SuperGen: Worth the Risk

| About: Astex Pharmaceuticals, (ASTX)

In small-cap biotech land, it’s a rare to stumble across a stock that offers a favorably lopsided risk/return ratio. One anomaly fitting this description is Supergen (SUPG), currently trading at $5.55 (52-week range of $3.30 to $7.50) What sets Supergen apart from most other development stage biotech companies of relative size (market cap of $320m) is that they have already succeeded in gaining FDA approval for marketing of a mini-blockbuster cancer drug, Dacogen for Injection [MDS].

In late 2006, Supergen began receiving a steady, growing cash-flow from their development and marketing partner MGI Pharma (MOGN) as Dacogen hit the market and increasingly took share from its competitors. 2007 will be the first full year of sales for Dacogen, and MGI has estimated sales to be between $95-105m, with peak U.S. sales reaching $250m in the 2010 timeframe. This sales goal appears realistic when considering that Dacogen will likely expand its potential market as it has shown excellent efficacy results in other disease indications such as AML and CML where phase III trials are currently underway.

Supergen receives an expense free royalty rate of 20% on the first $50m in gross revenues, with a 2.5% increase in sales for every additional $50m sales tranche up to a maximum royalty of 30% for all sales over $200m. Potentially even more lucrative is the deal Supergen & MGI struck last year with J&J Cilag to launch and market Dacogen ex-North America. Given J&J’s dominating presence in the EU, this partnership will likely pay huge dividends. A phase 3 EORTC-sponsored study of Dacogen in patients with MDS is ongoing in Europe with an expected NDA filing in the EU in 2008. Supergen is entitled to the same 20-30% tiered royalty structure for worldwide sales of Dacogen.

Analyst Elemer Piros of Rodman & Renshaw sees Supergen turning a profit by Q3 2007 and climbing to $24 within 12 months. He expects Dacogen sales to hit $750m worldwide by 2011. Although his price target seems out-of-touch with reality today, it’s easy to place a value on Supergen at much higher levels based solely on discounted Dacogen cash flows.

If we assume a relatively conservative $500m in peak sales in 2011, Supergen would be receiving royalties of $137.5m ($10 + 11.25 + 12.5 + 13.75 + 15(x6). The NPV on the future royalty payments using a 20% discount rate would be $55m. Using a price-to-earnings ratio of 15-20 gives us a market cap of $825m-$1.1b, or $13.75 to $18.33 per share. This excludes any value of the pipeline, drug discovery engine, future milestone receivable and a sizeable cash stockpile Taking a step beyond Dacogen, Supergen owns a burgeoning oncology pipeline which is still early stage, but appears very promising. Their lead pipeline molecule, MP-470 (phase I), inhibits a wide array of mutant tyrosine kinases. Thus, MP-470 combats multiple efforts by cancer cells to resist anti-tumor agents and could make a wide range of existing therapies more effective. MP-470 can act synergistically with radiation as well as platinum-containing compounds. A second drug, MP-529, is expected to enter the clinic later in 2007. Supergen has hinted strongly at the likelihood of a partnership for one or more of its early stage drugs which would bring additional cash and offload at least a portion of the development costs, allowing Supergen to continue operating at a profit.

Another significant asset is Supergen’s computer model driven small-molecule discovery and screening engine [CLIMB] which rapidly identifies targeted drugs. CLIMB is expected to yield 1-2 new IND’s per year. As for the risk side of the equation, there are several key factors which provide an underlying bid for Supergen’s stock. With $80m in cash and another $40m in milestones receivable over the next year (Nipent sale, EU milestones) Supergen will have cash equivalent to nearly 1/3 of its current book value. There’s also the takeout put If SUPG drifts any lower given that MGI (a 9% owner) may be compelled to acquire Supergen and its cash hoard and at the same time retire all future royalty payments. Supergen’s growing oncology pipeline and drug discovery engine would be the icing on the cake for MGI.

Disclosure: Author has a long position in SUPG

SUPG 1-yr chart