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Those skilled in military operations are able to change their formations in such a way as to ensure victory based on the actions of opponents.
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- Sun Tsu, The Art of War

NPS Pharmaceuticals Inc. (NPSP), the $670M market cap Bedminster, NJ biopharmaceutical company, provided great news Monday. A medication that NPSP is currently testing met the primary efficacy endpoint in phase 3 of the study. The name of the medication is “GATTEX” and is intended for “Adult Short Bowel Syndrome”. That surely seems to be great news for the company and one would think it would send the stock higher. Indeed, the stock did climb higher as the market celebrated grandly Monday, sending the price of NPSP up over 30%.

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The market is clearly announcing that “GATTEX” will add a lot of profits to the bottom line of NPSP. I used EDGAR Online to gather data Monday. By rounding 60 million shares (66.93M outstanding and 58.26M float) and multiplying the increase in price Monday of $2.39, we get an idea of how excited investors became with the press release. The market cap increased almost $150M after the announcement.

Some of the key information in the press release includes:

  • In an intent-to-treat analysis, 63 percent (27/43) of GATTEX-treated patients responded versus 30 percent (13/43) of placebo-treated patients (p=0.002).
  • The STEPS study showed that GATTEX was well tolerated. Four of the 86 randomized patients discontinued the study due to adverse events, of which one was GATTEX-treated and three were placebo-treated. Adverse events appear to be consistent with the pharmacological effects of the drug.
  • More than 97 percent of eligible patients who participated in STEPS elected to roll into STEPS 2, an open-label continuation study in which all participants receive up to an additional 24 months of GATTEX therapy.

There are an estimated 10,000 to 15,000 SBS patients in the U.S. The positive part of having less than 15,000 patients is the medication qualifies for orphan drug status. The negative aspect is that there are less than 15,000 patients to market to.
NPS estimates the peak sales potential is near $350M. I find this estimate to be extremely high even after including outside US sales (in 2007 NPS granted Nycomed the rights of marketing outside North America which included Nycomed paying about $25M to NPSP in advance). Under the terms of the agreement with Nycomed, NPS earnings may be up to $185M plus royalties. It appears that I am not alone as industry analysis puts the estimate peak sales around $200M. When evaluating NPSP, I used the $200M in peak sales, as it is higher than my own. My estimate comes in much lower as I prefer to use the numbers that others are using to give room for error. Also, with a 10%+ chance of failure with the FDA, the current peak sales estimate value is at $180M. Pharmaceutical yields have very fat tails due to their large exposure to binary FDA rulings. As a result, I believe the estimated value should be further discounted due to the all or nothing payoff from the FDA rulings. For example, if GATTEX is eventually approved, a target price of $12-14 would appear to be reasonable. On the other hand, if something comes out of the data, as it does about 10% of the time, NPSP is looking at a full blown crash to the neighborhood of $5-6. With an FDA approval NPSP will be lucky to have a PE ratio under 80 and will still be priced for perfection. Considering the first phase 3 study resulted in a failure of the higher dose and a lower response rate in the lower dose, NPSP and GATTEX are far from perfection.

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I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short term trades. While not exactly the same in longer swing trades to investments, the concepts used are similar. I believe the company and the company stock correlation have separated, thus leaving the stock to be over-priced relative to the performance of the company.

As a result, I believe the run up Monday is unsustainable in the short term and I put on a short position into the close. I believe there will be profit taking combined with unwillingness to chase the stock higher causing the price to remain under pressure. NPSP is similar to National Instruments (NATI) a few days ago in the price movement. I wrote an article in regards to NATI here and Molycorp (MCP) here as well. It is easy to see what happens to a stock after the news runs out. The daily volume dropping off, indicating fuel for moving higher is dissipating, will be the confirmation for me to short further.

Source: NPS Pharma's Stock Price Is Getting Ahead of Company Value