Potential Acquisitions May Prove Positive For Vanda Pharmaceuticals

| About: Vanda Pharmaceuticals (VNDA)

In an earlier article we discussed Vanda Pharmaceuticals (NASDAQ:VNDA). It was our opinion at the time that assuming a launch of Iloperidone in 2009 and a full year sales of the drug in 2010 and a resulting EPS of over $2 in that year a stock price of $40 in early 2008 is possible. This would be achieved earlier if VNDA is bought out by a larger pharmaceutical company. It could also be achieved earlier if a strong development partner is announced in 2007 for either Iloperidone or VEC-162.

The company released its earnings yesterday and also announced the engagement of an investment bank to look at strategic alternatives including the acquisition of the company. We assume this is good news and not an attempt to salvage a losing proposition, as the company carried out a successful stock issue in January and now has ample funds for the development of Iloperidone. The worldwide rights to develop, manufacture and commercialize Iloperidone were licensed from Titan Pharmaceuticals (NYSE:TTP) who had previously established a corporate partnership with Novartis Pharma, AG. Vanda had licensed these rights from Novartis. Vanda will pay royalties on future sales to Titan.


Vanda (VNDA) uses a new approach to drug development which takes advantage of the large increase in pharmacogenomic information in the past ten years. The Company has no drug discovery capability and only considers licensing compounds which have already been tested in Phase I clinical trials, thus reducing the risk of candidates with a poor safety profile. The therapeutic markets have to be significant. The first candidates in later stage trials are schizophrenia and sleep disorders which have large markets. Positive Phase III results have already been obtained for both these compounds, a significant hurdle in drug development.

Vanda has very experienced management in pharmacogenomics drug development and the Company has strong IP. It is not a one compound company as mentioned above, with a good second compound for insomnia. The latter compound will be developed further with a partner which will delay its submission to the FDA. The compound also will need further Phase III clinical trials which are scheduled for 2008. Iloperidone could be approved and on the market in 2008/9 resulting in a potential valuation of well over $2billion by end of 2008 or four times its current valuation. VNDA has all the ingredients of a high growth investment opportunity. The company went public in 2006 and is relatively unknown to investors. It is regarded as a speculative stock. Its valuation is approximately $680 million and its stock price since the public offering has risen from $10 in April at the offering to approximately $30 today. This increase is due to the success of its two lead compounds in Phase III trials. The company has recently raised additional cash and has a strong balance sheet.

It is possible that the Company will be come a target of an acquisition for a large pharmaceutical company looking to improve its pipeline. On the other hand it may enter into a commercialization arrangement which will also strengthen its balance sheet and also enable the progress towards commercialization to be more effective. Both these events could have a significant impact on the stock price in 2007. Its valuation of approximately $790 million is on a par with other companies with no revenues and Phase III trials underway or finished; PGNX ($ 760 million), ISIS ($794 million), MNKD ($812 million) and GPCB ($831 million) are examples of comparables.

Disclosure: Author has no position in VNDA.