Good Entry Point for Aspreva Pharmaceuticals

| About: Aspreva Pharmaceuticals (ASPV)

Aspreva Pharmaceuticals (ASPV) sold off during the past week after the company announced that their CEO, Richard Glickman, would be leaving for personal/family reasons. He didn't elaborate, but the stock took a hit, perhaps on worries that his reasons for leaving aren't strictly personal.

Aspreva receives all of its revenue and income from Roche (RHBBY.PK) through a licensing agreement for a drug called CellCept. CellCept is presently being used off-label to treat Lupus Nephritis, the more debilitating form of Lupus. There has not been a drug developed to treat Lupus in over 30 years, and the company estimates that 11% of patients with Lupus Nephritis are already on the drug. Aspreva is also running trials to use CellCept on patients with Pemphigus Vulgaris, a rare autoimmune disease.

Selling at $20.32, Aspreva has little in the way of assets besides their cash pile of $7.83/share (big cash piles are a recurring theme for us). They are receiving a royalty stream based on off-label sales of CellCept to treat Lupus Nephritis. What they are doing is "indication partnering" in which a smaller firm agrees to run the clinical trials for a large firm who is too big to bother with small-market drug applications. Aspreva is running all the clinical trials and working on FDA approval. It is assumed that FDA approval is a virtual certainty as the drug has already been well accepted for Lupus Nephritis use within the medical community.

The major issue here is that the drug hasn't been approved yet but goes generic in the U.S. in May 2009. Aspreva has estimated that the maintenance phase of the trial, set to start this quarter, could last as long as 36 months, but hopefully less. So the company could still be going through trials when the drug goes generic. Aspreva has further protection in some big European countries through the end of 2010.

In the meantime, the royalty stream is presently generating around $4 per share in annualized earnings. On a DCF basis the company is selling at a modest discount assuming all the patent expirations happen when they are scheduled to and are not extended by the FDA. Should the drug get early approval or Aspreva find additional indication partnering agreements, the stock could have big upside based on a higher DCF value.

Full Disclosure: We own shares of Aspreva.

ASPV 1-yr chart: