Searching around this week, I came across an interesting small cap biopharma I feel investors should take a hard look at. The company has more cash on hand than its current market cap, with no debt, and a substantial partnership with a large pharma.
Vanda Pharmaceuticals (NASDAQ:VNDA) Pps: $4.19 Market Cap:$118.27M
Vanda engages in the development and commercialization of products for the treatment of central nervous system disorders. It offers Fanapt, an oral formulation of a compound for the acute treatment of schizophrenia in adults. The company is also developing Fanapt, a Phase II clinical trial injectable formulation for the treatment of Schizophrenia. Its products in clinical development also include Tasimelteon, which completed Phase III clinical trials for the treatment of sleep and mood disorders, including circadian rhythm sleep disorders; and Tasimelteon that is in Phase IIb/III trials for the treatment of major depressive disorder.
The first thing about Vanda I notice is the fact its market cap is lower than the actual cash it has on hand. Effectively, the company can buy itself. So many developmental pharmas lack the cash to properly have a chance to get their drugs approved. Vanda has more than enough cash and is not a super cash burner.
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The 2nd thing I noticed was its partnership with Novartis NG (NYSEMKT:NVG).
The company's product portfolio includes Fanapt (iloperidone), a compound for the treatment of schizophrenia, the oral formulation of which is currently being marketed and sold in the U.S. by Novartis, tasimelteon, a compound for the treatment of sleep and mood disorders, including circadian rhythm sleep disorders (CRSD), which is currently in clinical development, and VLY-686, a small molecule neurokinin-1 receptor (NK-1R) antagonist.
There is a significant barrier to entry in the schizophrenia drug market, proving the drug is better than a placebo. In a recent article from June of this year, Traci Pedersen from psychcentral.com explains how this has become a trend in the industry according to the FDA. Although not the best case scenario for making progress with this challenging disease, it provides some additional opportunities for a drug that is already on the market.
Pursuant to Vanda's amended and restated sublicense agreement with Novartis, it received an upfront payment of $200.0 million and is eligible for additional payments totaling up to $265.0 million upon the achievement of certain commercial and development milestones for Fanapt in the U.S. and Canada. Compare these facts to its current market cap, and I think we can see the company is grossly under spec-valued.
The most interesting part of this arrangement is that Vanda owns the rights to Fanapt everywhere else in the world besides the US and Canada. There is an EU approval decision expected in the second half of this year regarding Fanapt. Additional regulatory approvals in areas outside of the US and Canada could produce explosive growth. At Novartis' option, Vanda will enter into good faith discussions with Novartis relating to the co-commercialization of Fanapt outside of the U.S. and Canada or, alternatively, Novartis will receive a royalty on net sales. Novartis has chosen not to co-commercialize Fanapt with Vanda in Europe and certain other countries and will instead receive a royalty on net sales in those countries. These include, but are not limited to, the countries in the European Union as well as Switzerland, Norway, Liechtenstein and Iceland. They have entered into agreements with other partners for the commercialization of Fanapt in countries such as Mexico, Argentina, and Israel.
The approval in the U.S. and Canada sets the stage for EU approval and is huge for Vanda because of the issues getting these types of drugs to market.
On July 13th, shares of Acadia Pharmaceuticals (NASDAQ:ACAD) slumped over 10% after disclosing it`s discontinuing development for its AM-831 schizophrenia drug after it failed to "meet pre-determined criteria for further development in Phase I testing." AM-831 was being developed in partnership with Japan`s Meiji Seika Pharma.
In addition and also in the past month, Eli Lilly (NYSE:LLY) announced that their schizophrenia drug pomaglumetad did not meet primary end points. In study HBBM, pomaglumetad methionil did not separate from placebo in the primary efficacy endpoint in either the overall or predefined genetic subpopulation (based on the Positive and Negative Syndrome Scale, PANSS) at the two doses investigated.
Along with Fanapt, the company is also conducting four clinical trials to pursue U.S. Food and Drug Administration (FDA) approval of tasimelteon for the treatment of Non-24-Hour Disorder (N24HD) in blind individuals without light perception. Two of the clinical trials were initiated in the third quarter of 2010, the third was initiated in the third quarter of 2011 and the fourth was initiated in the fourth quarter of 2011. In addition, in the third quarter of 2011, Vanda initiated a Phase IIb/III clinical trial to study the efficacy of tasimelteon for the treatment of Major Depressive Disorder (MDD).
According to an article from August 6 in the Washington Post, of the estimated 65,000 to 95,000 blind people in the United States who have sleep complaints, up to 70 percent might suffer from non-24. Some who suffer from non-24 have found limited relief through treatment with synthetic versions of the hormone melatonin, which works to drag forward the body clock's reset time by providing a chemical pulse to the brain that signals nighttime. Vanda scientists hope that tasimelteon, which has a similar molecular structure to melatonin, will have superior beneficial effects. Synthetic melatonin itself is classified as a dietary supplement.
Vanda could represent a unique situation in small-cap biopharmaceutical stocks that is trading below cash along with an approved product that is marketed by a big pharma partner. They also have additional catalysts in the form of late-stage clinical trial results and an EU approval decision expected later this year. In addition, the Company has retained full global rights to Tasimelteon and ex-US/Canada rights to both the oral and injectable formulations of FANAPT, providing potential catalysts in the form of partnerships.
Given the current market cap and cash value of roughly $5.13 per share Vanda is both a very strong value play and an extremely undervalued speculative investment. Other noteworthy companies that have had with drugs similar to what Vanda is working on are Bristol Myers Squibb (NYSE:BMY), which has seen success with Abilify, Johnson & Johnson (NYSE:JNJ) with Invega, and Pfizer (NYSE:PFE) with Geodon, a larger market cap for a stock with limited threat of liquidity and licensing deals in place would be warranted. If management executes correctly here, along with various strong catalysts upcoming by the end of this year, we might very well be looking at a $10 stock in the next year or so.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Family holds VNDA Stock.
Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.