Three Reasons to Be Optimstic on NeurogesX

| About: NeurogesX, Inc. (NGSX)

I recently recommended NeurogesX (NASDAQ:NGSX) as a speculative buy and, after its second quarter earnings release, I remain optimistic on this stock. I have three reasons to be even more optimistic on NGSX. However, I think the timeline of whether or not to buy the stock has moved up.

The first reason to be optimistic is that the company reported that it will release top line results from its Phase III trials of NGX-4010 for the treatment of post-herpetic neuralgia in September. This means investors have a key date for a catalyst approaching fast.

In its earnings report, the company said that it plans to release its data near the end of September, which is well ahead of schedule. NeurogesX also says that it remains on schedule to apply for marketing approval in Europe by the end of 2007 and in the United States in early 2008.

The second reason for optimism is the that the company's Phase III trial for NGX-4010 in treating HIV-related pain is nearing its end as well. The company reported that this trial is over 90% of its enrollment, which will allow the company to report top line data in early 2008.

Thirdly, NeurogesX said that NGX-1998, which is a second generation drug of NGX-4010, is showing "reduced pungency and shorter application time than NGX-4010." NGX-1998 is currently in Phase I trials, but investors should be happy that NeurogesX has a possible drug in the pipeline that can follow its first drug.

There are still concerns and risks of investing in NGSX, just like any small biotech. The stock remains very weak, trading under $7. It is possible that these potential catalysts are already priced into the stock. It is also possible that the Street is just waiting for the data. If the latter is the case, now is probably a good time to buy. Also, I am a little concerned that the company does not have a partner in production of NGX-4010. But, again, that may just be something that will happen after the results come out next month.

Even with the concerns I have, I still think this would be a good time to buy if you have some speculative money. I believe that the PHN market is worth around $6.61 per share for the company, which means right now Wall Street believes the company's other potential markets are not worth much. Additionally, I think that the PHN market could be worth near $9 if the drug has the potential to gain a double digit market share. I also believe that the HIV pain market is currently worth nearly $2. The company also has potential in the painful diabetic neuropathy area, which I think is only worth about $1 right now, but could push to $4 in the future if Phase II trials go well. So, based on my fair value estimate for the company of $9.50, which I reported in an earlier post, the company is trading around a 25% discount to fair value. I believe that gives a pretty nice margin of safety, especially for a high risk stock.

Disclosure: I have no position in NGSX

NGSX 3-mo chart