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We've seen nothing but weak trading in Progenics Pharmaceuticals (NASDAQ: PGNX) after the company and its partner Salix Pharmaceuticals (NASDAQ: SLXP) received a complete response letter (or CRL) from the FDA regarding its Supplemental New Drug Application (SNDA) for Relistor.

Relistor is a drug designed to block something known as opioid-induced constipation (OIC), which is caused by the unintended interaction between opioids and mu-opioid receptors of nerve cells outside the brain and spinal cord (in this case cells in the gastrointestinal tract). Since Relistor avoids crossing the blood-brain barrier, it is able to effectively antagonize mu-opioid receptors in cells that opiates shouldn't be targeting in the first place, limiting opioid-induced side effects like OIC.

The drug has a lot of potential based on the huge number of patients who take opiates and experience adverse side effects, although Relistor's current indication in the United States limits it to use in patients with advanced diseases who are receiving palliative care and have OIC despite prior treatment with laxatives. This narrow indication was going to be expanded with Progenics' sNDA, which would have allowed it to be used in any adult patients with OIC experiencing chronic, non-cancer pain.

The CRL was considered quite surprising to the market, since Progenics was approved in Canada for "front-line" OIC treatment in adult patients undergoing palliative care and seemed capable of providing the data for an FDA approval. Nonetheless, the FDA rejection sent PGNX shares from over $10.80/share on July 27th to $5.39/share on July 30th, and really deteriorated the market's interest in the long side of PGNX - until now.

Last Friday, following its Q4 2013 and year-end 2012 financial results (find the press release here), Progenics rallied nearly 30% on Relistor's surprisingly good sales figures and surprising progress that PGNX made towards EPS-positive territory. This was primarily due to a solid jump in sales revenues, which brought Q4 total revenues to $8.9 million (up $6.7 million from Q4 2011). Progenics also incurred surprisingly low operating expenses, largely due to the fact that Relistor is being marketed by Salix Pharmaceuticals , which is better capitalized.

This provides a lot of psychological motivation for Progenics shareholders who were caught in the giant drop we saw after Relistor received its complete response letter last year. While we definitely need to see indication expansion for Relistor to justify the market capitalization of Progenics, the fact that the company is coming close to self-sufficiency implies that shareholders will be able to wait for further developments and another sNDA submission for Relistor without having to worry as much about time-sensitivity and share dilution.

This is a big deal in both psychological and financial terms.

Having tacked on about $1/share, PGNX has reached the approximate valuation it held directly following the FDA's issuing of the CRL. Depending on what we hear about the ongoing communication between Progenics, Salix and the FDA we should see the stock stay relatively close to its current level without the introduction of any more good (or bad) news.

Progenics management's comments during the Q4 2012 earnings conference call implied that they're hoping for a defined path towards FDA approval before the end of the year, but the unpredictability of the FDA's response times combined with the lack of clarity on why Relistor was rejected makes timing more difficult to analyze at this point.

Going forward, Progenics does have some other developments that could prove very interesting. For one, we have the phase II PSMA ADC therapy which targets prostate cancer cells with an antibody conjugate of PSMA. This drug could generate new interest in Progenics, especially if it's able to present an interim data analysis at ASCO 2013.

As uncertain as Progenics' future is, investors should also take note of the fairly low valuation of the company itself (at $148 million). I think this gives the stock substantial downside protection until we receive more news about Relistor's situation, which is also helped by the strong performance that the drug has seen in its current indication.

Source: Strong Relistor Sales Drive New Rally In Progenics