Emisphere: Set to Shake Up the B12 Market

Includes: EMIS, ISRG
by: Envelope Investing

As promised, I checked in on Emisphere Technologies (OTCPK:EMIS) at Experimental Biology 2010 and it was definitely a worthwhile trip. I came into the conference thinking that high-dose Eligen B12 would offer a viable alternative to B12 shots and that it would be a successful product; I left convinced that it is a genuine B12 shot replacement that within 5 years will completely replace B12 shots. The data is really that good. There is absolutely no need for anyone to ever have a B12 shot again.

At the conference I had the pleasure of meeting Dr. Cristina Castelli, the Director of Clinical Development at Emisphere, and speaking with her at length about Eligen B12 and also in broader terms about Emisphere’s delivery technology. The poster had graphs that compared the Eligen B12 to B12 shots over the course of the trial. In all four of the data points that they monitored in the trial (serum B12, active B12, and reduction in methylmalonic acid and homocysteine) Eligen B12 came in extremely close to B12 shots, only trailing ever so slightly. I would like to point out that Emisphere structured the trial in a very conservative manner in that they took the readings the day after the B12 shot was injected, when the effect of the shot is at its highest. If they would have waited for two or more days after the shot to compare the two then it is highly probable that Eligen B12 would have had superior data to B12 shots. Either way, I view it as splitting hairs as for all intents and purposes the data is very similar.

The feedback from doctors has been extremely positive. One of the main things that I have heard is a problem with compliance on B12 shots. The patients always get the first one and possibly some more but they grow weary of the trips to the doctors office and cancel appointments preferring to catch a round of golf or do some other activity instead (hey, who can blame them?). Eligen B12 would solve this problem.

As I said earlier, I see Eligen B12 completely replacing B12 shots. It will of course not happen overnight. As we all know, it takes some time and a lot of effort to change doctors’ behavior even if the new product is truly superior as is the Eligen B12. I feel that the way around this is to market the product to the consumer in addition to selling it to doctors. Any informed consumer would insist that they be given Eligen B12 instead of a B12 shot. I have seen this marketing approach work to perfection with one of my biggest gainers in my career, Intuitive Surgical (NASDAQ:ISRG). They marketed robotic prostectomy directly to patients and the patients demanded the robotic surgery instead of the traditional prostectomy. Of course, the two products are worlds apart but I think that the marketing lesson still holds true.

I am convinced that if a partnership deal is not already eminent then potential partners must be fighting each other for the rights to high-dose Eligen B12. What could a potential deal look like? My estimate is that a partnership will bring in an upfront payment of $10-15mm dollars and 20% in royalties. The margins on the Eligen B12 are going to be really high so there are plenty of profits to go around. Realistically this product is worth twice the fully diluted market cap of EMIS.

On a side note, I expect the stock to run to $10 sometime by the end of June. I expect a B12 partnership and a business solution (no dilution) to the Novartis (NYSE:NVS) note to be consummated soon. These events should leave Emisphere with a big chunk of cash in the bank and remove the financing concern clouds hanging over the story. I then expect that people will start handicapping the odds of successful trial data from the phase III Osteoarthritis trial that we will see in October. The consensus from people that I speak with is that EMIS will be a $20 stock if the data is good based solely on calcitonin. Looking at the performance of other companies’ stocks that are awaiting phase III data (all of which have much more uncertainty as to whether or not their trials will be successful), the stocks generally trade to somewhere around half of the expected valuation that the company would achieve if the trial were successful. In other words, EMIS will not sit at $3 until October and then gap up to $20 on good phase III data; it will go to $10 first and then double on successful phase III data. Given that we have already received the DMC’s recommendation to proceed based on safety and efficacy (we are hitting our endopoint) the stock should realistically trade even higher than $10, but I am going with $10 for now to be conservative.

People new to the story might think that my $10 target in two months is insane. But before you send over the padded wagon read back over my previous articles and try to find out where I have ever been wrong about this story.

Disclosure: Long EMIS