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Repros Therapeutics (NASDAQ:RPRX) is a nearly-defunct biotech company best described in ER terms as CTD (circling the drain). Despite this, it spikes periodically on rumors of I know not what. For the last few days it’s had a low of $0.88 and a high of $1.12.

There are options available (unusual for a low-priced stock), meaning you can buy puts instead of shorting. (Shares are hard to borrow and the stock moves fast, so puts are definitely the safer way to play this.) The November 2.5 puts appear to be the clearest play. They have been generally purchasable in the $1.75 area or below. So maximum profit is $0.75 if the stock goes to zero, or more likely $0.70 if the stock trades at a nickel after a bankruptcy filing. Break even is if the stock trades at $0.75 in November. Maximum loss is if the stock trades at or above $2.50 at expiration.

So why do I think the stock is headed for zero?

1. They are currently insolvent.

Here's the key extract from their recent 8-K and 10Q:

Since our currently available cash and cash equivalents is not adequate to meet our accounts payable and accrued expenses, we have engaged a law firm that specializes in work-out and bankruptcy matters to assist us in attempting to negotiate with and reduce amounts owed to our vendors. Several vendors have ceased performing any work for us and have notified the Company of a claim against us and in one case filed suit for payment of $147,000, which such vendor claims it is owed under their agreement with the Company. The Company intends, to the extent possible, to ensure that our available cash is used for patient safety in connection with our study closeout activities. However, due to our constrained cash position, the Company does not have sufficient funds at this time to comply with all of our financial obligations under the agreements with the clinical research organizations unless acceptable work-out arrangements are completed. The uncertainties relating to the foregoing matters raise substantial doubt about Repros' ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of these uncertainties.

As of June 30, 2009, we had approximately $4.0 million in cash and cash equivalents and our accounts payable and accrued expenses were approximately $7.5 million. Furthermore, as of August 14, 2009, we had approximately $2.7 million in cash and cash equivalents, and the amount of accounts payable and accrued expenses were significantly higher than $7.5 million. As a result, the amount of cash on hand is not sufficient to continue to fund our ongoing clinical trials of Androxal®, complete all necessary activities relating to the suspension of our clinical trial program for Proellex®, pay our accounts payable and accrued expenses as well as our normal corporate overhead and expenses. Effective August 16, 2009, we adopted a 50% salary reduction program for all salaried employees in an effort to reduce expenses while maintaining our current effort without diminution. We are in the process of exploring potential new financing alternatives that may allow us to maintain our current reduced level of operations; however, there can be no assurances that we will be successful in raising any such funds on a timely basis or at all. Significant additional capital will be required for us to continue development of either of our product candidates. Failure to raise sufficient funds in the immediate short term as described above will likely result in the filing of bankruptcy and dissolution of the Company.

2. Lead Progam is Dead

Their lead program, Proellex, is on clinical hold and is with very high likelihood dead. Liver toxicity that does not quickly resolve on discontinuation of a drug (DILI – drug induced liver injury) is a very serious side effect. Indeed this is the single most common reason for approved drugs being withdrawn from the market in the US (iproniazid, ticrynafen, benoxaprofen, bromfenac, troglitazone, nefazodone amongst others) and so the FDA is very cautious indeed about any investigational drug that causes liver injury. At the very least it would take 9 months to a year for the clinical hold to be lifted, and that is 9 months the company does not have. Even if the hold were lifted, prospects for eventual approval have to be considered extremely poor – the drug is being developed for a non-fatal condition, and so the FDA’s risk tolerance is low. Further, the NIH is due $6 million by the end of this month in order to maintain their license, and this is money the company simply does not have.

From their 10Q:

On August 6, 2009, we announced that the Company received verbal notice from the United States Food and Drug Administration (FDA) during a teleconference with the Division of Reproductive and Urologic Products that the Company's Investigational New Drug Applications (INDs) for Proellex® had been placed on clinical hold for safety reasons. This action followed the Company's voluntary decision to suspend dosing of all patients in its clinical trials of Proellex® after discovering elevated liver enzymes in a number of patients enrolled in the clinical trials.

The Company and the FDA are scheduled to discuss the safety of Proellex® and the overall direction and scope of the Company's clinical trials of Proellex® at a meeting in late September 2009. The FDA requested that the Company provide it with weekly information about the patients who experienced a “Serious Adverse Event” and still have elevated liver enzymes. The Company is in the process of gathering the information from its vendors and will provide the information to the FDA to the extent available. The Company intends to provide the FDA with a detailed analysis of all of the women with elevated liver enzymes at the September 2009 meeting and to discuss with the FDA the events that led to the suspension of the clinical trials, and determine whether and under which conditions, if any, the clinical hold may be lifted and the clinical trials of Proellex® be safely resumed.

If the FDA were to lift the clinical hold on Proellex® following the upcoming meeting in September 2009, and if the FDA requires a lower dosage of Proellex® to be used for future clinical trials, the Company would be required to commence Phase 2 studies again with the required lower dosage, thereby resulting in extensive additional costs and delays.

he Company’s Exclusive License Agreement, as amended on July 7, 2009, with the NIH dated April 16, 1999 relating to Proellex® requires that the Company raise no less than $6,000,000 on or before September 30, 2009, and additionally provides that the license may be terminated by the NIH immediately upon notice to the Company following a filing of a petition in bankruptcy or a letter from the Company to the NIH stating that it is insolvent. Through August 17, 2009, we have not raised any funds towards the $6,000,000 requirement.

3. Other Negatives

Other negatives include a potential delisting and a legitimate class-action suit. The company had two press releases within weeks of each other that contained clearly contradictory information about the liver tox issues, with the first release tending to minimize the problem.

Deficiency Letter from The Nasdaq Global Market

On August 7, 2009, the Company received a letter from The Nasdaq Stock Market advising that the Company’s market value was below the minimum $50,000,000 requirement for continued listing on the Nasdaq Global Market. The Company is provided 90 days until November 5, 2009, to regain compliance, at which time the Company’s securities will be delisted from such market unless the market value of the Company’s securities listed on Nasdaq is $50,000,000 or more for a minimum of 10 consecutive business days.

Shareholder Class Action Lawsuit

On August 7, 2009, R.M. Berry filed a putative class action lawsuit naming the Company, Joseph Podolski, Paul Lammers, and Louis Ploth, Jr. as defendants. The lawsuit is pending in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit..alleges that the defendants made certain misleading statements related to the Company’s Proellex drug. Among other claims, the lawsuit contends that the defendants misrepresented the side effects of the drug related to liver function, and the risk that these side effects could cause a suspension of clinical trials of Proellex. The lawsuit seeks to establish a class of shareholders allegedly harmed by the misleading statements, and asserts causes of action under the Securities Exchange Act of 1934. …

The Company has retained counsel to assist it in defending both these action.

4. Remaining Assets dubious

So basically the company is out of cash, is likely to be de-listed and is being sued. So what are its other assets? They have two programs – Proellex and Androxal. If we consider Proellex effectively dead, that leaves Androxal. This is best described as a drug candidate in search of an indication. The company originally tried to develop this for testosterone deficiency, but in the company’s own words: “After a Type "C" meeting held with the FDA on October 15, 2007, we believed that there was no clear clinical path to develop Androxal® for this indication in the U.S.” The company then tried to develop it for men of reproductive age with low testosterone levels who want to maintain their fertility while being treated for their low testosterone condition, but again in their own words: “Given that there is an acceptable treatment regimen for men with low testosterone, there is significant uncertainty as to whether or not an additional approach such as Androxal® would be approved by the FDA or accepted in the market.” Finally the company proposes to develop it for diabetes (presumably in men with low testosterone), but this is purely speculative and the company has not even filed an IND in this indication. Realistically the company would need $20 million and over a year to file an IND and enroll and complete a Phase II trial in this indication.

5. Outlook

So why does the company continue on with a market cap of some $15 million and huge volume and price spikes? I can only conclude these come from uninformed speculators or people pumping the stock. Normally I do not provide short analysis of legitimate biotech companies – it is easy to pick holes and criticize virtually any biotech, and its hard enough developing drugs without shorts piling on, but here I honestly believe that a quick, merciful departure from the scene for RPRX would be best for all concerned, and the only people benefiting from this stock right now are speculators.

Disclosure: Short via stock and options.

Source: Repros Therapeutics: Circling the Drain to Zero