2 Year-End FDA Run-Up Stock Plays

Includes: LCI, PSDV
by: Mike Havrilla

Below are two small-cap stocks with expected FDA decisions by year-end and stock prices below $5 per share that I currently own as potential run-up plays with PDUFA action goal dates in late December for pending New Drug Applications (NDAs).

On 8/30/10, Alimera Sciences (NASDAQ:ALIM) was granted a priority (six-month) review for the ILUVIEN NDA that was filed 6/29/10 with expected FDA decision by 12/29/10, seeking approval for diabetic macular edema (DME). pSivida (NASDAQ:PSDV) is due to receive $25M upon FDA approval + 20% profit sharing. In addition a MAA was filed for EU approval 7/8/10, and ALIM expects to complete the 3-year FAME study by year-end 2010 (this data not required for NDA), also expects to file a New Drug Submission (NDS) for Health Canada approval this month.

ILUVIEN (fluocinolone intravitreal insert) (sustained eye drug delivery system designed to provide therapeutic effect for up to 2-3 years using ultra low-dose of drug and delivered by insertion device utilizing 25-gauge needle that allows for self-healing wound) was licensed by PSDV to ALIM in March 2008 for $12M in upfront cash plus $5.7M of accrued development liabilities were cancelled. Fluocinolone Acetonide (FA) is an FDA approved corticosteroid with demonstrated efficacy for DME, resulting in a significant improvement in visual acuity for DME versus the current standard of care and designed to mitigate steroid side effects by using tiny amount of drug (400,000X less FA required using ILUVIEN drug delivery technology)

DME represents a market opportunity in excess of $1 billion and is the leading cause of vision loss for Americans under 65 with over 1 million treatable cases in the US and no FDA approved drug therapy (DME is currently treated by laser surgery). DME is characterized by swelling in the back o f the eye due to poor circulation and there are an estimated 300,000+ new cases of DME to treat each year.

ALIM plans to market ILUVIEN directly to retinal specialists, which have historically been early adopters of new treatments, including VISUDYNE (2000-01 with $140M in first-year revenue), MACUGEN (2005 with $800M in first-year revenue), and LUCENTIS (2006-07 with $800M in first-year revenue). Retinal specialists treat DME and ALIM expects to have a sales force of 30 reps at a cost of $12-15M per year to cover 1,600 retinal specialists across 900 retinal centers as part of a direct to physician marketing program that will not include a retail pharmacy presence for ILUVIEN.

PSDV cash / equivalents as of 3/31/10 = $4M and the Company received $15.2M from ALIM on 4/27/10 for full re-payment of note plus interest. PSDV has guided for adequate liquidity through at least 3/31/11, which is adequate to reach a $25M milestone payment due from ALIM upon potential FDA approval. PSDV would also have adequate liquidity if there is a three-month delay by the FDA. PSDV has approx. 18.5M shares of common stock outstanding and 13M common stock warrants outstanding with an average exercise price of $7 per share.

PSDV also has a worldwide collaborative research and license agreement with Pfizer (NYSE:PFE) under which PFE may develop additional ophthalmic products based on certain of our technologies. The PFE license includes an $11.5M equity investment (PFE owns 1.9M shares or approx. 10% of all PSDV common stock outstanding), R&D support, and up to $153M in potential milestone / royalty payments.

The technology systems developed by PSDV include Durasert and BioSilicon. The Durasert system uses a drug core with one or more surrounding polymer layers through which drug permeates to the target site in the body at controlled rates for predetermined periods of time ranging from days to years. Our back-of-the-eye products and product candidates utilize successive generations of the Durasert technology system. The BioSilicon, technology system, is a fully erodible, nano-structured, porous silicon designed to provide sustained delivery of various therapeutics, including small drug molecules, proteins and peptides.

Based on early pre-clinical data, PSDV is targeting BioSilicon as a second key drug delivery technology. BrachySil, a BioSilicon product candidate, has completed early stage clinical studies for the treatment of inoperable pancreatic cancer, and PSDV plans to seek a development partner before conducting pivotal Phase 3 clinical trials.

- PSDV has provided guidance for fiscal 2010 revenue of $22.8 million and cash / equivalents at 6/30/10 (the end of PSDV's fiscal 2010 year) of approx. $17 million.

- Credit Suisse ALIM research report for ALIM on 8/30/10 includes US sales estimates (in millions) for ILUVIEN (DME indication) for years 1-5 of $96, $196, $260, $432, and $542.

- PSDV has a market cap of approx. $65 million at a stock price of $3.50 per share, zero debt, and enterprise value (EV) (market cap + debt - cash) of $48 million based on projected cash / equivalents of $17 million at mid-year.

- PSDV is due to receive $25 million upon FDA approval and 20% of net profits on sales of ILUVIEN by ALIM (who is also responsible for all development costs, including three Phase 2 studies for dry / wet macular degeneration and retinal vein occlusion.

- The profit sharing amounts (in millions) due to PSDV based on US sales model presented in report for years 1-5 are $9.5, $27.7, $40.4, $72.3, and $92.8.

Major shareholders of PSDV (accounting for 38.2% of shares outstanding) based on SEC filings include...

- Pfizer owns 10.5%

- QinetiQ Limited owns 9.2%

- Midsummer Investment owns 8.2%

- Orbis Investment Management owns 5.2%

- RA Capital Management owns 5.1%

Lannett Company (NYSEMKT:LCI) - FDA Decision (NDA) Morphine Sulfate

Filed NDA for morphine sulfate products on 2/26/10 for estimated FDA decision by 12/26/10 under a standard (10-month) review period, FDA denied six-month priority review request following approval of Roxane's morphine in Jan. 2010.

Lannett presents a relatively unknown, small / micro-cap value play in the generic drug industry with a current market cap of $107 million, an enterprise value (EV) of $95.5 million, a trailing price/earnings (P/E) ratio of 14.4X, a price/sales ratio (PSR) of 0.84X, an EV / EBITDA ratio of 5.3X, and a price / book ratio (PBR) of 1.2X.

LCI has posted revenue growth of 164% since fiscal year 2005 (FY-05) through FY-09, expanding the top-line from $45 million to $119 million. The Company has been in business since 1942 and acquired Cody Labs in 2006, which is one of only seven US companies with a license to import opiate raw materials used in the production of narcotic / controlled substance pain relievers such as morphine and provides LCI with a vertically integrated business model within the niche pain management segment of the generic drug industry that is expected to lower manufacturing costs and expand profit margins.

Key products for LCI include digoxin (87.9% market share) (Lanoxin, Digitek) (heart failure treatment) and levothyroxine (27.4% market share) (Synthroid, Levoxyl) (thyroid hormone replacement therapy), which have relatively few competitors within the generic drug industry as compared to other categories which may have more than 10 companies producing the same compound. It should also be noted that these two drugs are also subject to periodic shortages in the market, which I have experienced first-hand in my former life as a retail pharmacist. In addition, both of these drugs treat medical conditions in which it is crucial for patients to avoid missed doses.

On 9/13/10, LCI reported its fiscal year (FY) 4Q10 results (2010 fiscal year ended on 6/30/10 for LCI)...

- net sales of $125.2M for FY 2010, up from $119M in FY 2009.

- net income of $7.8M for FY 2010 or $0.31 earnings per share (EPS) vs. $6.5M or $0.27 for FY 2009.

- improved results despite FDA decision requiring LCI to cease manufacturing generic versions of pain drug Morphine Sulfate until approved through the NDA process (with decision expected by year-end 2010 under a standard 10-month review period).

- LCI provided guidance for FDA approval of its Morphine Sulfate NDA in near-term and expects to re-launch the drug in early 2011, in addition to 21 product applications currently pending at the FDA.

Looking ahead, LCI is expanding its facilities (including facilities acquired with Cody Labs) and has provided guidance for product submission in 2011 for two Paragraph IV patent challenges. In addition, the fundamentals for the global generic drug industry point to continued growth, including those outlined below.

1.) approximately 70% of all prescriptions in the U.S. are filled with generic drugs;

2.) IMS Health estimates $135 billion in branded drug sales (including $90 billion in U.S.) will face generic competition / patent expiration over next five years (including blockbusters such as Lipitor and Plavix);

3.) IMS Health estimates $42 billion in global generic drug sales in 2011, representing growth from an expected $28 billion in global sales in 2009 and $17 billion in 2008; and

4.) IMS Health estimates that the generic drug industry is growing at 7.8%, which is a faster pace than the worldwide market for pharmaceuticals.

Disclosure: Long PSDV, LCI