The FDA's clinicaltrials.gov website has some really interesting information on the European Phase III trial of Emisphere’s (EMIS) Oral Salmon Calcitonin for Osteoarthritis that is being run by Nordic Bioscience for Emisphere’s partner, Novartis (NVS).
One of the Primary Outcome Measures is Joint Space Width in the knee (along with Pain and Functional Disability). For the Secondary Outcome they are measuring “changes in biochemical markers of bone and cartilage metabolism.” Novartis is, in my opinion looking to prove that Oral Salmon Calcitonin is a disease modifying treatment for Osteoarthritis, that is why they are looking at joint space width and cartilage metabolism rather than just pain and functional disability.
Dr. Claus Christiansen, a legend in the industry and the Founder and Chairman of Nordic Bioscience, was the co-author of a study that showed that "Calcitonin treatment may counter the acceleration of cartilage degradation and the related rise of surface erosions," according to the study's lead author, Bodil-Cecilie Sondergaard. Of course this was a study on rats but it does give us a glimpse into the progression of the research that Novartis and Nordic Bioscience have been doing.
When we finally see some journal publications on the Phase II trial of Oral Salmon Calcitonin for OA that was completed almost a year and a half ago, I think we will see more proof that we have a disease modifying drug. Novartis and Nordic Bioscience have chosen to keep the Phase II results private while continuing to spend years and hundreds of millions of dollars researching Calcitonin. I am convinced that they would not have invested so heavily in this if they thought Calcitonin was just addressing the symptoms of OA.
The other interesting fact from the clinicaltrials.gov link above is that it shows August 2009 as the estimated "Final data collection date for primary outcome measure." A friend recently had Novartis positively verify this date at a UBS conference. This means that Novartis will get a futility look within the next several weeks that will give them a very good indication of whether or not they successfully reached their primary endpoint. If the data is good, the multi-million dollar trials will go on. What this means to Emisphere shareholders is that if this Phase III trial is not canceled within the next several weeks the probability of success has gone up dramatically (probably even into the 90%+ range given the total lack of toxicity and the safety profile of this drug). The value of the Emisphere's double digit royalty stream for Oral Salmon Calcitonin will then increase substantially.
So if we are really closing in on commercialization of a disease modifying treatment of Osteoarthritis just how big could this be? Well according to the CDC, 26.9 million Americans suffer from Osteoarthritis. If we assume a fairly conservative cost for the Oral Salmon Calcitonin of $4/day or $1460/year (conservative given that the CDC estimates the direct, out of pocket costs are ~$2600 per person per year just for treating symptoms) we have a market potential in the U.S. alone of just over $39 Billion. I estimate that the U.S. market is about 40% of the world market, we get to a worldwide potential of just over $98 Billion. Assuming roughly 10% penetration can rapidly be achieved in just the first few years, we have a $10 Billion drug. Emisphere has over 10% royalty on gross sales (nearly all of which will flow to the bottom line).
EMIS currently has 68 million fully diluted shares outstanding and a market cap of a only $50 million. With close to $1 Billion in pretax income potential only a few years away, this stock is grossly undervalued.
Of course as an analyst my job is to look at all the facts when evaluating a company and not simply sweep the ones under the rug that contradict my opinion. So I would not be doing my job if I did not point out that the recent capital raise was far from ideal. There was way too much dilution for the common shareholders. I believe that there are other options available to avoid similar dilution in the future and that between now and approval of Calcitonin further dilution should be minimal. For instance, I believe the Calcitonin Osteoporosis, this close to commercialization, could easily fetch in excess of $10 million for each 1% royalty sold to a royalty shop.
Therefore investors should load up now at these absurdly low levels (thank the recent offering for depressing the price) and then double down after the end of the month when Novartis completes their futility look and we can assume all is clear.
