The Long Case for Unigene Laboratories

With Pfizer (PFE) having to exit Exubera and Jim Cramer hyping Nastech desperately not that long ago, I am sure many Seeking Alpha readers are familiar with the investment story behind the alternative delivery of drugs. For those who are not, the case is quite simple. Most of the drugs have to be injected because otherwise the active pharmaceutical ingredient [API] would be destroyed (degradation) in the gastro-intestinal tract. As patient compliance with oral forms (tablets) is greater than when compared to injectable formulations, the story is quite compelling.

So what is necessary to have a successful alternative delivery platform? First, it is all about bioavailability of the delivery route (http://en.wikipedia.org/wiki/Bioavailability). If you have a bioavailability of 10% it basically means that you need 10 times more of the API. If this leads to a price 10 times higher, forget it. Nobody is going to pay for that (see Exubera). As most of the delivery forms are in the range of 5%-15%, this seems to be a major hurdle unless you can produce the API 10 times more efficiently.

What else do you need to be successful? I would say a low variability. This means that you want to get each dose at the same bioavailability. And not the first day 5% and the next day 20% as this would mean that you under- or over-dose.

A good example here is insulin. If you overdose it is lethal and if you under dose it could be lethal as well. So the therapeutic window is very narrow. Other APIs like calcitonin are less troublesome as there are no side effects and the exact dose has never been established anyway.

Now that we are all on the same level of understanding let’s see why Unigene (UGNE.OB) is different. Besides the fact that they already have an approved drug and are running at break-even, they mastered exactly what I have described above. They have the cheap manufacturing technology to produce the API in quantities to serve world markets. This technology is called recombinant DNA technology and has already been validated by companies like GlaxoSmithKline (GSK) and Novartis (NVS).

Secondly, they reported in October that in their lead trial all of the subjects achieved a biological response and the study met the desired goals for blood levels and variability.

Now as the technology platform seems to be established, you can apply it to hundreds of APIs (some of them address blockbuster diseases like osteoporosis, osteoarthritis, diabetes and obesity just to name a few). If you think you have to wait years until the story plays out, you may be dead wrong.

First of all, Novartis is already running two phase III trials for two blockbuster opportunities – Osteoarthritis, which is affecting 21 million Americans and Osteoporosis which is currently a $7 billion market. Some informed people may now argue that calcitonin isn’t as powerful as the current gold standards like fosamax or other late stage drugs. But those who keep up with the experts in the field know that 'too powerful' drugs aren’t the desired goal anymore. They can lead to frozen bone which can cause spontaneous fractures while doing everyday activities like walking. Think about that!

Not to mention the other disastrous side effects like osteonecrosis of the jaw where already hundreds of law suits have been filed or the heart rhythm problems that the FDA is currently investigating. By the way, those issues relate to all bisphosphonates like fosamax, actonel or boniva.

Recently, the FDA issued another warning letter saying that although severe musculoskeletal pain is included in the prescribing information for all bisphosphonates, the association between bisphosphonates and severe musculoskeletal pain may be overlooked by healthcare professionals, delaying diagnosis, prolonging pain and impairment and necessitating the use of analgesics (http://www.newsinferno.com/archives/2326). Those developments, together with the latest independent health report stating that all osteoporosis drugs have equal efficacy (http://www.virtualbonecentre.com/news.asp?artid=10936), will benefit safer drugs like calcitonin, which has a proven safety record of over 30 years.

Secondly, the FDA is allowing more and more companies to file through a special fast track called 505(b)2. This application route is faster as you can rely on literature or the FDA’s finding of safety and efficacy. And as the injectables are already approved, there are plenty of data’s regarding safety and efficacy. In times where the pharmaceutical industry is running out its pipeline, this is exactly what you want to have: products with a faster time to market.

Doesn’t that all make it sound like this company should be worth billions? Well, as they are still trading on the otcbb, you can have it for discount prices (Currently around $150 million market cap).

Other recent developments include the joint venture in China with Shijiazhuang Pharmaceutical Group, notably controlled by Lenovo (LNVGY.PK) and a hedge fund run by Goldman Sachs (GS), for the development of biosimilars (generics for biotech products) and a joint invention together with the Yale University of a so called “site directed bone growth” technology which is believed to be revolutionary.

Near term catalysts include an FDA approval for the second improvement in their manufacturing process which should reduce the COGS for their existing product by a factor of three, milestones from existing or new partnerships and even a product approval in China shouldn’t be that far away.

Disclosure: Long UGNE.OB