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NPS Pharmaceuticals (NASDAQ: NPSP) is one of the many biotech stocks that has given its shareholders exceptionally large returns this year.

The Utah-based company has a diverse pipeline that contains five compounds, targeting four different indications. NPS' flagship product is GATTEX (teduglutide), which is a drug being developed for short bowel syndrome.
This unpleasant syndrome is generally seen in patients that have undergone surgery, and have significant portions of the small intestines missing although it is basically the result of malabsorption of nutrients in the small intestines of its patients.

It's also important to realize that current treatment for short bowel syndrome is quite limited. Patients are recommended a high calorie diet (lots of carbohydrates), and are given certain vitamins and minerals via injection to ensure that their bodies have enough. There are also medications that can slow down food's movement through the small intestines of patients, and the option to feed patients through a vein (parenteral nutrition).

GATTEX, a recombinant analog of human glucagon-like peptide 2 (a protein), brings something fresh to the table. Unlike current short bowel syndrome treatments, GATTEX acts to rehabilitate the intestinal lining in patients by increasing the length of the villa as well as the crypts in-between them. GATTEX also prevents proteolysis (destruction) from the patient's body through a neat little change in the protein's structure. This offers short bowel syndrome patients that have problems with the lining of their small intestines a much better option, since GATTEX can actually improve the surface area of their small intestines and dramatically boost patients' capacity for nutrient absorption.

NPSP has been on the rise after its NDA submission, and saw 30% gains in the last six months in anticipation of the once-extended PDUFA action date of December 30, 2012. The market still had its concerns about GATTEX's NDA submission earlier in the year, but this changed after a Gastrointestinal Drugs Advisory Committee meeting in mid-November that was held to discuss GATTEX's NDA. There was a unanimous vote in favor of approval, and virtually no concerns brought up about the drug's lack of efficacy versus its safety profile.

NPSP stock didn't react all that much to the very strong vote made at the GDAC meeting, although the market's perspective on the biotech name is being altered a bit. Virtually everyone is expecting a GATTEX approval on December 30th, but there are some questions as to whether or not the drug (along with the rest of the pipeline) justifies the company's hefty valuation of $886 million. There are about 10,000 patients that are being targeted by GATTEX, which forms the basis for NPS' estimated revenue of $350 million for GATTEX. This large figure also factors in the drug's orphan drug status, which guarantees seven (instead of five) years of exclusivity in the US drug market according to the FDA's PDUFA guidelines.

This revenue alone would justify the company's current market capitalization, although the estimate seems overly optimistic at this point, and does not account for the significant dropoff in short bowel syndrome patients that would use GATTEX years after approval. Investors should be focused on the notion that NPS has a few other drugs in development that could build the company's value even after GATTEX hits its peak.

Their phase III drug NATPARA, for instance, is another recombinant drug that acts as a hormone replacement therapy for hypoparathyroidism patients. Since hypoparathyroidism affects less than 200,000 in the United States, it is classified as an orphan disease (which makes NATPARA an orphan drug). As mentioned earlier, NATPARA's orphan drug designation gives it 7 (instead of 5) years of drug exclusivity in the United States and also gives it some extra pricing power due to the lack of treatment options at this time.

NPSP has been advancing quite consistently towards a new 52-week high, with the last one of $11.22/share being made on October 12th during a NPSP buying spree in reaction to the press release that confirmed and put a date on the aforementioned Gastrointestinal Drugs Advisory Committee meeting in mid-November. The recent rise in NPS stock has been met with an equally-proportioned rise in short interest, which implies that the shorts are not willing to make any major moves prior to the likely FDA approval of GATTEX.

We will probably see even more excitement build for NPS Pharmaceuticals in anticipation of the PDUFA action date of December 30th, which will probably result in a very controlled drift to the upside for NPS. It's difficult to say whether there will be a "sell the news" reaction at the start of 2013 or not, but before the news hits we are probably not going to see much volatility.

Source: NPS Pharma Drifts Higher On Potential Orphan Drug Approval