm for now, so the focus is likely to shift to "Capesaris" which is being developed as a selective estrogen receptor alpha agonist, for the treatment of men with advanced prostate cancer. Capesaris is in Phase II development, which means that it might not be long before investors consider the upside potential for this pipeline candidate, and that is another reason, why the stock could have significant rebound potential.

Capesaris has already achieved some initially promising clinical results although at high doses and for long-term usage there could be safety concerns. Because of this, the company is testing in Phase II with different dosage levels. The goal of this clinical trial is to conduct an initial test of the activity and safety at three different dose levels in men at 125, 250, and 500 mg daily. According to BCC Research, (see graph below), the global prostate cancer market is estimated to reach about $50 billion by 2017. Drug therapeutics for prostate cancer is expected to be worth about $18 billion. This gives a sense as to the potential blockbuster status some prostate cancer treatments will reach and that is another reason why GTx remains a high-potential stock.

(Click to enlarge)

4. This stock is now extremely oversold and there is also a short squeeze potential developing. As the chart above shows, the relative strength index or "RSI" for this stock is just 16. When the RSI level reaches 30 or lower, stocks are generally considered to be oversold. When oversold conditions are reached, there is the potential for a significant rebound, which is often based on the thought that the level of selling has reached extreme levels based on emotion and momentum that cannot last much longer. With GTx shares having an RSI level of only 16, it is extremely oversold and this does appear to make a sharp rebound more likely.

Furthermore, a significant rebound might be fueled by shorts. We have to remember that this stock was trading around $7 per share just weeks ago, and now it is just over a buck. Shorts have made a fortune in just a matter of weeks and because this stock has begun to form a base between around $1.30 to $1.50 per share in recent days, shorts should be now seeing that this stock appears to have bottomed out.

According to Shortsqueeze.com, there are nearly 6 million shares short, this represents about 30% of the float. Based on average daily trading volume of 700,000 shares, the short interest represents about 9 days worth of trading volume. With so many shorts having made so much money here in recent weeks, many will presumably want to lock in those gains soon, especially if they see the stock has stabilized and that it could be poised for a rebound which oversold stocks often see.

The combination of the fact that this stock is extremely oversold and now has stabilized, coupled with a strong balance sheet, significant insider buying, and with Capesaris in Phase II development, bargain hunters and shorts are likely to fuel a strong rebound rally in this stock soon. From current levels, even a partial rebound could create significant percentage gains. Considering that the stock was trading at $7 just weeks ago, and with about 6 million shares short, it would not be surprising for this stock to trade back over $2 per share in the coming days. That would offer investors potentially quick gains of about 40% or more.

Stocks that have seen a big share price decline often experience three stages after a plunge: 1) Capitulation, 2) Stabilization, and 3) The Rebound. When looking at the recent trading in this stock, it is easy to see that capitulation has occurred based on the volume and price action. It is also easy to see that the stock has stabilized which is the second step before a potential rebound occurs. When you see below that over 17 million shares traded on August 19, this was the capitulation day. When you also see that trading volumes are rapidly "normalizing" to more reasonable levels, and that the stock has been trading in a range of about $1.31 to $1.51 for several days, the shares have clearly stabilized. The next phase to come appears to be the rebound, which looks likely to be fueled by bargain hunters (like the buying being done by Jack Schuler) and by shorts who are likely to want to lock in profits before a potential rebound occurs.

Volume on Aug 28, 2013: 1,117,600 shares, closing price $1.35Volume on Aug 27, 2013: 1,051,900 shares, closing price $1.37Volume on Aug 26, 2013: 1,318,000 shares, closing price $1.43Volume on Aug 23, 2013: 1,766,800 shares, closing price $1.45Volume on Aug 22, 2013: 1,078,900 shares, closing price $1.38Volume on Aug 21, 2013: 2,506,800 shares, closing price $1.44Volume on Aug 20, 2013: 3,579,400 shares, closing price $1.49Volume on Aug 19, 2013: 7,120,800 shares, closing price $1.43

Clearly, like with any biotechnology investment there are potential risks that remain and this company could be facing significant challenges if Enobosarm continues to disappoint or if Capesaris does not achieve positive results. That could force the company to sell its pipeline and remaining assets at prices that could cause losses for shareholders. However, those issues might not occur and are too far on the horizon to be a risk now anyway. Furthermore, if the company gets back on track with Enobosarm or announces positive results for Capesaris, this stock could be back at $7 per share, which is the price target analysts at Stifel gave it earlier this year. With just over a buck in downside potential in a worst-case scenario, and potentially $7 per share or more if things go well, that is the type of risk to reward ratio that makes sense to me. However, in the short term, the upside potential is probably limited to somewhere in the $2 to $3 range.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I am long GTXI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Take Your Profits On BioCryst Pharmaceuticals Stock

BioCryst Pharmaceuticals, Inc. (BCRX): Take Your Profits On BioCryst Pharmaceuticals Stock - Seeking Alpha (function(_,e,rr,s){_errs=[s];var c=_.onerror;_.onerror=function(){var a=arguments;_errs.push(a); c&&c.apply(this,a)};var b=function(){var c=e.createElement(rr),b=e.getElementsByTagName(rr)[0]; c.src="//beacon.errorception.com/"+s+".js";c.async=!0;b.parentNode.insertBefore(c,b)}; _.addEventListener?_.addEventListener("load",b,!1):_.attachEvent("onload",b)}) (window,document,"script","4ffae9d6f05d1da630000008"); if (SA.Data && SA.Data.Cache) { var adata = SA.Data.Cache.get('campaign_content'); }.market_currents_list li .ticker_date_left .mc_list_tickers a{font-weight: normal} var ms_slug = ''; var article_dashboards = '@investing-ideas@sectors@'; var article_sectors_themes = '@short-ideas@us@biotechnology@healthcare@article@'; var ratings_hash={}; var ARTICLE_ID = 1668262; var ARTICLE_TYPE = "standard"; var ARTICLE_LOCK = ""; var author_slug = "researchcows"; var pticker_for_ads = "bcrx"; var time_left; var lock_comments = false; var machine_cookie = readCookie('machine_cookie'); var middle_version = ABTest.identity%10; try { window.sessionStorage.setItem("/article/"+ARTICLE_ID, '1'); } catch (error) {}var mone_article_tags = "{bcrx};;;{healthcare};;;{short-ideas,us,biotechnology,investing-ideas,sa-exclusive};;;{researchcows}"var ord = Math.floor(Math.random()*1000000000);Seeking Alpha Seeking Alpha Portfolio App for iPad Finance (1) var ipadData; SeekingAlpha.Initializer.AddAfterLoad(function(){ if (SA.Utils.Env.isIPad && !/3/.test(SA.Data.Cookies.get("user_devices"))){ Mone.event("ipad_promotion_top","top_ipad_banner_large","ipad_promotion_displayed"); ipadData = new SA.Data.iPad(); ipadData.instanceName = "ipadData"; var responseHandler = new Object(); responseHandler.handleResponse = function(data){ if (!data.averageUserRating) return; var stars = data.averageUserRating Home | Portfolio | Market Currents | Investing Ideas | Dividends & Income | ETFs | Macro View | ALERTS | PRO   This article was sent to 1,592 people who get email alerts on  . Which cover: new articles | breaking news | earnings results | dividend announcements Get email alerts on   » This article was sent to 337,722 people who get the Investing Ideas newsletter. Get the Investing Ideas newsletter » Take Your Profits On BioCryst Pharmaceuticals Stock Sep 1 2013, 19:33 by: ResearchCows  |  about: BCRX BOOKMARKED / READ LATER Bookmarked

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BioCryst Pharmaceuticals, Inc. (BCRX) has reported that the Phase 1 trial of the oral treatment BCX4161 (with healthy volunteers) has met all objectives. The safety and kallikrein inhibition findings of the study provide strong support in moving the development to a Phase 2a file for treatment of HAE patients. The oral use of BCX4161 was found to be safe, and was tolerated well, with no major adverse events and other adverse events led to the creation of limited dosage. Tests of coagulation in the laboratories remained normal. The company said that a successful oral kallikrein inhibitor like BCX4161 for preventing HAE attacks has major implications for the treatment. If the treatment is effective, it will be a better option compared to androgens currently the main oral treatment because it has fewer side effects.

The Phase 2a clinical trial is expected to start in the last quarter of this year, and will test the administration of 400 mg of BCX4161 three times every day for 28 days in a random design. Approximately 25 HAE patients, prone to a high frequency of attacks (once a week), will be used, and the study is to provide proof of concept for the treatment strategy.

The market reaction

The stock price shot up by almost 50% on the announcement of these results, and then rose further 25% the next day. It is true that clinical trial data is often a major catalyst for the stock price for development stage biopharmaceutical companies, but, in this case, the market reaction seems to be a little extreme when you consider that this was a Phase 1 trial using healthy volunteers. The study only determined that the treatment was safe and patients tolerated it well. It also showed the drug-inhibited kallikreincauses dramatic swelling in patients with HAE, and can be potentially fatal if it happens near the airway. There is no doubt that the approach is sound because other companies working on HAE treatments such as ViroPharma (VPHM) and Dyax (DYAX) also use the inhibition of kallikrein as the basis of their treatments. We should be in a better position to judge the potential when the results of the phase 2 trial become available. The HAE treatment space is fiercely competitive but the treatments from the competition -- Cinryze, Berinert, Kalbitor, and Firazyr -- all have to be injected or infused. Being an oral treatment will give BCX4161 a competitive advantage, although the current formulation requires four pills to be taken three times daily, which may not be seen as being particularly convenient. BioCryst is currently working on second-generation oral kallikrein inhibitors that could ultimately create a significant presence in the market.

Second quarter finances

For the quarter, revenues declined to $821,000 compared to $4.2 million in the previous year because of a drop in reimbursable peramivir expenses. Research and development expenses declined from $12.8 million in the previous year to $11.7 million, primarily because of lower development expenses for peramivir and BCX5191, though this was offset by a $5.0 million non-cash charge connected with BioCryst's "PNP" licensing agreement.

The net loss for the quarter was $12.2 million ($0.23 per share) in comparison to a net loss of $12.3 million ($0.25 per share) for the previous year. Cash and cash equivalents amounted to $31.3 million at June 30, 2013, in comparison to the total of $28.9 million as of March 31, 2013 and a total of $37.1 million as of December 31, 2012. Operating use of cash for the quarter was $4.1 million compared to $8.1 million in the previous year. Net operating use of cash for the first six months of 2013 came to $13.0 million. Based upon current trends, BioCryst expects that 2013 net operating use of cash will be around $22 to $26 million. Tha company closed its public offering on August 6 at a price of $4.40 per share, which is expected to net around $18.5 million.

The future outlook

There is still a major obstacle on the road to success for BCX4161, and that is that the body absorbs very little of the active ingredient and gets rid of the rest. This means that patients need to take a lot of tablets often (four tablets three times a day) which is not particularly attractive. As for the other major product, Peramivir, the Phase 3 trial was terminated early by its independent data monitoring committee because it did not prove to be particularly effective. However, it has been developed with funding of more than $230 million from the Biomedical Advanced Research and Development Authority (BARDA) and it is reimbursed for expenses for the development process. The company should continue the development even if the chances of success are remote.

Recommendation

BCX4161 has a long way to go before it can expect FDA approval and it must be subsequently commercialized successfully. Equally, not much hope should be placed on Peramivir. Given the high risk nature of investment in this early stage biotech company, I would strongly recommend that you take advantage of the run-up in the stock price and take your profits.

Source: Take Your Profits On BioCryst Pharmaceuticals Stock

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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ViroPharma: Cinryze Shining The Pharma Stock

ViroPharma (VPHM) is an international biopharmaceutical company which develops and commercializes drugs that are used for the treatment for Hereditary Angioedema, or HAE.

The increasing prevalence of HAE provides a tailwind opportunity for the biopharma companies that are producing drugs for this medical condition such as Shire Human Genetic Therapies ,CSL Behring , ViroPharma, Sanquin ,Dyax Corp., Pharming NV , Halozyme Therapeutics and BioCryst. Out of these companies, I believe ViroPharma is well positioned to monetize this opportunity through its Cinryze therapy.

The limited use of first-line steroids on Cinryze and in-house subcutaneous Cinryze would further impact positively on company's growth. I expect ViroPharma to continue adding patients to Cinryze therapy on a continuous basis going forward. In addition, ViroPharma also has strong potential with Maribavir, which will be used for the treatment of human cytomegalovirus, or HCMV, disease.

About HAE: HAE is one of the very rare and life-threatening genetic disorders. The symptoms include episodes of edema or swelling in various body parts including the hands, feet, face, and airway. Patients suffering from HAE have a genetic defect that controls a blood protein called C1 Inhibitor. This results in production of either inadequate or non-functioning C1-Inhibitor protein. Since defective C1-Inhibitor cannot effectively perform its regulatory function, a biochemical imbalance occurs and produces unwanted peptides that induce the capillaries to release fluids into surrounding tissue, thereby causing edema. According to the U.S. Hereditary Angioedema Association, around 6,500 to 10,000 patients in the U.S are suffering from HAE. There are an estimated 3,400 HAE patients in Canada, 5,000 - 10,000 HAE patients in Europe, and 15,000 HAE patients worldwide.

ViroPharma is known primarily for its leading product Cinryze, which has an Orphan Drug designation for the prophylactic treatment of HAE in the U.S. as well as acute and pre-surgical use in Europe. The company's other products are Vancocin, Buccolam, and Plenadren.

Cinryze's advantage against its competitors

It is the first and only FDA approved (Oct-2008) C1 esterase inhibitor therapy for routine prevention of HAE attacks in both the U.S. and Europe.It is approved for both professional and in-home injection allowing the patients flexibility to use the therapy at their convenience.

Pipeline of Approved Products

(click to enlarge)

Cinryze is the backbone of the company

For patients suffering from HAE, ViroPharma is a godsend. It is administered as an intravenous injection to prevent attacks and swelling in teenagers and adults suffering from HAE. This therapy provides the body with enough working C1 esterase inhibitor to help prevent the causes of swelling and is proven to reduce the frequency, duration, and severity of HAE attacks. Normally, C1 esterase inhibitor prevents production of bradykinin, which is a protein that causes vessels to leak a large amount of fluid into the tissues.

In its second-quarter of 2013, net sales were $104 million up from $95 million in the comparative period of 2012. Commercial product growth of Cinryze in the U.S and Europe is the primary driver of the increase in net sales quarter over quarter. Cinryze reported global sales of $95 million, representing growth of 23% over the 2012 period.

In the U.S., patient demand was $96 million for the quarter in comparison to $91 million in the first quarter for 2013. It shipped more than 22,000 doses to its specialty pharmacies and distributors, with dosing rates at an average of 1.8 doses per week. Even though a smaller percentage of steroid patients converted to Cinryze during the quarter, a larger proportion of new patients, and those previously managing HAE with acute treatment, began Cinryze therapy. Moreover, nearly 80% of its patients are administrating Cinryze therapy at home, which looks pretty impressive from a patient's point of view.

The company's management is estimating Cinryze to generate peak worldwide sales of $800 million in 2020. According to ViroPharma Management, the number of high-dose steroid-treated HAE patients in the U.S. has declined from around 1,500 at the time of Cinryze's launch in late 2008 to slightly less than 1,000 currently. Out of these 500 patients, around 300-400 patients shifted to Cinryze. Seeing the increasing number of patients, I believe that Cinryze patient additions can grow to $1billion in the HAE US market by the end of 2020, from $400 million currently. Moreover, Cinryze is now launched in the top five countries of Europe, which are the UK, France, Italy, Spain, and Germany. The company is anticipating profitability from this expansion in Europe in the next year.

In-House Subcutaneous Cinryze

ViroPharma has developed an optimized, low-volume subcutaneous formulation of Cinryze that is without rHuPH20, instead of Phase 2 study of subcutaneous Cinryze (C1 Esterase Inhibitor) with rHuPH20. As a result, ViroPharma expects to conduct a Phase 3 subcutaneous registration study with this alternative formulation in the same time frame that had originally planned to conduct testing for the combination product. The company plans to initiate Phase 3 trial in mid-2014. This new formulation is an improvement over prior non-rHuPH20 formulations, which caused injection site reactions. The new formulation contains new excipients (the older ones were known to be associated with pain/irritation), which could result in better tolerability and will potentially improve manufacturing cost of goods relative to rHuPH20. The company plans to deliver up to 2,000 IU of Cinryze in a single injection (the current IV dose is 1000 IU twice per week).

As noted on the most recent call for new formulation;

Vin Milano - ViroPharma Incorporated - Chairman, President, CEO

So the second question, or the first question in this case, was around have we done any Phase I work with our low-volume formulation.

Colin Broom - ViroPharma Incorporated - VP and Chief Scientific Officer

Now, we have done work on a prototype or earlier version, a low-volume that was a more concentrated formulation. So we do have pharmacokinetic data related to an injection -- a bolus injection subcutaneously. This new formulation, low-volume, that we'll be taking forward will advance into the first Phase I study. As I said earlier we're not anticipating there to be differences with the performance. It is Cinryze and it is using generally accepted as safe excipients.

Rachel McMinn - BofA Merrill Lynch - Analyst

So just a follow-up, I think with the earlier formulation that was a real concern about injection site pain and just pain around the [blood]. So do you feel comfortable with this newer formulation of resolving those issues because the volume is so much substantially lower, and like that's really it? Or is it something -- how do we know that it's not any C1 inhibitor would be really painful or any level of volume? I'm just trying to understand the competitive longer-term commercial implications of subcu without the Halozyme technology.

Colin Broom - ViroPharma Incorporated - VP and Chief Scientific Officer

Yes, Rachel, we are confident that the lower volume, very importantly, less volume administered will generate less reaction. In addition our very early work uses a more concentrated hyperosmolar formulation. This will be osmolar if it's normal. And also the excipients, generally accepted as safe excipients are benign in terms of tolerability. So I do expect this lower volume formulation should be better tolerated than our previous experience.

The new formulation is also developed in another tax jurisdiction, which will positively benefit the company's tax structure. ViroPharma's tax guidance for 2015 is 32%. By 2015, the company is expecting 30% of sales coming from Europe, $300- $500 million, and 70% from the US. Based on the product mix of business over the long-term, I assume that ViroPharma's tax rate could be close to 21% in the long-term with a 50/50 Cinryze mix. With 60/40 revenue mix, tax rate could be close to 24%. Going forward, I believe its own in-house subcutaneous formulation has both margin and tax benefits since it will not carry the 10% royalty obligation that was due Halozyme.

Earlier, ViroPharma's subcutaneous Cinryze collaboration with Halozyme (HALO) was halted due to the presence of non-neutralizing antibodies that were reported among patients enrolled in the Phase 2 trial. The discontinuation of the study is a safeguard related to the emergence of an unexpected incidence of non-neutralizing anti-rHuPH20 antibodies in a number of patients. These antibodies have not been associated with any adverse clinical effects and are of unknown clinical significance. The study was fully enrolled and 41 patients completed at least one dosing arm of the study drug and a total of 20 patients completed both dosing arms. This data will be informative for design of future subcutaneous administration studies.

Maribavir breakthrough is the next catalyst

Maribavir is ViroPharma's experimental oral antiviral drug for the treatment of human cytomegalovirus, or HCMV, disease. Unlike the currently available anti-HCMV drug, which aims at UL54 HCMV DNA polymerase, Maribavir slows down UL97 and demonstrates in-vitro activity against resistant strains. By inhibiting UL97, Maribavir inhibits viral encapsulation and nuclear egress of viral particles, thereby avoiding infection of healthy cells. Along with this activity against resistant strains, it is generally better tolerated than existing anti-HCMV drugs, and I think it would fill an unmet medical need. In June 2013, ViroPharma received orphan drug label for Maribavir in Europe for the treatment of CMV in patients suffering from impaired cell mediated immunity.

Two months ago, the company announced encouraging results from the two ongoing, Phase 2 dose ranging studies investigating Maribavir for both first line treatment of HCMV viremia and treatment of resistant/refractory CMV. It is conducting two Phase 2 dose ranging studies of oral Maribavir at one of three doses, which are 400mg, 800mg, or 1200mg in transplant recipients. The separate studies were spurred by discussions with the regulatory agencies; the FDA supported the resistant setting and EMA supported use in front line. The first study is a randomized, active (valganciclovir) controlled Maribavir dose blinded multicenter Phase 2 study in up to 160 European hematopoietic stem cell or solid organ transplant recipients who have demonstrated CMV viremia but do not have CMV organ disease. The second study consists of a randomized, dose blinded multicenter Phase 2 study intended to enroll up to 120 hematopoietic stem cell or solid organ transplant recipients who have resistant or refractory CMV viremia with or without CMV organ disease.

According to ViroPharma's president and chief executive officer,

"We appear to have very good response about 90% in treating asymptomatic CMV viremia, which is what one would expect for a potent anti-CMV treatment. The resistant/refractory patients are more complicated, and we are seeing nearly 85% of patients attaining undetectable viral levels and a sustained antiviral response through the end of treatment in roughly half of the enrolled subjects, which is impressive given the lack of treatment options and high unmet need in these patients".

In both the ongoing studies, Maribavir shows a favorable safety and tolerability profile. Adverse events seen in these studies appear consistent with those expected in transplant recipient populations and what it has observed in more than 1,000 patients who have received Maribavir in previous clinical studies.

Phase 2 studies of Maribavir

EU- First line treatment of CMV viremia

US- Treatment of resistant/refractory CMV disease

After the earlier failure of Maribavir for prophylaxis, ViroPharma is proceeding cautiously by analyzing the data for three obstacles for a successful antiviral:

1) Efficacy

2) High barrier to resistance

3) Safety

Initial data from the first 83 patients treated across both studies appeared promising, with 92% of treatment-naïve and 84% of resistant HCMV patients achieving viral loads below the limit of detection, which demonstrates that Maribavir passed the first obstacle.

Initial data from the first 83 patients

1st line EU Study or Asymptomatic Patients

Viral loads below quantification limit

However, the results included some study participants who had not completed the whole trial and therefore, could still have a viral rebound, and it didn't disclose how Maribavir performed at different doses. I am optimistic and assume a 50% chance that Maribavir is approved in the U.S. and Europe by 2016. Due to the larger available patient pool in both the European Union and the U.S., studies are expected to read out in the first half of year 2014. I expect ViroPharma is likely to get breakthrough title for Maribavir for treatment-resistant CMV infection.

Upside drivers for ViroPharma

1. Plenadren US approval - Plenadren is not approved in the U.S; however, it has received orphan drug label status in the U.S. and has maintained orphan status in Europe. The FDA decided that the data filed in the EU and approved by the European Medicines Agency related to use of Plenadren for treatment of adrenal insufficiency in adults isn't sufficient for assessment of benefit/risk in a marketing authorization submission in the U.S and that additional clinical data would be required. And according to the recent transcript call, it is very likely that company will get positive news on Plenadren from FDA very soon

Joseph Schwartz - Leerink Swann - Analyst

Okay, so if we can't get any insight into that now, when is the meeting expected to occur? When can we expect to get some clarity on the regulatory pathway for what seems to be a good drug and the FDA's just requiring more work than was required in Europe?

Vin Milano - ViroPharma Incorporated - Chairman, President, CEO

We' going to try to get the meeting in the fourth quarter. So depending on when that meeting is, we could have data by the end of the year or information by the end of the year.

2. No competition for U.S. Cinryze before 2020 and the drug will maintain its dominance even after its expiration in 2015.

3. High probability of approval for Phase 2 candidate, Maribavir

4. Faster development among its product pipeline

Timeline of ViroPharma's Clinical Program

Country-by-country launch in Europe

Meet with FDA to discuss ph.III protocol

Country-by-country launch in Europe

Regulatory discussion with FDA

Data from ph.II study to prevent CDI recurrence

License drug to a potential partner

Complete enrollment in ph.II study in Friedreich's ataxia

Complete enrollment in two ph.II studies and
announce top-line data

Ph.II study results/Meritage M&A option decision

Downside risks

ViroPharma is currently developing a subcutaneous formulation of Cinryze. If in any case the development of this new formulation fails, it would question ViroPharma's ability to extend Intellectual Property protection beyond orphan exclusivity expiration in 2015.Risks include the potential for disappointing clinical data, regulatory setbacks, and commercial shortfalls. Since ViroPharma presently has only three commercial products (Cinryze, Plenadren, and Buccolam) any of those possible setbacks may impact the stock negatively.

Competitor's presence

It wouldn't be justifiable to analyze ViroPharma's growth avenues in HAE market without knowing what its competitors are doing in the same market. One of its competitors is Halozyme Therapeutics, which often relies on other companies to in-license the product to improve the performance of protein therapies. Last month Halozyme Therapeutics halted a Phase 2 study of Cinryze with rHuPH20 due to unexpected, potentially serious antibody buildup. Although the antibodies have not been associated with adverse reactions, Halozyme, along with ViroPharma, decided to end the trial. The FDA told investigators to stop dosing patients with rHuPH20 in the Baxter and ViroPharma clinical studies. Baxter and ViroPharma were relying on Halozyme's rHuPH20 to improve delivery of their therapy. This resulted in a major setback for the company and since then shares of Halozyme have been trading low.

At the end of 2012, Halozyme signed a $507 million deal with Pfizer (PFE) for its Enhanze technology which may help to reassure investors that the industry hasn't lost faith in Halozyme's product. This deal seems to be a win-win situation for the companies. Halozyme has granted Pfizer a worldwide license to develop and commercialize products combining rHuPH20 with Pfizer proprietary biologics. Halozyme will receive an initial payment of $8 million. This opportunity also has the potential to enhance Pfizer's ability to optimize treatments for patients.

Another competitor of ViroPharma is Dyax (DYAX), which focuses on HAE and other plasma kallikrein-mediated disorders. Its key drivers are the Kalbitor and DX-2930. Since February 2010, Dyax has been selling Kalbitor in the U.S for the treatment of acute HAE attacks in patients 16 years of age and older. Outside the U.S, it has established partnerships to gain regulatory approval and commercialize Kalbitor in certain markets; additionally, it is evaluating opportunities in others. In the second-quarter financials for 2013, Dyax reported revenue of $8.6 million for Kalbitor net sales, as compared to $9.2 million for the same period in 2012. As of June 30, 2013, Dyax had cash, cash equivalents, and investments totaling $46.9 million, exclusive of restricted cash, which will help the company to perform financial operations related to DX-2930.

Unlike Cinryze, Kalbitor is not approved for in-home injection and should be given by a medical professional. Also in contrast to Cinryze, Kalbitor is designed to treat acute episodes of HAE.

The company is developing DX-2930 as a subcutaneous injection for prevention of HAE attacks. Last month, Dyax announced dosing of the first subject in a Phase 1 clinical study, where it evaluated the safety and tolerability of a single subcutaneous administration of DX-2930. The Phase 1, single-center, randomized, double blind, placebo-controlled study is planned to assess the safety and tolerability and to characterize the pharmacokinetics of single, subcutaneous administrations of DX-2930 in healthy subjects. This seems to be a significant milestone for the DX-2930 development program.

Recently, the company collaborated with Laureate Biopharma for process development and cGMP production of a new treatment candidate known as DX-2930 for HAE. DX-2930 is a fully human IgG antibody designed to prevent HAE attacks by inhibition of plasma kallikrein. In working with the cell line producing DX-2930, Laureate's scientists were able to manufacture a high-titer antibody process successfully. This process was modifiable to cGMP production in both stainless steel and single-use bioreactors. Aseptic filling, a routine operation at Laureate, produced the clinical drug product in 98% yield. Finally, both companies resulted in the successful release of bulk drug substance.

The other competitor is BioCryst Pharmaceuticals (BCRX). Its BCX4161 is a novel, selective inhibitor of plasma kallikrein, which suppresses bradykinin production. The company reported positive results in Phase 1 trial of the oral treatment BCX4161 in terms of safety, tolerability, drug exposure, and on-target kallikrein inhibition. As a result, the company is currently prepping the initiation of a Phase 2a proof of concept, or POC, study for kallikrein, which is expected to begin in the fourth quarter of 2013. The trial will test 400 mg of BCX4161 administered three times daily for 28 days in a randomized, placebo-controlled, two-period crossover design. The main goals for this clinical trial are to evaluate the safety and tolerability of BCX4161 and to calculate the degree of efficacy in reducing the frequency of HAE attacks. Amongst a healthy degree of competition in the prophylactic HAE market, I believe that even modest efficacy could create a meaningful market opportunity for BioCryst given the number of patients who may consider using a prophylactic drug if there were an oral option. However, BCX4161 has a long way to go before FDA approval, and afterwards another challenge would be its successful commercialization.

Valuation

Valuation Metrics with competitors

Source: Yahoo! Finance

ttm= trailing twelve months mrq=most recent quarter fye=financial year end 2014

After looking at the valuation metrics, ViroPharma looks stronger than its competitors do. Its Price/Sales ratio is less than its competitors' ratio. It also looks financially stronger in terms of cash and revenue. However, it has a negative PEG ratio, which may bother investor's interest.

Summary

ViroPharma has seen a robust growth in the stock price this year due to continued success in Cinryze. Seeing the increasing number of patients with the HAE disorder, I believe that Cinryze has robust growth potential in this market even after the drug expiration in 2015. Along with that, the company has potential to attain a Maribavir breakthrough by the mid or end of calendar 2014. As the Maribavir program is in its infancy stage, I believe it has significant opportunity in HCMV disease. Moreover, the weaker competitor's presence also reflects the dominance of ViroPharma in HAE market. The stronger product pipeline indicates a better future for ViroPharma. Currently trading at a stock price of $30, I think that the approval of subcutaneous Cinryze in the future and Maribavir next stage development will spike the stock to a higher price. This stock is definitely bullish for long-term growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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