Forward Looking Trial Results Should Help NPS Pharmaceuticals Bounce Back

| About: NPS Pharmaceuticals, (NPSP)

Did investors over-react to safety data about NPS Pharmaceuticals' (NASDAQ:NPSP) late-stage GI drug Gattex (teduglutide)?

A research note authored by George Farmer, Phd., one of our favorite analysts in the sector, points firmly in that direction. His firm, Canaccord Genuity, suggests that clients buy shares of NPS Pharmaceuticals on after an over-done sell-off following GATTEX Cancer Signals.

Recently, NPS Pharmaceuticals released new data from the company's Phase 3 STEPS 2 study of Gattex in short bowel syndrome. Much of the data was consistent with prior studies – Gattex significantly reduces the amount of parenteral and IV nutrition relative to placebo, and a large number of recipients respond. It was reported that three patients developed cancer and two died from it during the course of the study, but two of the cancer cases involved lung cancer in known smokers.

The other- as explained by Stephen Simpson- was a metastatic adenocarcinoma with probable GI origin – clearly a concern with a GI-active drug like Gattex. "Here, though, is a question of sloppy patient enrollment. Gattex has always been contra-indicated in people with cancer, and the clinics were not supposed to enroll patients with any sign of cancer five years prior to the study. Apparently a CT scan of the adenocarcinoma patient showed some suspicious signs that should have been investigated more thoroughly."

Another Seeking Alpha contributor, Bryce Istvan, also believes the sell-off was unwarranted. "While the data was positive, investors were spooked," writes Istvan. "Despite the deaths, the study was reviewed and approved with no recommended changes by an independent safety board. The drug has been granted orphan drug status by the FDA and European Medicines Agency (EMA). It has already been submitted for approval with the EMA and NPS plans to file for FDA approval by year end."

Shares of the company did close 6% higher during an otherwise brutal market day on Tuesday.

In his notes, analyst Farmer writes: "Despite report of three cancer cases (2 lung, 1 GI), we continue to see high GATTEX promise as treatment of short bowel syndrome (SBS)."

Farmer sees "a significantly oversold NPSP shares trading near our estimated $5 floor assuming zero pipeline value ($2.50 Sensipar royalty value, $2 net cash). We are confident in H2/12 GATTEX approval on a Q4/11 US regulatory filing, but nevertheless believe commercial potential will be dampened. Eliminating 10-15% of the SBS market (patients with cancer history), reducing 2012 approval likelihood to 60% (from 80%), and ramping more slowly to a new 2021 peak $263M target in our model, we estimate GATTEX value at $3.50/share (from $6.50). Our $2/share estimate for 558 remains unchanged."

He continues: "Whether GATTEX caused, propagated, or had nothing to do with reported cancer episodes is uncertain. GLP-2 mitogenic effects on gut are well understood, but impact on lung is questionable. Of dubious consequence, we note that Dan Drucker reported GLP-2 receptor expression in rat lung in 2000, but at much lower levels than in rat gut. Moreover, per management, lung cancer incidence in SBS patients in Poland (where both cases were observed) is quite high. STEPS2 updates at DDW in May will be critical, in our view, to better ascertain GATTEX cancer risk."

Canaccord sees ultimate GATTEX approval granted by U.S. regulators.

The BioMedReports FDA Calendar and Worldwide Regulatory Catalyst Tracker remind investors that the firm is expecting Phase III NPSP558 results in hypoparathyroidism later this quarter. This is an important milestone in their NPSP558 pivotal Phase III study in hypoparathyroidism and the company pointed out in our tracked March news release, that they are looking forward to reporting top line results by the end of 2011 of NPS Pharmaceuticals.

There are currently no approved treatments for hypoparathyroidism, a disease that can cause serious bone, muscular and neurological symptoms. Current treatment approaches are palliative and can lead to long-term health risks. As a replica of natural parathyroid hormone 1-84, NPSP558 has the potential to address the unmet need by treating the underlying cause of the disorder rather than just manage the symptoms.

That forward looking news item alone should continue to bring buys back into the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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