Vanda Pharmaceuticals: Heavily Undervalued

Vanda Pharmaceuticals (VNDA) is making a stunning come back this year as FDA finally approved its schizophrenia drug Fanapt. But the story is far from over, and there is every reason to believe VNDA is still heavily undervalued and has huge upside potential. This is a potential giant market for Vanda if it can steal market share, and also makes Vanda a likely takeover target for large pharma. At more than a $15 billion market in 2007 and growing faster than many other markets, if Vanda can steal just 10% of this market, it makes for $1.5 billion in sales, and with 26.7 million shares outstanding, Vanda would price around $56, $28 if it takes just 5% of sales.

Currently, based on Vanda's website, it is not recruiting any salesforce. Also, there is no news that the company is raising money from investors. Apparently, it is looking for partnership or to sell the company outright. This does not come as a surprise, as in Feb, 2007, when its share price was still in mid-30s, Vanda already hired JP Morgan to find a partner for its experimental drug or to sell the company.

Here are a few quick facts about Vanda Pharmaceuticals:

• The schizophrenia drug market is worth over $20 billion in 2009.
• 3 of the top 10 prescription drugs globally were schizophrenia drugs, with revenues of $3 billion or more each. They are Seroquel by AstraZeneca (AZN), Risperdal by Johnson & Johnson (JNJ) and Zyprexa by Eli Lilly (LLY).
• As recently as 2008, Merck (MRK) paid Addex Pharmaceuticals $702 million to help "develop" a schizophrenia drug. Vanda's Fanapt is already approved and ready to market.
• In the last 2 months, both Lundbeck (HLUKY.PK) and Schering-Plough (SGP) have had setbacks with their schizophrenia pipeline.
• With their FDA approval, Vanda stands a very good chance at becoming the new king of schizophrenia drugs as its drug has better safety profile than those already on the market. Other antipsychotics, used to treat patients with severe mental disorders, have been linked by the FDA to weight gain, diabetes and other side effects. Vanda has said that in clinical trials, iloperidone, which it will market as Fanapt, didn’t cause “clinically meaningful” increases in weight, blood sugar or cholesterol. Schizophrenia patients also tend to change to new therapy.
• The company also is developing an insomnia drug Tasimelteon that is in the final stage of testing normally required for approval.

Let's take a look at Vanda'a stock. There are only 26 million shares outstanding. That's not a lot for a biotech company, which shows how well management has handled the balance sheet. Almost half of the 26 million shares are held by SAC (Steven Cohen), Fidelity and Kevin Tang.

Vanda also has an injectable form of Fanapt which is only administered once every four weeks. This will be a huge benefit to patients that are challenged by taking daily doses of the tablet form.

Then it comes to the question of how to evaluate the buyout price. A precedent case is the 2007 buy out of New River Pharmaceuticals by Shire plc (SHPGY). On Feb, 20 2007, Shire plc acquired New River Pharmaceuticals Inc. for $64 per share, or approximately $2.6 billion in total, in an all cash transaction. At that time, New River had only about 10 employees, with a market capital less than $200 million, and its drug VYVANSE™ (lisdexamfetamine dimesylate) was for Attention Deficit and Hyperactivity Disorder (“ADHD”). The current total US ADHD market is only worth $3.3 billion, which is far less than schizophrenia. Based on the facts I listed above, you can easily come to the conclusion VNDA is still heavily undervalued.

Some amateur investors who have been negative on VNDA said a partner will only give VNDA high single digit royalty, that is completely not true. A most recent example is Elan (ELN). On July 2, Johnson & Johnson said it was spending $1 billion to acquire a minority stake in the Irish drug maker and take over development of Elan's Alzheimer's disease drugs. Elan's rights to bapineuzumab and its other Alzheimer's drugs have been whittled down to 25% from 50%. That means, in a partnership involving advanced stage drug, the royalty usually comes about 50% or even higher.

Morningstar has given VNDA a 4-star rating with a $20 fair value estimate and a $50 sell target.

Disclosure: Long VNDA.

Comments

[User 334355:]

i hope you're on with that 'vnda' , i have it from that after hours that it shot from 1.09 to 10 something , sold most of it the following morning at 12...you think that pump and dump gonna help you get out ?

Jul 08 09:00 AM

[rrtzmd:]

...geez, if ignorance is bliss, no doubt the author is in heaven...ilioperiodone is NOTHING but a variant of respiridone, otherwise known as risperdal...risperdal has been around like 15 years and is already marketed as a generic...Hoechst Marion dumped ilioperidone onto Titan Pharmaceutical 13 years ago...Titan sold international rights to Novartis in 1998 and Novartis didn't do anything with it...Titan messed with it for a while but apparently realized what a waste of effort it was and sold it to VNDA in 2002...ostensibly, VNDA's chairman had some of genotype test that would allow him to identify patients on whom ilioperidone MIGHT work better...at one point there were several lawsuits being bounced around about the drug but I don't know whatever happened to those...if you want to know VNDA's real potential ask your family MD...they also have tasimelteon...but that is NOTHING more than a variant of the currently available rozarem...the funny thing is that rozerem has never been shown to be any more safe OR effective than just taking plain old melatonin!...so VNDA successfully develops yet another drug that no one needs -- whoopee!...maybe that's why VNDA doesn't have any PARTNERS -- because they all know how WORTHLESS the pipeline is...I loved the author's observation that VNDA "is not recruiting any salesforce"...HAW!...that should tell you EVERYTHING!...they aren't recruiting any salesforce because they know they probably won't ever be able to convince anybody to buy their products!!!!...VNDA is nothing more than a stupid Wall Street trick that was probably never meant to do more than enrich some venture capitalists and company management at the expense of naieve investors.

Jul 08 09:54 AM

[biotechoptions:]

VNDA has a lot of work to do if they're going to make much of iloperidone, and they'll need a partner to do so. Notwithstanding the fact that I completely disagree with the assessment that VNDA has a 1.5b drug on it's hands, the "analysis" regarding the royalty rate and benchmark of the ELN/JNJ deal is so ridiculous (and 'amateurish') it's not even worth commenting on.....

Jul 08 10:09 AM

[bestinclass:]

The CEO of VNDA is overly optimistic because he wants to inflate the potential his company/product. Crowded market, reimbursement issues, and the likelihood that ilop. is going to be competing with generics makes this a risky acquistion.

Aug 02 12:26 PM