Market Bets On Approval For Hyperion's Ravicti On FDA's 'Hint'

| About: Hyperion Therapeutics (HPTX)

There were a lot of very bullish moves in the biotech sector last week, including a particularly huge rally in Hyperion Therapeutics (NASDAQ: HPTX) which drove the stock up about 33% in the last five trading sessions.

Hyperion Therapeutics is focused on the development therapies for orphan diseases and hepatology.

Even if biotech stocks are unexplainable in their volatility half the time, it would appear that Hyperion is rallying in anticipation of a (positive) FDA decision on Ravicti - Hyperion's drug for Urea Cycle Disorders ((NYSEARCA:UCD)), although anyone who has been following the news know that this wasn't the case.

Strangely enough, the stock seemed to throw some fuel on the bullish trend following the company's most recent press release, which basically revealed that the FDA needed more time to review the drug's NDA (specifically regarding the "post-marketing requirements") and wouldn't meet the PDUFA action date of January 23rd, 2012 (yesterday).

This news would normally keep the stock flat or neutral due to investors' frustration, but the fact that the FDA is holding off on the final decision due to a post-approval issue seems to imply that they intend to approve the drug when the time comes. From the market's perspective, I guess that could be considered a subtle hint that approval has definitely been decided upon.

This is clearly a good thing for Hyperion stock. The "hint" drove shares of HPTX above $15/share last Thursday (which caused the stock to touch a new 52-week high of $15.47.) What's even better is that this recent move was made on heavy volume, which adds conviction to the market's read on the hint.

Assuming that it's all true, is Hyperion still a good bet for an investor at roughly $15/share?

At the current price, Hyperion has a market cap of roughly $250 million. That isn't terriblly expensive for a company that has an FDA-approved drug, although it does bring to question Ravicti's potential to reach its estimated peak sales and its profitability.

If you look at a few thousand people with UCDs, and assume that Ravicti reaches two thirds of the market after gaining momentum, you still have a product that falls very short of an intrinsic worth of $250 million. The real value of the drug is locked up in the hepatic encephalopathy indication. Although this is also an orphan indication too, it has maybe a dozen times the market potential and could be a lot more lucrative for the company. This, I think, will give Hyperion investors some support despite my expectation of an unexciting launch for Ravicti in the UCD indication.

Although the therapy has a great safety profile, orphan drug designation, and seemingly a very good chance at FDA approval, I don't see much advantage offered by chasing the recent rally in HPTX for most people. If anything, I think that investors can stay on the sidelines watching until we see the PDUFA decision for the sNDA that will allow Hyperion to market Ravicti as a treatment for encephalopathy. It just seems unlikely that Ravicti will be able to "wow" anyone with its market launch, which might hinder buying interest for some time. Also putting pressure on HPTX is the lack of bearish (short) interest, which indicates that there is some extra room for "sentimental shift."

On the bright side, there is one thing I really like about HTPX. The company's pile of cash was recorded to be $56.5 million on September 30th, 2012. I think that this should provide the company with enough for quite some time, hopefully eliminating the possibility of any equity financings for a long time - at least until the end of 2013.

Going forward, I think investors can expect an FDA approval for Ravicti for UCDs followed by an introduction to market which should happen before the end of 2013. Like I said, I am personally skeptical on the results although I think that hepatic encephalopathy could be exciting enough to consider HPTX for a play later on. At this price, HPTX looks a bit expensive for its current target indication, and it seems that FDA approval has already been priced in. It's really not the optimal time to buy a biotech stock like this.

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. I have no business relationship with any company whose stock is mentioned in this article.