Biotech Update: Arena Pharmaceuticals, Acusphere, Cephalon, ViroPharma, Auxilium

Though we’re anywhere but in a high growth market presently, there are groups that may provide big upsides based on growth potential, especially in light of major recent pull-backs. One industry that interests us is biotech, so Zacks senior analyst Jason Napodano, CFA helped us with some notable suggestions in the space.

What’s new in the world of biopharmaceuticals these days?

Arena Pharmaceuticals (ARNA) reported financial results for the third quarter 2008. Although results were largely in-line with expectations, investors are starting to take notice of Arena’s cash position. Despite the $212.1 million still on the books at the end of September 2008, management has reduced its year-end cash balance guidance from $160 million to $115 million due to the planned redemption of $55.8 million in Series B1 and B2 convertible preferred stock in November 2008.

This is an unfortunate use of funds, in our view, because it puts Arena’s cash position in danger of running out late in 2009 unless the company either signs a development partner for pipeline candidates lorcaserin or APD-125, or undertakes a significant dilutive offering. Management does have some additional cash-generating opportunities with its early-stage pipeline and research capabilities, but nothing that would be meaningful enough to put off raising funds to support lorcaserin in 2010.

On the third-quarter call, CEO Jack Lief noted "a number of companies doing pre-diligence" on lorcaserin. He also noted "no apparent pattern" from the blinded data that would prohibit the approvability or commercialization of the drug. The ideal situation is a bidding war between large-cap pharmaceutical companies over lorcaserin. We are not quite ready to jump into that camp -- hence the ‘Hold’ rating -- but it is clear obesity is something big pharma is very interested in.

Have you reached a verdict on lorcaserin yet, based on the data you’ve reviewed?

Our stance on lorcaserin is that the drug looks safe, with no major cardio, CNS, or metabolic concerns to speak of; but, the phase IIb efficacy data fails to impress. The efficacy of lorcaserin demonstrated in the phase IIb trial (~8 lbs at 12-weeks) falls short of some of the other candidates currently in late-stage trials (~20 to 25 lbs after 24 weeks for Qnexa, Contrave, and pramlintide/metreleptin).

However, safety remains a chief concern of all interested parties (partners, patients, physicians, and the FDA), and we note that the real long-term efficacy of the drug will not be known until BLOOM offers data in March 2009. So the stock remains in a holding pattern while we wait for the data in March 2009.

Interesting. Any recent news elsewhere worth reporting?

On October 24, Acusphere (ACUS) and Cephalon (CEPH) signed a definitive agreement whereby Cephalon will provide $20 million in upfront financing to Acusphere in the form of $5M in cash and $15M in a senior secured convertible note.

The deal is very positive for Acusphere shareholders, as the company exited the third quarter with only $4.1 million in cash on the books and was going to run out of operating funds by mid-November 2008. The financing avoids any near-term bankruptcy risk or the need for a massive dilutive offering.

We also note that should Cephalon decide to license Imagify, Acusphere was able to maintain a significant portion of the economics. The deal entitles Acusphere to a sizable approval milestone of $40M and royalties -- which is 20% -- on U.S. sales of the drug.

What’s your particular take on this deal?

There seems significant, and perplexing, confusion around it. We are surprised at the stock price decline in the past few days. Perhaps this is profit-taking after the run-up last week on the news that the FDA would hold an advisory panel meeting in December 2008 to review Imagify. We discuss this panel meeting and our prediction for the outcome in our October 13, 2008 report. This report also has our analysis of the RAMP-1 and RAMP-2 data, and our forecasts for Imagify sales.

Nevertheless, this is a very good deal for Acusphere. The current market conditions and financing opportunities for small-cap biotechnology companies are extremely challenging. The fact that Acusphere was able to secure $20M in financing and still maintain significant upside on its intellectual property for shareholders so close to bankruptcy is fantastic news. We think it is a testament to Imagify and potential billion-dollar opportunity it offers.

How about for Cephalon?

Cephalon will most likely choose Option No. 1 (Imagify License) if Imagify is approved. However, even if Cephalon chooses Option No. 2 (51% Ownership), Acusphere shareholders can still reap significant financial rewards if the drug is approved. A post-approval deal on Imagify is most likely worth more than twice what the company will get with option No. 1, so investors, while disappointed with the 51% dilution, will still come out ahead.

Investment in Acusphere still represents a risky and speculative play. However, in our view, odds favor a positive panel recommendation in December 2008, and the stock represents a very attractive "call option" at this level.

Any other noteworthy items to help give us an update on the pharma sector overall?

ViroPharma (VPHM) posted very strong financial results for the third quarter. Vancocin sales blew away expectations, coming in at $65.9 million, up 29%. Vancocin continues to benefit from impending treatment guideline changes and ViroPharma’s new specialty salesforce. The acquisition and approval of Cinryze greatly strengthens the company's future prospects.

We are excited to hear about the commercialization plans in early November. We expect management to be in position to launch the product before the end of the year. Besides strong Vancocin sales and the Cinryze approval, both phase III trials on maribavir are progressing on plan.

Do you remain bullish on ViroPharma shares?

I do. ViroPharma’s business fundamentals are strong. Sales and earnings are outpacing expectations and the company should exit the year with over $300 million in cash on hand. We are maintaining our Buy rating with a price target of $16.

One more stock I’ll cite here is Auxilium Pharmaceuticals (AUXL). Its lead product, Testim, a 1% testosterone gel indicated for the treatment of hypogonadism, continues to gain market share and post solid sales growth.

Plus, Auxilium’s late-stage candidate, Xiaflex, under development for Dupuytren’s Contracture, just completed a successful phase III program. Xiaflex is also under development for Peyronie’s Disease and Frozen Shoulder Syndrome.

Thus, the business fundamentals at Auxilium are strong. The stock has had a significant pull-back based on the volatile stock market and significant under-performance of biotech names. Auxilium shares are looking very attractive at this level.

However, we are admittedly risk adverse, and thus only maintaining our Hold rating. Our near-term target is $20 per share.

Jason Napodano, CFA is a senior analyst covering the Big Pharma and biotech markets for Zacks Equity Research.

Comments

[Biotechs_Maven:]

Jason, forgot (intentionally) to include the facts that:

a. ARNA Lorcaserin Phase IIa was done in 25 different clinical sites, and Phase IIb was done in 40 different clinical sites. while VVUS Qnexa as done in 1 single sites.(Orex Contrave Phase IIb was done in 14 sites)

b. ARNA Phase IIa and Phase IIb do not include diet and exercise in the trial, while VVUS Qnexa Phase II was utilizing Diet and Exercise as mandatory part of the Trial.

c. ARNA Trial also only done in 12 weeks, while VVUS and OREX trial are done in 24 weeks, so longer time of course means more total weight loss.

d. Lorcaserin Phase 2 trial: 352 (Phase2a) + 469 (Phase2b)= 821 Patients.
VVUS Qnexa Phase 2 trial: 200 Patients
Advantage LORCASERIN (more then 4 times Qnexa Patients)

e. Lorcaserin Phase 2 trial: 352 (Phase2a) + 469 (Phase2b)= 821 Patients.
OREX Contrave Phase 2b trial: 419 Patients
if we Compare only Phase 2b patients : Advantage LORCASERIN (50 patients more then Contrave Patients)

f. and finally ARNA Lorcaserin is a brand new drug formulation, while OREX and VVUS drug are all combination of 2 different GENERIC Drug, and even though they have patent on this two generic combination, it will not stop some doctor from pescribing two generic into one and still cheaper then
OREX and VVUS brand name drug...
While Doctors can not do this to ARNA Lorcaserin,
thus making ARNA Lorcaserin more attractive in marketing point of view :)

for my complete analysis please go to this yahoo message board links:

messages.finance.yahoo...

that is in VVUS message board, but it also have more links inside that post to the post I made on ARNA message board...

anyway this is the direct link to the ARNA message board :
messages.finance.yahoo...

messages.finance.yahoo...

messages.finance.yahoo...

2008 Nov 03 01:22 PM

[Biotechs_Maven:]

on ACUS, Jason also forget (intentionally) to provide the details of the transction.

Jason post above: Cephalon will provide $20 million in upfront financing to Acusphere in the form of $5M in cash and $15M in a senior secured convertible note.
and my simple copy and paste from ACUS 8K revealed :
("Cephalon") to provide $20 million in upfront financing by purchasing a $15 million senior secured convertible note and by paying a $5 million upfront fee for an exclusive worldwide license to AI-525, a preclinical-stage injectable formulation.
So the $5million is for AI-525 and not for Imagify !

Jason also do not tell you that the $15million convertible to 51% of ACUS shares means the transaction was done with ACUS shares priced at 21cents PPS.Far lower then the Friday before the deal was announced, where ACUS closed at 57cents... so it means a 63.2% discount to market price of ACUS shares, while it make the current shareholder to become minority since the total current outstanding shares will only become 49% of ACUS after CEPH exercise their convert to 51% of ACUS.

also CEPH had one year to exercise this 51% options, and ACUS can even pay this convert in cash to prevent CEPH from converting to 51% ownership of ACUS...
Usually when you mortgage your house, you will get back your house if you pay the debt with the interest...
not in this deal :)

Also CEPH CEO, Baldino, when asked by an analyst at their latest Quaterly CC, downplayed this deal, and do not even mention Imagify name at all.
even said: "you mean the little deal we did ?"
so to CEPH, this is just another little deal :)

I already e-mail Jason asking about the low PPS on this ACUS deal, but Jason never replied back to me.
Of course he did not have too :)

Jason said above:
<The financing avoids any near-term bankruptcy risk or the need for a massive dilutive offering.>
While not too long ago, Sherri, CEO of ACUS is saying that they have enough money until at least January 2009.So if the December FDA Panel meetings is good, they will have no problem raising money.Now Sheeri suddenly said, ACUS is going to bankrupt in November 2008 if this CEPH deal is not closed ???
Also, Jason said above that this convert deal is not dilutive financing? well if CEPH decide to convert the $15million to 51%of ACUS shares IT IS DILUTIVE FINANCING !

2008 Nov 03 01:41 PM

[Biotechs_Maven:]

Jason also said :
< How about for Cephalon?

Cephalon will most likely choose Option No. 1 (Imagify License) if Imagify is approved. However, even if Cephalon chooses Option No. 2 (51% Ownership), Acusphere shareholders can still reap significant financial rewards if the drug is approved. A post-approval deal on Imagify is most likely worth more than twice what the company will get with option No. 1, so investors, while disappointed with the 51% dilution, will still come out ahead.>

Jason, so now you admit the fact that ACUS investor might get DILUTED , and how come it is still come out ahead ?

I show you how bad it is:
If and ONLY IF, Imagify is approved by FDA on February 2009,
then ACUS shares surely will go up higher from here !
And since Jason previous target price of ACUS is $5,
let's use his number then.

so at that time CEPH 51% of ACUS is equal to ownership of 69,200,000 shares of ACUS.
with $5 PPS, that 69,200,000 x $5, the value will be
$346,000,000
That is huge capital gain, and remember CEPH only paid $15million for it.
That capital gain goes right back to CEPH Balance Sheet under Gain from Investment !
So with this new found gain, CEPH can afford to go back to ACUS and pay a higher license fee then the $40million license fee (option 1).

yes the rules said the decision to choose who get this license must be done with no CEPH originated ACUS board member involved.(oh yeah, forgot to mention that CEPH will have their shares representated proportionally in ACUS board) and don't forgot CEO of CEPH is already in ACUS board for while...

back to licensing again...
Just assume CEPH now need to pay ACUS $80million upfront to license Imagify.
it is still cheap compare to their capital gain in ACUS shares...
and when they pay this $80million to ACUS, 51% of that money still belong to CEPH since they own 51% of ACUS...

also ACUS share would go higher again now (higher then $5), and that means CEPH capital gain would even go higher :)

so there is no way, CEPH are going to use this $15million and exchange it with the right to license for $40million.Because that means they have to pay $40million from their own cash...

I am sure they will use this $15million to convert to ACUS 51% shares, and use the capital gain to pay the license and still have a lot of profit from that capital gain intact, and later get more capital gain since ACUS shares would go up !

2008 Nov 03 01:51 PM

[Biotechs_Maven:]

Yes, ACUS shareholder will still win a lot if Imagify is approved first time on February 2009,

but now the risk to reward ratio is no longer as good as before this 51% diluted deal.

beside if CEPH only willing to pay "the call option" at 21cents, why ACUS shareholder should pay more then that ?

remember, CEO of CEPH is board member of ACUS, so he have more access to classified trial data of Imagify that never revealed in full to public.
so he know more about the risk to reward ratio then regular ACUS share holder ever will...

ps: I use the term call option above, since Jason prefer to show that this ACUS cheap share price is almost like call option...
meaning it can go to zero very soon if ACUS "expired" :)

2008 Nov 03 01:56 PM

[Biotechs_Maven:]

Jason might argue here that the PPS in this transaction is not based on 21cents PPS since he said the financing is $20million ($5Million + $15million).

and even though I had explained clearly why the REAL FINANCING is only $15million,since that is the amount that can CONVERT ,

I will also point out another fact that Financing always involved Interest.
and CEPH only charge ACUS interest on the $15million convert.
so of course according to any accounting rules,
the financing is only $15million, thus $15million devide by 69,200,000 shares = 21.68cents PPS !

again it is clear the additional $5million is to license other drug not related to Imagify !
and paying to licensing drug is not FINANCING !

2008 Nov 03 02:08 PM

[ArtfulDodger:]

Good info! Thanks.

2008 Nov 04 10:01 PM