Savient Pharma: Cheap Biotech Without FDA Approval Risk

Savient Pharma (OTC:SVNT) - a small cap biotech trading 50% below the 52 week high with an approved FDA drug with blockbuster potential - provides an ideal risk/reward scenario. The approved drug also has orphan status, giving it a 7 year marketing exclusivity.

Naturally, the stock wouldn't still fall into the small cap arena if everybody agreed on the blockbuster potential of Kyrstexxa. The drug is one of the first for gout in over 40 years and provides treatment of chronic gout in adult patients refractory to conventional therapy. It treats an previously untreatable disease, providing for a under-served patient base. This is why many analysts and investors are high on SVNT and the blockbuster potential of the drug.

While some in the analyst community disagree over the potential of Kyrstexxa, the major reason for the low stock valuation is that the previous management team made a huge mistake in attempting to auction the company off after obtaining the expected FDA approval of the gout drug last year. This mistake is amongst a litany of other blunders over the last couple of years.

At the time of FDA approval, management reckoned that the company would be more valuable if, instead of spending precious resources on developing a sales team, it could leave that task to a big pharma buyer that already had a massive sales force - maybe somebody already working with rheumetologists. In theory, numerous companies could even tap into an existing underutilized and established sales force, therefore not reinventing the wheel at a huge cost. Theories don't always work in the business world and instead it is presumed that companies used the lack of an established sales force against SVNT in negotiations.

However, those negotiations collapsed and the stock quickly followed. SVNTs stock swooned from $23, eventually falling to the $9 level after the failed auction. Clearly irrational considering the stock traded near $15 before the FDA approval. Was the company's valuation completely reliant on a buyout? An approved orphan drug that meets a desperate need surely has value beyond any such transaction.

As misaligned as the previous management team was, they did an exceptional job in preparing for the launch of this drug with or without a buyout. Even though the auction failed last October, the drug launched on December 1st and had the company had a salesforce in training by January - just in time for the hiring of industry veteran, Eli Lilly & Co (NYSE:LLY) executive and former ImClone Systems CEO. John Johnson brought immediate credibility to the company, though the stock languished at its lows for the next couple of months.

Currently, as the company comes close to reporting Q1 results, the stock has gotten a bid and is now approaching the $11 level. Remember, the stock is still down $4 since gaining FDA approval and adding a very experienced CEO - one who (it should be noted) successfully sold his last company to a big pharma giant. Hmmm....

Q1 results reported on May 5th will be instrumental in obtaining a higher valuation. Revenue in the $2-3M range could show that the drug is on the way, thus providing SVNT with the ability to negotiate on a firm footing. This time, offer a fair price or the company will clearly go it alone.

Analysts have major disagreements over the peak revenue estimate and it ostensibly comes down to differences of opinions on the potential patient population. See the below excerpts from a Reuters article from last month. Even the bullish analysts undercut management estimates, but they still favor a positive outcome for the stock. Leerink Swann remains as bearish as ever.

Via Reuters DealTalk:

Savient says there are about 170,000 Americans suffering from severe refractory gout. U.S. health regulators estimate this at about 100,000 patients, with the total gout patients numbering more than 2 million.


"Even if they have 10,000 patients on the drug, that's $600 million right there, which is their current valuation," Roth Capital Partners' analyst Andrew Vaino said, though he estimates a target population of about 45,000 patients.


"I am still maintaining my estimate of 56,000 patients," said Global Hunter's Lee, who believes the stock is highly undervalued.


Analyst Joseph Schwartz of Leerink Swann sees the drug fetching a maximum of $500 million in sales. "This is the absolute maximum if everything goes right. If four to five thousand rheumatologists in the United States each put their patients on this drug and they stay on for a year, that would suggest $500 million in the United States," he said.

In summary, SVNT remains a speculative biotech but not nearly as risky considering that it already has FDA approval. This should cap the downside risk, but the upside has lots of potential even if the company doesn't meet managements estimates.

Disclosure: I am long OTC:SVNT in client and personal accounts.