Why Morgan Joseph Expects Triple-Digit Gains For This Pfizer Partner

Mar. 5.12 | About: Lpath Inc. (LPTN)

Lpath (NASDAQ:LPTN), the leader of lipidomic-based therapeutics, is one of Morgan Joseph's top biotech picks - and for good reason. The company has several catalysts in play that address - and possibly cure - unmet medical needs. Developing monoclonal antibodies to target bioactive lipids through its ImmuneY2 platform technology, Lpath is, in my view, easily on Pfizer's (NYSE:PFE) takeover radar. Here's why Morgan Joseph believes the company will hit $8 in less than 18 months from now:

Lpath's lead product, iSONEP targets sphingosine 1 phosphate (S1P) to treat wet AMD (age-related macular degeneration), RPE (retinal pigment epithelium) detachment, and diabetic retinopathy. Around 50% of the elderly, or 1.5M in the United States, suffer from a condition in which blood vessels grow in the back of the eye to create a leaky faucet. Currently available drugs Lucentis and Avastin, owned by Genentech of the Roche Group (OTCQX:RHHBY), only treat the symptoms over an effective 30 - 60 days. iSONEP is much closer to a cure, as evidenced by past studies.

In the Phase I trial, the candidate met primary endpoints for tolerance and also indicated an ability to mitigate retinal thickness and regress lesion, among other significant biological effects. In 2 of the 15 patients, RPE detachment was completely resolved. Average reduction of the faucet was 76% - far better than what Lucentis and Avastin have shown. Moreover, Lpath was only allowed to dose once, which limited the ability of the candidate to showcase its efficacy. Currently, the company is partnered with Pfizer in developing iSONEP.

In 2010, Lucentis yielded around $2.9B in revenue from ~270K patients. Each patient needed to be injected an average of 5.5 times per year, which comes out to an annual cost of $10,725. Avastin, which has a majority of the market, treats around 675K patients. Overall, the market size is expected to grow by a CAGR of around 10% over the next 13 years, reaching more than 3M patients by 2025. This positive trend will be driven by the baby boomer generation.

To value iSONEP, we make several assumptions. First, we assume that the treated population only grows by a CAGR of 5.8% from 2017 to 2034. Then we consider that the average price per annual patient dosing trends from $9K to $3K over that time period as royalties hover between 10% - 16%. Adjusting for the ramp-up factor and discounting backward by 15% yields an intrinsic value of more than $670M. Morgan Joseph finds the drug candidate worth $710M on a risk-adjusted basis with a peak global sales target of $3.6B.

Aside from iSONEP, Lpath has favorable risk/reward in other areas of its pipeline. ASONEP, which also targets S1P, completed the Phase I trial in cancer patients where it indicated solid tolerance and produced significantly stronger results than Avastin. The company is aiming to begin Phase II in July 2012, off of this solid momentum. Adding in both Lpathomab - which targets a bioactive lipid involved in central nervous system diseases - and ImmuneY2 to the mix, Lpath is a prime takeover target.

Facing a major patent cliff, I believe that Pfizer is in a desperate position to catalyze its pipeline. While recent quarterly results were strong across the board, investors are still weary, in particular, about Lipitor's patent expiration. Morningstar anticipates that sales will be roughly flat over the next few years, hence the company trades at 19.6x past earnings but only 9.1x forward earnings. With a historical 5-year average PE multiple of 16.6, however, the opportunity for value creation is significant if management can only dissipate investor fatigue. Acquiring Lpath would thus represent a meaningful step in the right direction.

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

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