Why Somaxon Pharmaceuticals Should Be A Double From Here

Somaxon Pharmaceuticals (NASDAQ:SOMX) has had a tough time of it over the last year, falling from a pre-split adjusted basis of $6 per share to the most recent closing of $1.50 per share. Much has changed for the positive for Somaxon recently, none of which has yet to be reflected in the stock price. In the last three months the company has successfully settled litigation's with three of four companies with generics of Silenor, its lead insomnia drug. A recent direct offering has bolstered their balance sheet giving them room to grow in the coming year. With $8.2m in cash and a market cap of $10m Somaxon should appear on value trader's radars. It has also seen their insomnia drug adopted by a large Medicare heath plan.

In October Somaxon effected a 1-for-8 reverse split of its stock and there is now only 7.19 million shares outstanding qualifying it as a "low float" stock. Over the last few months, there has been a trend in stocks that undergo reverse splits to initially sell off and then have a large rebound in price. It has been a month since the reverse split in Somaxon shares and the stock has yet to have its post split run despite good news. The consolidation in the $1.50 area over the last month in a weak market environment bodes well for the stock price in the near term.

Some recent examples of large post reverse split runs are PURE Biosciences (OTCQB:PURE). After the reverse split on August 15, 2012, PURE moved from $1 to $1.68, a 68% move after a one month consolidation. Rosetta Genomics (NASDAQ:ROSG) was a huge post reverse split runner back in May when it ran from $1.40 to $23.43 within a week. Over and over stocks, particularly biotech stocks, that implement reverse splits have large rallies within a month of the split. Somaxon looks like its time has arrived.

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A look at the Somaxon chart shows a stock ready for a breakout move above $1.54 with a target of the 200 day MA at $2.81. For long term investors, recent news that effective October 1 MedImpact Healthcare Systems adopted Silenor in a preferred formulary position for the treatment of insomnia in its Medicare Part D health plans should be viewed as positive. MedImpact is a pharmacy benefit manager covering approximately 100,000 Medicare Part D insomnia prescriptions per year. Under the agreement with MedImpact, Silenor will be included in MedImpact's formulary on a Tier 2 unrestricted basis for the fourth quarter of 2012. This should help to bolster the revenue of Somaxon going into 2013.

Somaxon is not the prettiest biotech out there but it has fallen to a compelling valuation over the last few weeks, trading slightly above cash value. For investors looking for value in biotech land with a chart set-up that has nice upside potential, Somaxon could be your ticket to gains in 2013.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SOMX over 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.