Nuvo Research Worth Buying

Aug.19.09 | About: Nuvo Pharmaceuticals (NRIFF)

Lenny's comment regarding OTCPK:NRIFF:

Hi Vinny,

I picked up some Nriff after it dropped, and after reading some of the message boards i see potential SP hopes of between $2-$3 post FDA approval (4th time the charm?).

In your opinion, is this too aggressive?

I would love to understand what techniques you are using to determine potential upside.



VFC's Take: For reasons that I've outlined HERE, I think that Nuvo Research is worth buying at these price levels because I believe that Pennsaid, through partner Covidien, has a good shot at US approval come November.

Personally, I'm not going to jump on the $2-$3 price target band wagon just yet - not that I don't believe that the stock could get there eventually, but I think asking for those prices immediately after approval is a bit premature.

From what I've gathered, total annual sales of Pennsaid in countries where it is currently approved total about $12 million. Of course, in the United States that number will be significantly higher as Pennsaid is entering into a $40 billion market, according to Nuvo's website. However, of that market, most other products are over-the-counter and Pennsaid will be prescription-based. In my opinion, that's heavy competition for market share.

Some estimates have Pennsaid annual US sales estimated to be between $200-$400 million.

Additionally, Nuvo will receive either $15 or $20 million upon Pennsaid approval, depending on labeling criteria. However, the exact numbers of Nuvo's royalties on sales are unclear at this time; the agreement only states that (quoted from the Nuvo website)

Nuvo will receive royalties on net U.S. sales of Pennsaid and Pennsaid
Plus at rates that are consistent with industry standards for products at similar stages of development. Nuvo will be eligible to receive additional escalating sales milestone payments for the products totaling up to US$100 million.

Until I know the exact percentage that Nuvo will receive I'm going to assume that the number is 10% - I think that's about right.

With nearly 400 million shares outstanding, judging where NRIFF should trade after Pennsaid approval is a speculator's game right now, but I am guessing that it will trade closer to a $400 million market cap ($1 per share), or even a little less, than the $800 million - $1.2 billion that a $2-$3 price would call for.

To be honest, I'm expecting - and would be happy with - an eighty cent stock price post approval. Maybe that is a bit conservative, but I'm not going to get carried away just yet. The bottom line is that before I know the exact royalty percentages that Nuvo will receive on Pennsaid sales I'm playing my estimates to the conservative side.

The scenario where I can see NRIFF trading for higher than my estimates is if the full $100 million in possible sales milestones is reached because that would indicate that the product is a hot seller. At that point I could see the stock supporting a billion dollar market cap.

Hope this helps, somewhat - but remember, this is just one guy's opinion.

Disclosure: VFC is long NRIFF.