December 23rd

Twelve Biotech Picks For 2012

We’ve identified twelve small to mid-cap biotechnology companies to watch in 2012, broken down into six categories based on valuation, fundamentals, their pipeline, potential M&A, potential turnarounds, and potential make or break data

On Valuation

Depomed (DEPO) – $4.87 ($270 Million)

Depomed is one of the most attractively valued names in our coverage list. We forecast that the company should exit 2011 with $136 million in cash and investments ($2.25 per share). Burn for 2012 should be around $30 million. In August 2011, Depomed entered into a new commercialization agreement with Santarus around the promotion of Glumetza (metformin extended release). The economics of the deal are extremely favorable to Depomed. With the recent price increase on Glumetza, sales should approach $100 million in 2012. Depomed is entitled to 29.5% royalty from Santarus on sales. In 2013, the royalty rate jumps up to 32%.

We see Glumetza has having peak U.S. sales over $150 million up to the first patent expiration in 2016. We see the net present value (NPV) of these projected cash flows worth $120 million ($2.00 per share) to Depomed. Besides Glumetza, Depomed has collaborative agreements with Johnson & Johnson (JNJ), Merck (MRK), Boehringer Ingelheim, Ironwood (IRWD), and Covidien (COV) around the company’s AccuForm technology. The eventual approval of Janumet-ER at Merck will provide another attractive royalty stream to Depomed. We estimate the value of these collaborations is approximately $40 million ($0.65 per share).

That puts the value of Depomed at $4.90 per share, about where the stock is today, before the recently launched Gralise (gabapentin extended release). Depomed launched Gralise in October 2011 with a 160-person contract sales force. Initial prescription data suggested sales in the fourth quarter around $1 million, with the current run rate at around $5 million. The market is valuing Depomed like Gralise is cash neutral – about $65 million in peak sales. We disagree. We think Gralise is an eventual $400 million product driven by superior characteristics compared to generic gabapentin and Pfizer’s Lyrica. That makes Depomed highly attractive. Our target is $8 per share.

Pozen (POZN) – $3.83 ($115 Million)

Pozen is crazy cheap. The company should exit 2011 with $113 million in cash ($3.75 per share), thanks to a recent deal to sell the Treximet royalty for $75 million in cash.

The cash balance is only slightly less than the entire market value. Burn for 2012 should be about $25 million, meaning the company will still have north of $85 million in cash at the end of 2012. Beside a cash balance, the size of the entire market value, Pozen collects royalties on sales of Vimovo (naproxen-esomeprazole) sold at AstraZeneca to the tune of around 10% on global sales.

The launch of Vimovo has been admittedly slow, posting only $10 million in the third quarter 2011. However, we think that is about to change. The sales of $10 million in the third quarter 2011 came from only 10 countries, including the bulk from the U.S. Since the third quarter 2011 ended, AstraZeneca has launched Vimovo in a total of 25 countries. The drug has been approved in a total of 38 countries with 69 applications filed to date. Sales of Vimovo are going to increase meaningfully in the coming quarters.

In fact, on November 17, 2011, Pozen CEO, John Plachetka, stated that he believed worldwide Vimovo sales could exceed $100 million in 2012. We think AstraZeneca will eventually get Vimovo to a $100 million run-rate in the U.S., and a $150 million run-rate in Europe. Increased coverage by Medicare Part-D in 2012 should help drive U.S. sales in 2012 and beyond. We note royalties on Vimovo are cash payments with little to no ongoing expenses. We calculate the NPV of these projected cash flows at $60 million ($2.00 per share).Besides Vimovo, Pozen has a major catalyst in the second quarter 2012 with the release of the Phase 3 data on PA-325/40.

We are extremely confident in the outcome of the trial, and think that with Pozen’s planned unique marketing approach, PA-325/40 (safer aspirin) could deliver peak sales in the U.S. of $250 million. That puts the NPV of the drug with $50 to $60 million to Pozen. We see Pozen has having little downside given the huge cash balance and positive cash flows from Vimovo and eventually PA. Our target is $7 per share.

On Fundamentals

Trius Therapeutics (TSRX) – $6.59 ($523 Million)

It’s hard to find a better positioned biotechnology company than Trius Therapeutics. The company recently announced positive data from their first Phase 3 trial testing tedizolid in a head-to-head non-inferiority study versus Pfizer’s blockbuster drug, Zyvox (linezolid). The data showed that tedizolid, a second generation oxazolidinone, yields statistically similar efficacy results to linezolid, with superior dosing, convenience, and tolerability.

Tedizolid is being developed for serious gram-positive infections, including MRSA, and will compete directly with Pfizer’s Zyvox and Cubist’s Cubicin (daptomycin) when generic vancomycin is insufficient. The drug offers several advantages over Zyvox (linezolid), including far better dosing (once daily vs. twice daily), a shorter duration of therapy (6 days vs. 10 days), improved bioavailability, and better gastrointestinal tolerability. Previous clinical data suggests that tedizolid will also be active in bacteremia. Versus Cubicin (daptomycin), tedizolid will offer advantages of both an oral and intravenous dose and activity in lung infections.

In July 2011, Trius signed a commercialization agreement with Bayer Healthcare for the Asia / Pacific rights to the drug. Bayer paid Trius $25 million in cash and will fund 25% of the development costs for the drug, which includes rights outside their territory including the U.S. and Europe. We think Trius will look to sign a deal in Europe at some point in 2012. Data from the second Phase 3 trial is expected late 2012 / early 2013. All told, we think tedizolid is a $300 to $400 million drug in the U.S., with peak sales at $750 million worldwide. Our target is $11.

Cytomedix (CMXI.OB) – $1.04 ($55 Million)

Cytomedix has done a fantastic job over the past year in turning the business around. The Angel whole blood separation system acquired from Sorin in April 2010 was a transformation for the company. When Cytomedix acquired Angel, the business was declining due to neglect. Cytomedix has since turned that around and we now project a healthy 6% CAGR for the next few years thanks to product promotion and label expansion. Cytomedix filed a U.S. 510(k) application in September 2011 to expand Angel use to create a bone marrow aspirate concentrate. Aesthetic and Sports Medicine applications with Angel create a bright future for the product.

The biggest catalyst head for Cytomedix is the pending national coverage decision by the Center for Medicare / Medicaid Services for AutoloGel. The AutoloGel system is a unique technology that enables rapid isolation and activation of platelet rich plasma from a patient’s own blood to treat non-healing chronic wounds. Data on AutoloGel suggests the procedure is cheaper and more effective then products like Dermagraft and Apligraf, two products with over $100 million in sales. We expect that CMS will approve AutoloGel for Coverage with Evidence Determination in May 2012, and that should put AutoloGel in position to capture significant market share from the market leaders.

In the meantime, we are waiting on the outcome of a partnership discussion dating back to October 2011 when management recorded a $2 million non-refundable option fee from an undisclosed global pharmaceutical company for the exclusive right to negotiate a license and supply agreement whereby the AutoloGel System would be distributed exclusively through the pharmaceutical company’s dedicated, hospital-based sales force for the U.S. chronic wound market. This could be big news for Cytomedix, and further strengthen what we see a solid fundamentals already. Our target is $2. For more on Cytomedix (Click Here).

On Developing Blockbusters

Neurocrine Bio (NBIX) – $8.12 ($448 Million)

Investors typically like to invest in biotechnology companies sitting on potential blockbuster drugs, and we think that Neurocrine Bio’s elagolix is one to watch. Neurocrine hs teamed up with Abbott Labs for the development and commercialization of elagolix, the first oral gonadotropin-releasing hormone (GnRH) antagonist for the treatment of endometriosis.

Endometriosis is a medical condition caused by an excess of the hormone estrogen, characterized by growth of the endometrium (uterine tissue) outside of the uterus, most usually on the pelvis, that affects an estimated 100 million women of reproductive age worldwide, or about 10% of the female reproductive age population according to the World Endometriosis Foundation. There are an estimated 10 million women affected by endometriosis in the U.S.

In October 2011, Neurocrine and Abbott announced commencement of a Phase 3 program with elagolix. We are confident in the design of the Phase 3 trials given the efficacy and safety previously seen with elagolix. We also note that in September 2011, Abbott Labs announced it had commenced a Phase 2 clinical trial to evaluate elagolix in the treatment of uterine fibroids, another potential large indication.

From a sales standpoint, we think peak U.S. sales are around $1.5 billion. Abbott’s upfront payment of $75 million in June 2010 (and $530M backend) seems to validate this forecast. We remind investors that Abbott owns the worldwide rights to elagolix, including in Europe, were we see another 10 million potential users. Our target on Neurocrine Bio is $12.

Aastrom Bio (ASTM) – $1.86 ($72 Million)

Critical limb ischemia affects approximately 1 million people in the U.S. each year – roughly 2% of the population over the age of 50. Over 25% of patients with peripheral arterial disease will eventually development CLI. CLI is defined as inadequate blood flow to the limbs, and if left untreated can result in tissue loss, gangrene, amputation and death. In fact, CLI leads to an average of 160,000 major limb amputations each year. CLI has a high mortality rate: 20% after 6-months after initial diagnosis and 25% after 12-months. Nearly 30% of all patients who undergo a major limb amputation will require another amputation at some point in the future. The mortality rate post-amputation remains high, at roughly 25%.

This creates a potentially enormous market opportunity for Aastrom’s ixmyelocel-T, an autologous stem cell therapy that recently completed Phase 2b trials. The data from the Phase 2b program, known as RESTORE-CLI, was recently presented at the American Heart Association (AHA) meeting in November 2011. The data show that patients on ixmyelocel-T had a 62% risk reduction in time to first occurrence of treatment failure vs. standard-of-care alone. Patients on ixmyelocel-T also showed a 32% risk reduction in all-cause mortality and/or major amputation. For patients with the most severe form of CLI, which Aastrom refers to as “no option CLI”, patients on ixmyelocel-T showed a 77% risk reduction in TTF and a 61% risk reduction in death or amputation.

The Phase 3 trial should begin shortly, and if these data hold up, Aastrom is sitting on a potential blockbuster drug with ixmyelocel-T. Our target is $5.

On A Change In Perception

Transcept Pharma (TSPT) – $7.05 ($95 Million)

It’s rare that a drug gets approved and the stock does nothing, but that’s what happened to Transcept Pharmaceuticals on the day the company received approval for Intermezzo. Intermezzo is a low-dose formulation of zolpidem (Sanofi’s Ambien) designed for dosing as needed in the middle-of-the-night. Transcept has teamed up with privately-held Purdue Pharma to market Intermezzo to the primary care and sleep doc / psychiatry market. Purdue is expected to launch Intermezzo in the second quarter 2012.

The market remains highly skeptical of Intermezzo, believing that generic Ambien 10mg will do the trick at about 1/10th of the cost. And we acknowledge the issue. However, Transcept has shown pharmacokinetic data that demonstrates Intermezzo to be superior to generic zolpidem on absorption and metabolism – meaning Intermezzo works faster and leaves the body sooner. That’s ideally designed for a middle-of-the-night dose. We think investors are missing two key reasons why Intermezzo will sell.

Firstly, generic full strength zolpidem is not safe for middle-of-the-night dosing. The label for Ambien notes patient should not take the drug unless they have 7-8 hours of sleep time remaining. Physicians shouldn’t be prescribing Ambien in this type of off-label use. The FDA held an advisory panel meeting in May 2011 to discuss this exact issue. We think Intermezzo offers a safer, on label, option.

Secondly, this is an enormous market. We calculate that nearly 80 million American adults (35% prevalence rate) are affected by some form of insomnia or sleep disorder which involves waking in the middle-of-the-night. About half (~45%) have difficulty returning to sleep (MOTN-Insomnia). This creates a potential target population of 35 million Americans. From a peak sales standpoint, we think Intermezzo can do $250 million in the U.S.

We arrive at $250 million by the following: 235 million adult Americans…35% with nocturnal awakenings…45% with subsequent insomnia…60% without onset issues…15% currently seek Rx…7.5% eventually turn into Intermezzo users…Intermezzo costs $5.50 per pill, with average 2.5 pills per week (125 per year) => 235 million * 35% * 45% * 60% * 15% * 7.5% * 125 pills/year * $5/50 per pill ~ $250 million.

Right now Transcept is trading as if Intermezzo is a dud – having peak sales less than $50 million. We think after Purdue launches the product in the second quarter 2012, and we start getting initial prescription data in the third and fourth quarter, perception around Transcept will change for the positive. Our target is $10.

Amarin Corp (ARMN) – $6.36 ($955 Million)

It’s been a wild ride in 2011 for Amarin Corp. In April 2011, the shares rocketed higher on news that the company’s second Phase 3 trial, ANCHOR, testing AMR101, an prescription-grade omega-3 fatty acid, met all primary and secondary endpoints with statistically significant reductions in triglycerides and LDL-C. The data was considered a “home run” by investors. AMR101 looks like a superior prescription-grade omega-3 fatty acid to Glaxo’s Lovaza, a $1.2 billion drug worldwide. Shares continued their climb after the ANCHOR data came out in April, peaking at nearly $20 per share by the end of May 2011. At one point, the shares were up 150% YTD.

However, news came out in shortly thereafter that the U.S. Patent and Trademark Office had issued a final rejection notice on a key Amarin patent for AMR101. The news continued to get worse throughout the next few months, we more final rejection notices relating to AMR101’s intellectual property.

All the while, Amarin management has shied away from talking about the issue. There are no press releases discussing the patent applications or the process on the company’s website. On a recent analyst conference call, CEO Joe Zakrzewski said the company would not discuss the status of its patents or the pending application with the USPTO. This caused further selling the stock. Today, at $6.36 per share, the stock is down 25% YTD – like ANCHOR never happened. Investors have completely discounted the potential for AMR101’s exclusivity.

We do not know when perception around Amarin will change. In fact, we can guarantee it will not change until the company starts answering questions around filings and provides the Street with a clear and detailed explanation of the intellectual property strategy for AMR101. What we do know is that with IP exclusivity, AMR101 is a multi-billion dollar product. We peg peak sales around $3.5 billion by 2022. If perception around this exclusivity changes, Amarin’s stock could head back to the highs we saw in May 2011. Even at $20 per share, we think the shares are cheap for a big-pharma takeout. But it all comes down to cleaning up the IP story.

On Make-Or-Break Data

Acadia Pharma (ACAD) – $1.27 ($67 Million)

Parkinson’s disease is a chronic, progressive neurological disorder that results in a degeneration of neurons in the region of the brain that controls motor function. There are roughly 1.5 million new cases of Parkinson’s in the U.S. each year, representing a $3 billion opportunity. Parkinson’s disease patients often have a significant shortage of the neurotransmitter dopamine.

Acadia estimates that roughly 30-40% of the patients receiving dopamine replacement therapy have some sort of treatment induced psychosis – auditory and visual hallucinations, and delusions are the most common. Pimavanserin is a potent and selective 5-HT2A inverse agonist. The hypothesis is that adding pimavanserin in combination with currently-available antipsychotic drugs approved for Parkinson’s may regulate the optimal combination of dopamine (D2) receptor blockade and 5-HT2A inverse agonism, thus reducing symptoms of PDP. Beyond PDP, the drug has potential for use in application of Alzheimer’s disease psychosis and schizophrenia.

By the middle of 2012, Acadia Pharma should offer up data on its third Phase 3 trial testing pimavanserin for the treatment of Parkinson’s Disease Psychosis. We remind investors that the company’s first two Phase 3 programs failed due to unusually high placebo response. Management has made a number of changes to the current Phase 3 program compared to the first 2, including testing only the highest dose (40mg) of pimavanserin and improving the randomization to 1:1. Management also increased the entry criteria and created a social lead-in therapy to make sure patients enrolled fit the criteria for the drug.

The trial will also only take place in North America, where treatment practices are more standardized. Finally, the company redefined the efficacy endpoints to look specifically at symptoms of PDP. We’ll find out mid-year if these changes helped. Acadia’s stock is incredibly cheap, with a market value of only $67 million, if pimavanserin works. A proven Phase 3 drug in a potential multi-hundred million dollar indication like this could be worth 3 to 4 times that amount to a pharmaceutical partner.

Zalicus (ZLCS) – $1.24 ($123 Million)

In June 2011, Zalicus announced it has initiated a Phase 2b clinical trial evaluating Synavive for the treatment of rheumatoid arthritis. The trial, SYNERGY (SYNavivE for Reducing signs and symptoms of rheumatoid arthritis trial), is a 12-week, 5-arm, double-blind, placebo-controlled study to evaluate the safety and efficacy of Synavive as a treatment for the signs and symptoms of rheumatoid arthritis in approximately 250 subjects with moderate to severe disease. We estimate the program will take approximately 10 months to complete (looking for enrollment to complete in March 2012), thus we are expecting top-line data in the middle of 2012 (best guess is July 2012).

The primary objective of the trial is to evaluate Synavive efficacy compared to placebo. The primary endpoint will be efficacy measured by the Disease Activity Score in 28 Joints (DAS28). DAS28 is a common, patient specific, outcome tool used in therapeutic trials to assess disease improvement or response. Key secondary objectives include evaluating the efficacy of Synavive compared to its individual components (2.7mg of prednisolone and 360mg of dipyramidamole) as well as how Synavive performs in comparison to 5mg of prednisolone. We expect the typical patient will have moderate-to-severe RA, over the age of 60, currently on stable doses of methotrexate but not yet progressed to biologics.

As the company’s most advanced proprietary candidate, the Synavive Phase 2b data has the potential to move Zalicus shares big either up or down. Previous data with Synavive gives us confidence in the outcome. Zalicus will probably seek to partner the drug following positive Phase 2b data. We think Synavive has peak sales in the $250 million range. It’s clearly the biggest catalyst for the stock in 2012. For more on Zalicus and it’s pipeline (Click Here).

On A Takeout

Nile Therapeutics (NLTX) – $0.51 ($20 Million)

In November 2011, Nile Therapeutics announced top-line data from its recently completed Phase 1 clinical trial evaluating the pharmacokinetics (PK), pharmacodynamics (PD), safety and tolerability of subcutaneous bolus and subcutaneous infusion of cenderitide in patients with chronic heart failure. The trial was designed to understand the doses required to achieve pre-determined plasma levels of cenderitide when delivered through a subcutaneous infusion pump. The pump used in the trial was Medtronic’s MiniMed Paradigm pump, most commonly used for delivering a continuous infusion of insulin.

The top line results from the Phase 1 trial show that the primary end-point was met. Cenderitide achieved target PK/PD levels consistent with the previous Phase 2 data when delivered through Medtronic’s MiniMed Paradigm subcutaneous pump. Additionally, target bioavailability and stead-state PK levels were achieved when delivered through subcutaneous infusion. The drug was well-tolerated when delivered through a 24 hour subcutaneous infusion with no injection site irritation or adverse reaction. Finally, weight-based dosing reduced PK variability, as compared to a fixed dosing regimen.

We expect full data coming in March 2012 at the American College of Cardiology meeting. However, it is clear the trial was a success. Nile and Medtronic feel as though they understand the target dose range for continuous subcutaneous delivery of cenderitide when dosed continuously in the out-patient setting during the post-acute period. The next step for cenderitide would be a Phase 2 trial in 2012 seeking to test the hypothesis that cenderitide can help reduce hospital re-admission in the post-acute period following ADHF.

In the press release, Medtronic mentions moving into this study. However, the collaboration between Nile and Medtronic (signed in February 2011) was for a Phase 1 study only. Medtronic now has 90 days to review the Phase 1 data and make a decision on moving into Phase 2. We think it is clear that they are interested in continuing to develop cenderitide.

Nile and Medtronic are now negotiating on a longer-term licensing / collaboration. If a deal is not reached in the next 90 days, Nile can seek alternative partners. We do not think Medtronic will let this happen. Although we are not expecting an out-right acquisition at this time, we do believe that Medtronic will pick up funding for the cenderitide Phase 2 program and pay Nile an upfront payment for the rights to the drug. If this next Phase 2 trial is successful, we would then expect an acquisition of Nile by Medtronic.

Alexza Pharmaceuticals (ALXA) – $0.70 ($50 Million)

On December 16, 2011, Alexza announced it had retained Lazard to assist in exploring strategic alternatives to enhance shareholder value, including a possible sale or disposition of one or more corporate assets, a strategic business combination, partnership or other transaction. The company also announced it had provided to all of its employees a 60-day notice of layoffs under the California WARN Act. Alexza expects to significantly reduce its work force as it continues the actions necessary to pursue FDA and EMEA approval of Adasuve. The exodus from Alexza has already begun. On December 20, 2011, CFO, August J. Moretti, left the company to become the CFO of Depomed Inc.

February 4, 2012 is the PDUFA date for Adasuve (Staccato loxapine). We remind investors that on December 12, 2011, the FDA’s Psychopharmacologic Drugs Advisory Committee voted to recommend that Adasuve be approved for use as a single dose in 24 hours in conjunction with the FDA recommended Risk Evaluation and Mitigation Strategy, for the treatment of agitation in patients with schizophrenia or bipolar mania, but the narrow margin of 9-8-1. The market remains highly skeptical of final FDA approval on February 4, 2012. However, we’re going to go out on a limb and say the drug gets approved – the boldest prediction in this report. We believe the drug gets approved because, despite the narrow margin of 9-8-1 vote by PDAC, PDAC does not approve the new drug application, the FDA does.

One person signs the NDA – Thomas Laughren, M.D., Director of the Division of Psychiatric Products. Dr. Laughren was the one that orchestrated the changing of the REMS, the rearranging of the voting during the panel to attempt to find common ground among the 18 panel members, and the one that proposed the single-dose in a 24 hour period label. We believe he did all this to get to a positive PDAC vote. And, based on what we saw at the PDAC meeting, we believe he wants to approve the drug.

If Adasuve is approved, we believe Lazard will be successful in finding Alexza a commercial partner. We remind investors that Biovail paid Alexza $40 million for Adasuve in 2009, prior to the company’s merger with Valent. The first complete response letter gave Valent management the perfect excuse to walk-away from the deal. But once finally approved, we think other pharmaceutical parties will be interested. Management believes that Adasuve can be effectively priced at $70 per unit. We believe this compares favorably with IM Zyprexa ($30 per injection) given the current reimbursement codes (per diem) and the potential to avoid restraints, caregiver injury, and heavy sedation, all which add additional costs into the system. Contrary to popular belief, generic injections like haloperidol work out to be far more expensive than branded IM Zyprexa or Adasuve.

We think Adasuve has peak sales in the U.S. of $125 to $150 million. We arrived at this estimate as follows: There are roughly 10 million patients in the U.S. and Canada with schizophrenia and / or bipolar disorder…90% experience episodes of acute agitation…Episodes occur about once per month (12x per year)…50% of the time these episodes are severe enough to seek medical treatment…Adasuve to be priced at $70 per dose…oral vs. IM market share is 55% / 45%…Adasuve to capture approximately 3.5% of the market (2.5% from IM + 1% from rapidly dissolving oral tablets) => 10.0 million x 90% x 12 x 50% x $70 x 3.5% = $132 million.

Alexza is a risky buy down here at $0.70, but if the drug is approved as we suspect, and a deal does get orchestrated by Lazard, we think a price of around $1.50 per share could be achieved for the entire company. After all, once Adasuve is approved, a potential pharmaceutical partner will then have access to the Staccato system, which facilitates rapid inhalation of drug into the lungs. An acquisition will also include the company’s manufacturing facility for Staccato in Mountain View, CA. Of course, if Adasuve gets rejected by the FDA, the drug is probably dead, the manufacturing facility is worthless, and Alexza is heading toward bankruptcy. Either way, Alexza is certainly one biotech company to watch in 2012.


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