Piper Jaffray Likes Array, Should You?

Mar.25.13 | About: Array BioPharma (ARRY)

Shareholders of Array Biopharma (NASDAQ: ARRY) enjoyed a 8% rally after Edward Tenthoff of Piper Jaffray upgraded the stock from a "Neutral" to "Overweight" rating, implying that the market is undervaluing the stock ahead of potentially exciting clinical trial data due later this year as well as additional partnership opportunities that the company may have with its current pipeline.

The firm also raised its price target on the stock to the $7.00 mark, implying that ARRY still has ~50% upside going forward.

This overall bullish argument is generally based on Array's 3 partnered development programs and 2 non-partnered programs as displayed in the following chart:

Program Partner Indication Progress
ARRY-614 N/A Myelodysplastic Syndromes Post Phase I
ARRY-520 N/A Myeloma Phase II
selumetinib AstraZeneca Non-Small Cell Lung Cancer Post Phase II
MEK162 Novartis Melanoma Post Phase II
danoprevir Roche Hepatitis C Virus Phase III
Click to enlarge

Probably the biggest strength of Array from a biopharma investor's standpoint is the relative diversity of its pipeline, which is focused in oncology but is split nicely into a number of compounds that won't make or break Array's stock single handedly. This is an especially nice thing to have for oncology drug developers due to the high failure rate that cancer drugs have in late stage development.

The only catch for investors is the cost associated with the R&D of multiple compounds. As reported in their Q2 2013 results, Array spends roughly $26 million per quarter which is made up mostly of the quarterly $14 million R&D budget they have.

While the R&D expenses would have been much heftier had Array not partnered the three compounds mentioned earlier, the deal limits Array to royalties on sales which are generally substantial enough to cover Array's R&D expenses for other pipeline compounds.

On the bright side, Array's prospects throughout the next few years could be incredible based on up to $3 billion worth of milestone payments.

I also agree with Piper Jaffray that Array has shown an incredible ability to secure favorable partnerships with big pharma companies, and should be able to generate more arrangements by auctioning off ARRY-614 and ARRY-520 - two compounds that are being developed from very attractive indications.

After holding a public share offering in late 2012 Array has gathered a decent cash pile of ~$110 million that should definitely keep things running smoothly for the rest of 2013. There is concern that the company may have to fund itself again in 2014, although it seems feasible that ARRY-520 may be partnered off before this becomes an issue.

Array should be presenting additional clinical trial data for ARRY-520 later this year, as well as progress in its dose-discovering phase I in combination with carfilzomib which could expand its indication down the line. I think this should draw enough attention for the compound in time for a partnership in the second half of 2013 or early 2014, although this remains purely speculative.

I don't expect ARRY to move as high as $7.00/share without the announcement of a new partnership or strong clinical data for a partnered drug that would trigger a milestone payment, but the stock's uptrend remains well supported and may be especially suitable for options-based strategies that bets on mild movement for long periods of time.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.