Inhibitex Initiated at Neutral with Significant Upside Potential

| About: Inhibitex, Inc. (INHX)

We are initiating coverage of Inhibitex (NASDAQ:INHX) with a ‘Neutral’ rating and $2 price target. Our neutral rating stems from the very early-stage nature of the company’s pipeline -- leading candidate FV-100 is currently in phase II testing -- and the potential dilution risk coming from cash-raising activities later in 2009 or in 2010.

Nevertheless, Inhibitex does have significant long-term upside potential based on the outcome of the ongoing phase II program for FV-100 and the movement of INH-189 into a phase I program. Data from the phase II FV-100 program is expected around the middle of 2010. Data from a phase I proof-of-concept program on INH-189 is expected late 2010 / early 2011. Potential catalysts for the stock also include phase II or partnership news on Pharmasset’s PSI-7851 or Idenix’ IDX-184 phase II HCV phosphoramidate candidates.

FV-100 a Game-Changer

Inhibitex's lead development candidate, FV-100, has the potential to be a game-changer for the treatment of herpes zoster, or shingles. The current standard of care, Glaxo’s (NYSE:GSK) Valtrex (valacyclovir), with an estimated 55% market share, is dosed at 1000mg three times a day. Valtrex has improved lesion healing and pain indication reduction over older drugs Famvir (famciclovir) and Zovirax (acyclovir), but the treatment option can still be improved upon significantly.

The phase II trial for FV-100 -- a potential once-daily dosing agent -- is designed to show the drug is superior to Valtrex on pain reduction after 30 days, the primary endpoint, as well as show superiority on key secondary endpoints including: pain after 90 days, incidence of post herpetic neuralgia (PHN), mean time to lesion healing, and use of concomitant pain medications.

If successful, we believe that Inhibitex’ drug has $500+ million peak sales worldwide. However, even with efficacy only on par with Valtrex, we still believe that FV-100 has commercial potential given the reduction in dosing (improved compliance -- especially in the elderly population) from three times daily to once daily.

INH-189 Could Be Huge, But Still Early-Stage

Inhibitex’s HCV phosphoramidate nucleoside analogue (protide) candidate, INH-189, could be a potential blockbuster given its rapid onset, favorable once-daily dosing, high potency activity, and improved tolerability profile. Preclinical in vitro data has been very impressive. Plus, INH-189 could have potential synergistic benefits with ribavirin, making the drug an excellent add-on therapy to standard of care.

With phase I concept data that confirms the exciting preclinical work and management’s optimism on the drug, INH-189 could fetch $100 million or more in a development partnership. We remind investors that in March 2009, Vertex Pharmaceuticals (NASDAQ:VRTX) paid nearly $400 million to acquire privately-held ViroChem and its HCV non-nucleoside N25b polymerase inhibitor, VCH-222. Inhibitex’ nucleosides N25b polymerase inhibitor looks to offer similar potency with potentially less resistance and improved dosing.

But INH-189 is still pre-IND, and phase I concept data is not expected until late 2010 or early 2011. Plus two other phosphoramidate candidates -- Pharmasset’s PSI-7851 and Idenix’ IDX-184 -- are over a year ahead of INH-189 in development.

Need for Cash in 2010

Inhibitex exited the second quarter 2009 with $24.5 million in cash and investments. We estimate burn for the second half of the year will be approximately $10 million, up from the $8.4 million in the first half of the year as the phase II FV-100 program continues to ramp in enrollment. Therefore, management will exit 2009 with approximately $15 million on the books, enough to fund operations into the third quarter of 2010.

The best (non-dilutive) opportunity to raise cash in 2010 will be through a partnership on FV-100. However, with phase II data not expected until the middle of the year, we believe that management may need to undertake some sort of dilutive cash raise before the data comes out. Raising $10 million at the current stock price will be approximately 20% dilutive to existing shareholders.

$2 Target, With Significant Upside

We see Inhibitex fairly-valued at $2 per share. This incorporates our peak sales assumption for FV-100, partnered so that Inhibitex receives an estimated 20% royalty on worldwide sales. Our target assumes no contribution from the rest of the preclinical pipeline, including INH-189, as we do not believe investors will begin to pay up significantly for these assets until concept is proved.

We are also factoring in the current cash balance and the need for a potential raise in 2010. Upside to our $2 target is significant, and can arrive in the form of "homerun" phase II FV-100 data next year, a partnership on INH-189 late 2010, monetization of the MSCRAMM technology, or out-licensing Aurexis for cash.

Additional information can be found in our full research report, available upon request.