Adventrx Pharmaceuticals: Undervalued Based on Product Approval Potential

| About: Mast Therapeutics, (MSTX)

With six weeks to a U.S. Food & Drug Administration (FDA) decision on Adventrx Pharmaceuticals’ (ANX) Exelbine™, an enhanced formulation of the chemotherapy drug, vinorelbine, trading continues to be volatile. The reason?

Diverging opinion with a side of emotions at play.

Vista Capital Partners set a $7.50 price target on Adventrx shares in the latter part of June, two days after Rodman & Renshaw revised their target on the company upwards 355% to $16. Shares quickly leaped to a new 52-week high, on equally impressive volume.

However, some investors are not as enthusiastic. Growing share volume has accompanied a growing short interest in Adventrx Pharmaceuticals’ shares. Investors betting on a decline in the company’s stock comprised 7.7% of the float at the end of June (NASDAQ.com). To top it off, TheStreet.com analyst Adam Feuerstein added:

Adventrx is overvalued (perhaps wildly so) on a fundamental basis. […]At the moment fundamentals don't matter, but at some point, they will.

Feuerstein went on to explain that the addressable market for Adventrx Pharmaceuticals’ Exelbine™ is dismal, with U.S. sales of vinorelbine at $7 Million. Yet, this statement differs materially from a similar analysis in 2010, where Feuerstein wrote that the U.S. market for vinorelbine is worth $20 Million annually. In the unlikely event that the market for vinorelbine contracted 65% year-over-year (as the analyst’s research suggests), we took to Adventrx’s SEC filings for a precise answer:

Based on data from IMS Health, total vinorelbine sold in the U.S. in 2009 was approximately 9.4 million milligrams. We estimate that the current average sales price for generic, or multi-source, vinorelbine in the U.S. is between $1.40 and $1.50 per milligram.

This puts U.S. sales of vinorelbine between $13.16 Million and $14.10 Million per annum – twice the number which Feuerstein quoted.

Pricing Strategy

Exelbine™, which would aim to replace branded and generic formulations of vinorelbine through its administering benefits, would offer Adventrx Pharmaceuticals pricing power over competitors if granted a unique Healthcare Common Procedure Coding System product code. According to the company, a unique code would allow Exelbine™ to be quoted at its own price - regardless of the price of substitute products. Let’s put this into perspective with an example.

Microsoft (NASDAQ:MSFT) controls the market for Office software. They are the sole supplier of Microsoft Office. While substitute products exist, they are not ‘identical’ to Microsoft’s Office Suite. This gives Microsoft leverage to price their product at a premium to substitutes. Adventrx’s plans for Exelbine fall along the same lines.

According to their annual report, Exelbine will be priced at $5-10 per milligram:

While we have not determined a price for Exelbine if it were approved by the FDA, we expect decision makers to value its unique formulation as compared to Navelbine and its generic equivalents, and we anticipate pricing Exelbine in the U.S. between $5 and $10 per milligram.

Valuation

Adam Feuerstein at TheStreet.com prepared a valuation for shares of Adventrx Pharmaceuticals assuming 50% market penetration for Exelbine by 2013 (that is, in two years). To be more conservative, suppose 33% penetration, and pricing at the low-end.

9,400,000 milligrams * 33% * $5/milligram = $15.67 Million in sales for fiscal 2013.

And, if Feuerstein wanted to know what those sales were worth to shareholders today, we would discount 15% and divide by a fully-diluted 35.67M shares (10Q), resulting in revenue per share of $0.38.

At this stage, in place of a randomly assigned sales multiple (albeit, it is tempting), we’ll use the industry average price-to-sales ratio of 11.38 to measure ‘fair value’.

11.38 * $0.38/share = $4.32/share valuation.

Conclusion

Adventrx Pharmaceuticals will continue to trade in a volatile range at least until the FDA has rendered an opinion on Exelbine. Using a simple calculation, we showed that shares of this late-stage biotechnology firm are undervalued on the basis of a potential product approval and commercialization efforts. However, Exelbine’s FDA trial could also be the stepping stone for a multitude of products, including Adventrx’s ANX-514, a novel, detergent-free reformulation of the chemotherapy drug docetaxel, and ANX-188, a compound for the treatment of patients with sickle cell disease.

To support their efforts, cash and equivalents tallied $46.55 Million or $1.30/share, as of the most recent quarter.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ANX over the next 72 hours.