A 'Firecracker' Pharma Stock for the Fourth of July: CollaGenex (CGPI)

Jun.30.06 | About: China Redstone (CGPI)

In honor of July Fourth, LCM highlights four stocks to add some sparkle to your portfolio. Our picks – in interactive gaming, retail, specialty pharma, and telecom – feature near-term catalysts and supportable themes. Here's our specialty pharma pick:

CollaGenex (OTCPK:CGPI) – CollaGenex is poised to undergo a transformational event with the July launch of Oracea (approved by the FDA on May 30), a modified-release formulation of doxycycline for the treatment of rosacea. Our proprietary survey work indicates excellent early awareness on the part of clinicians, robust efficacy, and comfortable safety margins, factors which, combined with the company's strong and well-regarded sales force, will likely drive sales beyond $100 million by the fifth year after launch. Recent market weakness and a patent delay provide a compelling entry point for investors, in our view.

Launch of Oracea, a modified-release 40-mg doxycycline for the treatment of rosacea, set for July around the ADA meeting. In May, the FDA approved Oracea for the treatment of rosacea, three months ahead of our expectations. Rosacea remains a dissatisfied market, with only a fraction of the estimated one million sufferers on treatment. We expect Oracea to expand the market via use in combination with topicals. With an 80-person dermatology-dedicated sales force already in place and operational since 1Q06, the company is targeting a July launch.

Our Lazard Capital Markets survey suggests strong demand for the product in rosacea and early off-label acne use. Early clinician awareness and the company’s new, but well-regarded, sales force (53% of respondents knew their rep and 42% characterized CollaGenex reps as being superior to other dermatology sales forces) should produce a relatively quick uptake. Nearly 70% of respondents indicated that they would use Oracea off label in acne in an average of 20% of their patients with acne. Of note, with an expected July launch, there could be significant upside in acne, as the product will be available in a high-demand period (before adolescents return to school). Our 2006 sales forecast of $6 million for Oracea assumes an early September launch and could prove conservative. We forecast sales of $94 million in 2009, four years after launch.

Incyclinide could be the first novel systemic in acne in years and may provide CollaGenex its second leg of growth beyond 2009. Incyclinide, a novel, chemically modified tetracycline in Phase IIb, has demonstrated considerable activity in acne with an early onset of action. Phase IIb data are due in early 1Q07.

Risks. Beyond regulatory, development, and commercial risks, Oracea’s patent is now under reexamination and has yet to issue. This patent offered broad protection in novel antibiotic classes, but was recently prevented from issuing due to newly discovered relevant publications. Management characterizes this 11th-hour submission as defensive in nature and expects a six- to nine-month delay; our external consultants agree, based on the publicly disclosed information. The patent may either not issue or issue only in a seriously reduced form.

Our 12-month price target is $16. It derives from a sum-of-the parts NPV analysis, including $11 per share for Oracea U.S., $3.60 per share for Incyclinide, and $1.10 per share for the marketed products.