MAP Pharma: Still Potentially A Good Short Sell

| About: MAP Pharmaceuticals, (MAPP)

I usually do not write perceived 'negative' articles with an opinion to short a stock, but the following company may be a good short candidate for the midterm. I would like to caution traders to be careful when considering a short and to fully understand the risks that are involved with short selling.

Many investors were awaiting an approval for MAP Pharma (MAPP) migraine treatment, LEVADEX, on March 26th. Unfortunately, the company received a Complete Response Letter (NYSE:CRL) and while the stock initially behaved oddly well that day, the stock has since sold off to approximately $13.00 as reality has started to set in. At this price, the company, with 30.7 million shares outstanding as of 3/26/12 and $98.8 million in cash as of 12/31/2011, has a market capitalization of $397 million and an enterprise value of $298 million. This is a lofty valuation that reflects both a high probability of approval and a rosy sales outlook, which potentially makes MAPP a good short sell.

I feel Investors should keep in mind that this product is likely 12+ months away from approval. On April 12th, MAPP reported that they have scheduled a meeting with FDA to discuss the CRL letter in the second quarter. If MAPP takes 6 months to resubmit the application and FDA gives them a 6-month review, we are looking at 12 months for a new PDUFA date. The company has stated that, "the FDA requested that the Company address issues relating to the chemistry, manufacturing and controls, or CMC, of LEVADEX. FDA also stated that manufacturing deficiencies identified during a recent facility inspection of one of our third party manufacturers need to be resolved to FDA's satisfaction. The FDA also indicated that it had not been able to complete its review of inhaler usability information requested late in the review cycle." MAPP is referring to its our proprietary handheld TEMPO inhaler, which has not yet been approved by FDA and is going to require a close examination. Hence, this is very likely going to be at least a 6-month review once MAPP resubmits.

MAPP reported operating expenses of $55.7 million in 2011. As a reminder, the company had filed the NDA for LEVADEX in May 2011. Hence, one needs to consider the cash balance at the time of an expected approval in 12+ months and the likely possibility that the company will want to raise additional capital between now and then in preparation of commercialization (they want to hire a 50 person sales force). I expect that as the quarters roll by and the need to raise capital increases the stock will weaken.

The strongest short thesis to MAPP, however, isn't the remaining regulatory and dilution risk, although these are very real risks, the strongest argument for a MAPP short is the lack of commercial opportunity for LEVADEX. There are several very strong arguments that support the lack of commercial opportunity. One needs to go no further then examine the launch of Treximet (launched in May 2008) from GSK (GSK) and Pozen (POZN), or the experience of Sumavel (launched January 2010) from Zogenics (ZGNX). GSK reported sales of £15 million in 4Q11 for Treximet. After being on the market for three and a half years Treximet is annualizing at $96 million. Zogenics reported $8.8 million of net product sales in 3Q11, hence this product is annualizing at $32.2MM after two years. The migraine market has not been attractive since Imitrex (sumatriptan) went generic in 2009.

Perhaps an even better proxy for estimating the potential of LEVADEX comes from examining the success of Valeant's (VRX) Migranal, which is nearly the identical product. Migranal is an intranasal formulation of DHE (LEVADEX is the inhaled version of DHE). At the end of the day, just like Treximet, which is a fixed dose combination of sumatriptan and naproxen, and Sumavel DosePro, which is a needle-free sumatripan injection, LEVADEX is not even a novel product. LEVADEX is essentially a product that is already available to neurologists and migraineurs as an intranasal formulation known as Migranal.

According to EvaluatePharma, Migranal achieved sales of $24 million in 2011. Why should LEVADEX sell more?

Another great proxy for MAPP is Nupathe (PATH) who is developing single-use sumatriptan transdermal patch, Zelrix (NP101) for acute migraine. The company filed an NDA in October 2010 and received a CRL in August 2011. In a CRL letter that is eerily similar to that reported by MAPP, "the FDA acknowledged that the efficacy of NP101 in the overall migraine population was established. The CRL primarily contained chemistry, manufacturing and safety questions." PATH met with FDA and expects to resubmit in 1Q12. Furthermore, they believe, "our resubmission will result in a six month review period under the Prescription Drug User Fee Act." This supports our assertion that MAPP's next PDUFA date is similarly at least 12 months away.

PATH currently has 14.7 million shares outstanding and cash of $23 million. At a share price of $3.36, PATH has a market cap of $49 million and an enterprise value of $26 million. ZGNX has 65.4 million shares outstanding, cash of $56.5 million. At a share price of $1.92, ZGNX has a market cap of $126 million and an enterprise value of $69 million. Compare these valuations to MAPP's market cap of $397 million and enterprise value of $298 million. MAPP may indeed have a long way down to go.

A recent survey of 50 U.S. neurologists published by Leerink Swann's analysts Michael Schmidt, Ph.D. and Joseph Schwartz on March 22, 2012 reveals important supporting insights into the potential of LEVADEX. As part of this survey physicians were asked to forecast their use of Sumavel DosePro, Levadex, and Zelrix in their migraine patients in 1 to 2 years. The physicians expect to use Sumavel DosePro in 10% and 11% of their patients after 1 and 2 years, respectively. The physicians expect to use Zelrix in 10% and 13% of their patients after 1 and 2 years, respectively. The physicians expect to use Levadex in 10% and 12% of their patients after 1 and 2 years, respectively. To calibrate what these percentages mean, consider that these physicians report using Sumavel DosePro in 8% of their patients currently, which we know equates to a current run-rate in sales of $32.2 million per year. Similarly, Migranal is currently being used in 7% of their patients and this level of use equates to $24 million in 2011 sales. Hence, assuming price parity we can infer that if LEVADEX were to achieve 12% penetration, sales should reach $41-$48 million per year, making shares of MAPP potentially an excellent short candidate in my opinion.

I believe MAPP needs to come down to around the $8-$9 a share level for the stock to be properly valued, perhaps even a bit lower.

I am not writing this article to purposely hurt longs here, this is just my opinion and people are certainly free to disagree. From time to time I will offer some short sell ideas such as this one. I am not big on short selling, so do not expect too many of these types of articles from me in the future. I just felt I had to speak up on this one. I might write an article soon on Ariad Pharma (ARIA), a stock I feel is overvalued like MAPP.

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

Additional disclosure: DISCLAIMER: This article is intended for informational and entertainment use only and should not be construed as professional investment advice, but rather my opinions as a writer only. Always do you own complete due diligence before buying and selling any stock.