Pozen Is Overvalued, More So Now After Recent FDA Rejection - Here Is Why

| About: Pozen, Inc. (POZN)


On Friday, April 25th, Pozen received a Complete Response Letter (CRL) from the U.S. Food and Drug Administration (FDA)..

In a press release, The company cited a manufacturing issue at a 3rd party plant which caused the FDA rejection..

In the company PR, it stated that it did not have enough time to address the FDA issues, yet the company had over a year to get it right..

Written by Scott Matusow.

On Friday of last week, Pozen Inc.(NASDAQ:POZN), received a CRL from the FDA, disallowing the New Drug Application (NDA) for its coordinated-delivery tablet combination of omeprazole (Prilosec) and aspirin. This combination can basically be purchased over the counter (OTC) by consumers, but Pozen's solution is more seamless, which does give it an advantage.

There are a few red flags here that concern me about this rejection that potential investors in the company should be made aware of.

For starters, the company certainly had time to file the NDA last year in March, which gave it ample time to make sure the manufacturing process was correct and up to FDA standards. Simply saying now that it had no time to address deficiencies that the FDA found equates to a flimsy excuse in my opinion. Good management would have made sure a non-biologic solution as basic as an aspirin/prilosec combo should be manufactured properly. It seems to me that management was more concerned in saving a buck, and trying to pass this buck to investors in hopes to get this through the FDA process, rather than to spend a bit extra in time and resources to ensure the manufacturing was up to par.

Part of investing successfully in small cap companies is to invest in management first and foremost. Pozen management now raises red flags to me that says, "stay away."

Additionally, Pozen will only receive a royalty for its PA platform from Sanofi (NYSE:SNY).

According to the Pozen/Sanofi agreement, Pozen received an upfront payment of $15MM and will be eligible for pre-commercial milestone payments of up to $20MM and other future milestone payments and royalties on product sales.

So Pozen gets a royalty from Sanofi, but how much? Standard royalty rate here would be best case scenario of 10% according to the best of my research on this issue.

The best case analyst opinion here is peak sales of this product (if approved eventually) could be $400M. So let's figure average sales over 5 years of $100M, $25M a year. So to be fair, I will say $30 X5 years looking forward = $150M. With a single platform along with no other growth and no "block buster" proprietary drug potential, the company is currently very over valued in my opinion.

As of this writing, Pozen's market cap is around $250M, and as mentioned, has no other drugs in its developmental pipeline, and it certainly has no un-met need drugs. My best estimation for Pozen at this time would equate to a market cap of $150 to $200M based on its cut from the PA platform, which assumes another issue does not arise in the next year in which the company receives yet another CRL from the FDA. Without the added speculation of an un-met need drug. Pozen has no proprietary products, and are only royalty based.

  • Conclusion

Simply stated, with a lack of proprietary pipeline and un-met need drugs, Pozen is not worth more than $5 a share, or around $150M market cap. I used to be a bit more bullish on the company over a year ago when I wrote about it when it was around $5 a share, and predicted a partnership for its PA platform. When I consider management's poor handling of this situation and my revaluation here, I'm not a buyer and will likely never be. When I do invest long term, I make my bet first on management. In Pozen's case, management clearly dropped the ball and is making what amounts to excuses for the CRL. With over one year between the filing of the NDA and it's rejection on Friday, it's ample time for management to ensure the manufacturing process was up to FDA standards.

Regardless, even if the PA platform is approved, I can't justify a market cap much higher than $200M for the reasons mentioned in this article.

Disclosure: I am short POZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.