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It's not too often I come across a small-cap biopharma that I think might make a nice longer term investment. Most small-cap biopharmas burn a ton of cash on development treatments for such ailments as cancers, Hepatitis, and rare diseases. In this article, I would like to talk about the company Pozen (POZN), which I feel is a good long-term speculative investment, and a good trade with near-term catalysts coming up.

Pozen reminds me of another company I came across in 2011, Antares Pharma (ATRS), which I made a substantial investment in, but have since sold for an 80% gain in 14 months.

Antares is not a typical biotech that develops drugs to treat rare diseases such as the ones mentioned above. Rather, the company aims to take existing treatments and make them better via subcutaneous self-injections. When I first bought Antares, the price was around $2.20 a share. Within one year, the stock nearly tripled, hitting a 52-week high of $5.58, before settling back to where it trades today, in the high $3 range. Antares looks to have a bright future ahead of it.

Like Antares, Pozen takes existing drugs and seeks to make them safer and better - more tolerable. Today, I will look at the management, pipeline, upcoming catalysts, partnership potential and noteworthy financial items for Pozen.

  • Management

One reason Pozen reminds me of Antares is because of the strong management with strong backgrounds.

John R. Plachetka, Pharm.D., is President, Chief Executive Officer, and Chairman of the Board of Directors of Pozen. Prior to founding the company in 1996, Dr. Plachetka has held many high level positions in the pharmaceutical industry. Most notably, he had a nine-year career at Glaxo Inc. where Dr. Plachetka held various executive positions including Director of Cardiovascular Clinical Research and led the U.S. development program for Imitrex®, Trandate®, and a thromboxane antagonist.

Mr. Plachetka is the firm's biggest shareholder, holding over two million shares. He is also responsible for bringing Liz Cermak on as the firm's Executive Vice President and Chief Commercial Officer. A former Worldwide Vice President for Johnson & Johnson (JNJ), Liz has served in a variety of senior leadership roles across the pharmaceutical, consumer products, and health management businesses. She has over 25 years experience in the healthcare industry.

The CEO's heavy ownership stake is one of the reasons why I believe the management team is extra focused with added incentives to perform well for its investors. The scenario arguably communicates a direct sense of personal accountability towards building shareholder value for investors in the company. The more that CEO is able to create shareholder value, the more he will ensure his own compensation and benefits.

The value of the management's approach has been proven with its success in gaining FDA approval of two self-invented products. One of these products is Treximet, developed with pharmaceutical giant GlaxoSmithKline (GSK) in June 2003 for the acute treatment of migraine attacks in adults.

In what I feel is a very smart move, Pozen sold most of the future royalty and milestone payments covering Treximet sales in the United States to a financial investor for $75 million in November 2011. On the surface, this may not mean much. However, once I looked deeper, I noticed how the company is piggybacking the product by retaining exclusive U.S. rights to develop and market a lower dose sumatriptan and naproxen combination (MT400). This is the same combination used in Treximet. Effectively, the company raised $75 million while potentially having virtually the same product in development.

A pipeline chart later in this article will show the MT 400 drug in Phase III development. As a result of the Treximet decision, it is over one year later and the company has remained shareholder friendly by achieving a strong cash position while avoiding dilution. As of the end of Q3, 2012, Pozen had approximately $92 million in cash and short-term investments. The dilution alternative to raise cash was one annoyance I had with an otherwise strong Antares management team as they did a cash raise last year that I felt was unnecessary at the time, but might ultimately be the best course of action for them moving forward.

  • Upcoming Catalyst

Pozen plans on filing an NDA in April for its first PA product PA32540, which is a combination of 325 mg aspirin and 40 mg time-released omeprazole, better known as Prilosec, originally created by AstraZeneca (AZN).

From the company's website, we read;

Pozen's active PA product portfolio is focused on designing cost-effective, integrated aspirin therapies that enable the full power of aspirin by reducing its potential gastrointestinal (GI) damage. The PA product portfolio has the potential to benefit millions of Americans who use daily aspirin to treat cardiovascular disease, osteoarthritis, and other diseases.

PA32540 is designed to be a GI-safer form of aspirin to be administered orally once a day, at a cost of 1 dollar per day. PA32540 prevents secondary cardiovascular disease in patients at risk for aspirin-associated gastric ulcers.

Last week, the company announced the combined results of two Phase III studies of PA32540:

According to the studies, in the post-hoc analysis of subjects with a history of transient ischemic attack (TIA) or stroke, long-term (6 months) treatment with PA32540, compared to EC-ASA (325 mg), was associated with a significantly reduced rate of endoscopic gastroduodenal ulcers (2.0% vs. 12.4% respectively; p=0.005), and study discontinuation due to adverse pre-specified upper GI events (0% vs. 8.0% respectively; p=0.006). The incidence of adjudicated major adverse cardiac events was similar for PA32540 (2.9%) and EC-ASA (325 mg) (4.4%).

Mark J. Alberts, MD, UT Southwestern Medical Center, Dallas, Texas remarked:

Discontinuation of aspirin therapy is often due to the adverse GI effects of aspirin. In these pivotal studies, PA32540 was associated with a significantly lower rate of treatment discontinuation than aspirin alone. Patient adherence to aspirin therapy saves lives, as aspirin discontinuation increases the likelihood of potential adverse cardiovascular and cerebrovascular events.

In an article written by analyst Jason Napodano for Propthink, he writes:

Amazon.com sells a 500 tablet bottle of 325 mg aspirin for $11.00, or 2.2 cents per day. One can also buy 42 20 mg tablets of OTC Prilosec (omeprazole) for $23.95, or around 57 cents per pill. To re-create Pozen's PA32540, a patient would spend approximately $1.16 per day (taking two Prilosec pills plus an aspirin).

The above clearly demonstrates why it would be beneficial to choose Pozen's drug over taking aspirin and Prilosec separately - it would cost less at 1 dollar a day for a patient to buy PA32540 versus buying both drugs separately for $1.16. Additionally, PA32540 is time released and contains a dose specific solution in one pill where patients need not to worry about mixing both medications to get the desired result.

  • Partnership Potential

The above referenced article goes on further to note that the PA platform might be worth as much as $400M in sales per year globally, with the company receiving at least a $30M upfront payment from any potential partner. With an NDA filing expected in April the company's desire to secure a partner before the filing, I expect Pozen's stock price to increase significantly in the short term.

A partnership can spark a stock price depending on the details of the transaction. Generally, it shows that the development of a drug will be expedited and the potential is going to be greater because of more power and resources behind it. Last year, Sunesis Pharmaceuticals (SNSS) gained 15% on a day when it announced a partnership with Royalty Pharma. Royalty Pharma agreed to pay Sunesis $25 million if the company is successful in developing its lead product candidate Vosaroxin, which is an anticancer quinolone derivative class of compounds that have never used to attempt to treat cancer. In the time since, Sunesis has seen a stock price increase of well over 100% from $2.87 to $6.18.

Pozen is already partnered with such pharma giants as GlaxoSmithKline, Johnson & Johnson, and AstraZeneca, which shows Pozen's management has experience with gaining partnership deals with large pharmas.

  • Pipeline

The graphic below shows the rest of Pozen's marketed and pipelined solutions. It is worth noting that the company has other solutions that will also see NDA filings within the next year.

  • Financials

Pozen was profitable for the first two quarters of 2012, before showing a loss in the last two quarters of the same year. This was in part due to less than expected sales from Vimovo, which is partnered with AstraZeneca. AstraZenca may have priced Vimovo too high at $4 a day, causing the drug to lose market acceptance. However, as Jason Napodano reported in his article, AstraZenca may become more aggressive in its price point for the drug. Furthermore, AstraZeneca has filed Vimovo in 80 countries, receiving approval in 60 countries, and is currently launched in 40 countries. This leaves about 40 countries left for approval and roll out of the drug, which will equate to more revenue for Pozen moving forward.

Share Statistics

Avg Vol (3 month):

96,155

Avg Vol (10 day):

137,488

Shares Outstanding:

30.31M

Float:

24.52M

% Held by Insiders:

11.15%

% Held by Institutions:

66.20%

Shares Short (as of Jan 15, 2013):

1.70M

Short Ratio (as of Jan 15, 2013):

17.80

Short % of Float (as of Jan 15, 2013):

6.40%

Shares Short (prior month)3:

1.71M

The stock price and volume have been increasing steadily over the last two weeks or so. With nearly 6.4% of the float held short, Pozen makes for a decent short squeeze candidate. Institutional ownership is high, especially for a stock selling in the high $5 range like Pozen.

With a market cap of $173.06M, I believe that Pozen is undervalued by about $100M when considering the market opportunity for its PA platform, 40 more countries to roll out Vimovo, and the likeliness of a partnership for PA32540 which as already mentioned, should net at least a $30M upfront payment.

(click to enlarge)

From the chart above, the stock looks to be finally reversing the extended down trend it has been in since May of last year. It appears to me that catalyst traders and investors are accumulating the stock. With the NDA filing for PA32540 expected in April, and the likeliness of the company gaining a significant partnership with the drug before then, a short-term price appreciation to the $6.50 range looks to be in short order.

Price target opinions: $6.50 to $6.75 in the short term as a catalyst trade, and a one year target price of $10. Pozen just might be a very good stock to buy and hold for the long term, which is a rare thing for small cap biopharmas.

Source: Upcoming NDA, Potential Partner Add Further Investment Value For Pozen

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.