Emisphere: Why We're Confident

We recently finished buying a position in Emisphere (EMIS). We have done a ton of due diligence and networked with some of the smartest biotech minds on the street and think that the stock should be trading at $5 now and that it will be well above $50 within a couple years.

A couple weeks ago, news came out that Emisphere had been granted provisional GRAS (Generally Regarded as Safe) approval for their SNAC carrier to use with vitamins, supplements and minerals. They will get the full approval this summer when the the two articles are published in medical journals. This eliminates the need for any approval from the FDA for putting vitamins, minerals and supplements into the Eligen oral formulation and opens up big opportunities for Emisphere to commercialize Eligen very soon.

The first product that they are working on is B12. They have already proven that B12 delivered via Eligen in pill form has much higher absorption rates than standard B12 vitamins. They are working on a low dose B12 for the retail channel and a high dose B12 to replace B12 shots. The low dose will be ready when they get the full GRAS approval this summer and Emisphere is in talks with companies to find a partner to market the product. The high dose product is going to go through a very short clinical trial to prove the absorption rates. The B12 Eligen is very well understood by Emisphere and we are confident that they will prove great absorption rates when they finish the trial sometime later this year.

They will probably also market this product through a partner. Recently Par Pharmaceutical (PRX) paid $54.5mm to buy a nasal B12 spray from QOL Medical. Sales of the product were only $8mm last year, but the opportunity is huge given that there were 44 mm B12 injections prescribed in the U.S. alone in 2008. Emisphere has some interesting info on their website about B12. We feel that an oral delivery is far superior to a nasal spray (I don't think anybody would argue with me on this) and because of this the market potential is probably 5 times the size compared to the nasal spray.

We think that Emisphere is worth more than the current market capitalization of the company just based on the B12 given the price of Par Pharmaceuticals acquisition of what we think is an inferior product. Emisphere's CEO said on the conference call that he has been contacted by many companies, both large and small, about opportunities for partnering with Emisphere for B12 and other vitamins, minerals and supplements. Iron, polyphenols and glucosamine are a few that come to mind that are difficult for the body to absorb and would work well in Eligen formulation.

So I have established why we think that the stock is undervalued already and I haven't even gotten to why we are so excited and why we are confident this is going to be a huge winner. Emisphere's partner, Novartis (NVS), is currently underway in three phase 3 trials of Oral Salmon Calcitonin. One trial is for treating Osteoporosis and the other two are for treating Osteoarthritis. Salmon Calcitonin is already a standard of care for treating Osteoporosis so they don't need to prove efficacy, they just need to prove that the oral version is absorbed similarly to how it is absorbed in nasal sprays.

The other huge risk in any clinical trial other than efficacy is always toxicity. Salmon Calcitonin has no toxicity risk and in fact they have never reached a maximum tolerable dose (now you are probably starting to see why we can have so much confidence in something as risky as a biotech company). The salmon calcitonin market is already huge, with the global market recently estimated to be $750mm dollars annually and it is certain to grow with the aging of the population around the world.

We think that the market for Oral Calcitonin will be bigger because of the previously discussed superiority of oral delivery compared to nasal sprays. We estimate that peak sales of Emisphere's Oral Salmon Calcitonin will be greater $1 Billion just for the Osteoporosis market. Emisphere's royalty on this will be over 10% which will all flow to the bottom line. If they also get approval for treating Osteoarthritis the peak sales could peak at closer to $10 billion. There are currently not very many effective options for treating Osteoarthritis, especially with the much publicized implosion of Vioxx and if the clinical trial is successful we see this as being a blockbuster drug.

We are extremely confident that these trials will be successful. As I previously stated, toxicity is not a risk and efficacy is not an endpoint in the Osteoporosis trial. The other huge factor that gives us such a high level of confidence is that Novartis is probably spending over $200 mm on these three phase 3 trials. They went forward with the trials after seeing the yet to be published phase 2 data. The data had to have been overwhelmingly positive for them to spend so much money on these trials. Novartis has an incredible track record of success with Phase 3 trials.

So why is the stock so beaten down? Well, there were 2 huge fund liquidations that drove the stock price way down. We are confident that those are behind us now and the movement in the stock price confirms this assumption. The other issue is that the company needs to raise some money. They have cash through August. The CEO said on the call that he has a lot of options and that he is confident that he will resolve the cash issue in a manner that will make shareholders happy.

Novinski has done a great job of cutting expenses and the cash burn rate is currently running at $7-8mm. We are confident that the company will be successful in raising money on favorable terms, possibly without any dilution, but if they do a secondary we think that they will only raise a small amount and it would actually be a catalyst for the stock to move higher. They have a lot of potential to bring in money soon with the B12 and other new nutritional products, new partnerships, and milestone payments and therefore there is no point in raising a bunch of money now before these things have a chance of happening.

So given our base case $100mm pretax earnings for 2012, (assuming only B12 and Osteoperosis sales) and allowing for 50mm fully diluted shares outstanding and a 25X pretax earnings multiple, the stock would trade at $50 per share. Keep in mind that the Osteoarthritis market would be 10X the market size.

Disclosure: long EMIS

Comments

[logicalthought:]

Your web site ( www.eosfunds.com ) says "We have the highest record of success and rate of return of all the China focused funds." Would you mind providing some documentation to back this up?

May 17 06:54 AM

[in4thelonghaul:]

Honestly...that was not a very convincing article. You..or "we" are 'confident' of this and 'extremely confident' of that. Weird how those funds which liquidated were so blind to dump shares which are really going to be worth $50.00 before long...boy were they stupid!

But you did touch on that pesky lack of finances thing; luckily you are confident that it can be worked out on favorable terms, even in this trying market...you are such a confident guy.

Seeing that your target is apparently $50.00 and considering your parting admonition to keep in mind that the Osteoarthritis market would be 10X the market size of the B12 and Osteoporosis markets...I guess the implication is a potential share price in the hundreds of dollars range?

Gee...what an incredible deal, and I can get shares for under a buck!! LOL

May 17 12:07 PM

[Mee:]

EMIS does look more interesting given the GRAS result, and the NVS trials have huge potential. However, they have more than a need for cash for operations. They carry two convertible notes on their books that need to be dealt with. The $12M NVS note is due this December, and there's been no communication from mngt. regarding a plan to deal with the note. They don't have the cash to pay at maturity, and they also need to be careful issuing additional shares, since the MHR terms contain ratchets that could trigger extensive dilution. How do these issues affect your valuation?

May 17 12:20 PM

[opalchip:]

There is also the active lawsuit by Laura Kragie, former EMIS employee, who claims she owns the intellectual property for the B12 snac.
Why is that "little" problem not mentioned here?

May 18 12:13 PM

[opalchip:]

BTW - I generally agree with the writer, and I have a good size position that I will hold forever- but I don't believe in pumping, and there are further significant risk factors not mentioned here that potential new investors should be aware of. Not the smallest of which is the Rachesky/Icahn connection - in short, the BOD is not necessarily on the "little guys'" side.

May 18 12:22 PM

[Wall Street...:]

Also; why did you not mention the delisting issue. I own a few shares of EMIS myself but I prefer writers who offer full disclosure of BOTH the good and bad of any investment.

I hope you are right...........

May 29 03:15 PM

[biowatcher:]

Delisted. What are your thoughts? Still bullish and what kind of position are you holding?


On May 29 03:15 PM luckyandsmart wrote:

> Also; why did you not mention the delisting issue. I own a few shares
> of EMIS myself but I prefer writers who offer full disclosure of
> BOTH the good and bad of any investment.
>
> I hope you are right...........

Jun 08 12:13 PM

[SuperK:]

I knew of the delisting issue and that was a big influence on me when I bought in a while back (which made me sell as it rose to get my cost basis out and protect myself a little). I'm a small guppy / tadpole so my position is very small.... I thought the volume held up well today - all things considered. I'm still watching this close since there are still outstanding issues I'm concerned about - the company runs out of Operating cash soon.

Potential on this company is huge in terms of upside though...

Jun 09 01:44 AM

[TATyszka:]

Got to be wary of an author who refuses to acknowledge any of the valid questions and concerns raised by readers. After supposedly having "done a ton of due diligence and networked with some of the smartest biotech minds on the street," he wasn't even able to glean any of the nasty little negatives that presumably far less diligent readers noticed. I've read many articles on SA espousing the investment-worthiness of certain speculative stocks. What sets them apart from the pump-and-dump crowd, though, is the great measure of integrity they display in responding to readers and elucidating more on their ideas.

Here's an idea, Mr Ramelli, examine this SA article seekingalpha.com/artic...
See how there is give-and-take, Q and A, point and counterpoint, between the author and his readers (to the tune of >200 comments)? Read. Learn. Emulate. And you too may one day list a following of more than 19, and, more importantly, gain a little credibility.

Jun 23 08:42 PM

[Billybuck:]

I keep hearing about Unigene having the top product for this use. Could you share your thoughts on this?

Jul 04 12:47 PM

[biowatcher:]

Unigene is combined with the EMIS carrier for Novartis.


On Jul 04 12:47 PM Billybuck wrote:

> I keep hearing about Unigene having the top product for this use.
> Could you share your thoughts on this?

Jul 06 05:33 PM