The Long Case for Pain Therapeutics

| About: Pain Therapeutics (PTIE)

Currently, Wall Street has little love for Pain Therapeutics (NASDAQ:PTIE). Half the analysts covering the stock dislike it. Even Mad Moneyman Jim Cramer, whom I do admire, has given it his bear button. Despite all the negativity surrounding the stock, I think the pain may finally be over for the company and its investors.

Back in 2005, the $375 million biotech company disappointed investors when one of its lead products for Irritable Bowel Syndrome failed to meet an endpoint for efficacy in a FDA Phase III clinical trial. The stock tumbled following the news and investors wished the company’s name was the only thing with pain in it.

However, 2006 has seen a resurgence in the company. The hope of promising new products in Phase III clinical trials and the company's positive income growth in both the first (.02 EPS) and second quarters (.03 EPS) have given investors new found pleasure.

Pain Therapeutics is in sound financial shape having no debt and more than $122 million in operating cash flow. Last month, CEO Remi Barbier told investors in a presentation at a UBS investor conference that the company is worth more than $5 share in cash and the remainder of the company’s $8 plus share price is met with cash made available milestone payments. This positions the company very well among its peers. Most of the small biotech firms in PTIE’s space have loads of debt and less promising product prospects in the pipeline.

The milestone money Barbier was referring to in his presentation was a $150 million milestone payment the company received from King Pharmaceuticals (KG) earlier this year for its work and development on three abuse-resistant opiod painkillers. Two of these leading drugs, Oxytrex and Remoxy, are in Phase III trials. Oxytrex is believed to be an effective
replacement for Oxycodone, the highly addictive painkiller used for years by physicians. According to the company, news concerning an FDA decision may be forthcoming on Remoxy early 2007.

In addition to the milestone payment already offered, King will pay an additional $15 million cash payment and pay all research and development expenses up to $100 million relating to the collaboration on the drug. Pain Therapeutics also will receive a 15% royalty on any Remoxy sales for the first $1 billion and a 20% royalty for all sales after that goal is reached. Even conservative sales of Remoxy would guarantee Pain Therapeutics an additional $50-75 million in royalties the first year, since the market for this type of pain management drug is somewhere between $5-10 billion.

Pain Therapeutics could see more than $500 million in royalties just from Remoxy, which would value Pain Therapeutics at $1.5 billion if it traded at a conservative 3x sales. This would see the stock selling at more than 4x its current price of $8.50. All this from just one drug. Oxytrex is not even part of this equation. The approval and sales from that product would be added gravy.

So the best appears yet to come for Pain Therapeutics.

Yes. But what about the drug’s approval?

Well, I am not the only one that thinks Remoxy will see FDA approval. King also seems convinced approval is on the horizon because the company began positioning its sales force for the launch of Remoxy.

A couple of months ago, King purchased Avinza, an extended release form of morphine, from Ligand Pharmaceuticals, along with most of Ligand’s pain management sales force. This painkiller purchase will make King a small profit, but more than that, it allows the company immediately to start solidifying strong selling relationships with key pain management physicians to ensure the launch of Remoxy is a successful one.

Additionally, the insiders at Pain Therapeutics are committed to the stock owning more than 20% of it. A major investment group Black Bear Offshore Master fund recently filed with the SEC to up its stake from 16% to as mush as 25%. I would say this all this ownership is a bullish signal.

Despite all this good news and great promise, there continues to be a high short interest on the stock of 15% with 20 days needed to cover this interest. All this negativity could feed a rally in this stock upon the hint of good news.

Disclosure: Author is long PTIE