Will MERLIN Work Magic For CV Therapeutics?

Feb. 6.07 | About: CV Therapeutics (CVTX)

Allow me to propose a scenario that is painfully familiar too many investors:

Small biotech company comes public with a potential blockbuster drug….

Stock skyrockets….

Wall Street loves it….

A few months later the company’s hot drug becomes the focus of negative publicity…..

The company’s lone cash cow appears threatened….

Wall Street hates it….

Investors bolt….

Lawyers jump in….

Investor class action suits abound…..

Company stock crashes to earth….

Stock is now considered dead money.

Up until a few months ago, CV Therapeutics (CVTX) fit this descriptive chain of events to a T. However, unlike numerous biotechs before it, CVTX may provide the company’s more loyal and daring investors with a different, more positive ending.

CVTX was once a high flying $50 dollar stock sporting a market cap somewhere well north of $2 billion. That is not the case today. The stock has fallen over the past five years to a low of $9 a few months ago and is now trading at 12.75 with a total worth of approximately $725 million.

A major reason for this precipitous drop can be attributed to the events surrounding CVTX’s most promising drug Ranexa which is used in the treatment of chronic angina. Despite steady sales growth since its launch, Ranexa sales are hampered by a safety concern regarding QTC prolongation, which has led to it being indicated as a second line agent for chronic angina.

The company acted swiftly to address this situation by conducting the MERLIN trial.

According to CVTX’s latest 10-Q filed in November 06:

“It has conducted the Metabolic Efficiency with Ranolazine for Less Ischemia in Non-ST Elevation Acute Coronary Syndromes, or MERLIN TIMI-36, clinical study. This study is being conducted under a special protocol assessment, or SPA, agreement with the FDA. If treatment with Ranexa is not associated with an adverse trend in death or arrhythmia compared to placebo, under the SPA agreement the study could support potential approval of Ranexa as first-line chronic angina therapy, even if statistical significance on the primary endpoint is not achieved. In addition, if statistical significance on the primary endpoint is achieved, Ranexa could also gain potential approval for hospital-based and long-term prevention of acute coronary syndromes. The MERLIN TIMI-36 study is being conducted by the Harvard-based TIMI Study Group. We currently expect data from the MERLIN TIMI-36 study in the first quarter of 2007.”

Although MERLIN is not a wizard, its outcome could have a magical affect on CVTX shares. If successful, this trial could supercharge sales of Ranexa. It would become a mass marketed drug to all primary care doctors, not just heart specialists. It would definitely emerge as the billion dollar blockbuster that enthralled investors initially --- making CVTX a very cheap stock at the current price.

The stock’s 30% plus rise over the past six months would indicate positive news may be forthcoming. This move was accompanied by heavy volume validating its strength.

Other interesting activity surrounding the stock involves institutional ownership being reported in January by Wells Fargo (+10%) and Goldman Sachs (2%) in 13G public documents. Couple this with the nearly 30% short interest on the stock and it would appear fireworks are on the horizon.

Another positive for the company is its attractive pipeline. According to Yahoo Finance, the company is developing Regadenoson, a product under Phase 3 clinical trial, for myocardial perfusion imaging; Tecadenoson, a Phase 3 clinical trial product, for the reduction of rapid heart rate during acute atrial arrhythmias; Adentri, a Phase 2 clinical trial product; and CVT-6883, a product under Phase 1 clinical trial, for the treatment of asthma.

All these compounds in addition to Ranexa could be quite tempting to a big Pharma company looking to bolster its pipeline. So a buyout must also be seriously considered.

CVTX is scheduled to report earnings on Thursday, Feb. 8 after the market close. Because the company has reported poor fourth quarter earnings in each of the last two years, I would play it cautious and take a quarter of a position before earnings and add shares later incrementally.

CVTX 1-yr chart

Disclosure: Author is long CVTX