Cypress Bioscience Awaits Two Key Catalysts

Cypress Bioscience, Inc. (CYPB) is set for two major trading catalysts over the second half of this year in the form of a PDUFA decision date by the FDA on 10/31/08 for milnacipran in the treatment of fibromyalgia [FM] and the results from a third Phase 3 trial of the drug for the same indication. Cypress Bio has a partnership deal with Forest Labs (FRX), which includes both milestone payments of up to $250 million and ongoing royalties on product sales.

The stock bounced off its 52-week lows earlier this summer when Eli Lilly's (LLY) Cymbalta was approved by the FDA for FM. The two drugs work similarly, although Cymbalta is already approved and the FM indication was merely a label expansion. However, most analysts concluded that milnacipran would have a much better chance at approval at its initial PDUFA date at the end of October since both drugs have a similar safety profile as well.

Prior to the Cymbalta approval for FM in mid-June, most analysts were expecting a six to nine month delay for milnacipran to allow the FDA to review the pending
results of a third Phase 3 trial for the drug, which are due to be released in 2H08. Also, milnacipran is being evaluated in a blood pressure study, as it can cause blood pressure to increase, however the drug has been used in Europe for over a decade and has exhibited only a mild side effect profile to date in clinical use and Phase 3 trials. Most side effects were gastrointestinal in nature, in addition to hot
flushes and increased sweating.

The stock is currently trading around $8/share with half of that value in cash ($154 million) and zero debt, and with a projected cash burn rate of $30 million for 2008. Short interest is high at around 6.4 million shares, which equates to about 17% of the float and a short ratio of 22 days to cover.

Option traders are bullish on the prospects for Cypress Bio, with the most open interest in the September 2008 series with over 7,900 open call contracts at the $10.00 and $12.50 strikes versus less than 900 open put contracts across all strike prices for the same month.

The option trading in Cypress Bio points to Phase 3 results for milnicipran some time before mid-September when the majority of open interest will expire. Overall investor sentiment appears skeptical with short sellers unwilling to cover what has been a steady, high level at over 6 million shares.

Over the next three to four months, Cypress Bio will have two major binary catalysts which should provide traders with plenty of opportunities to capitalize on the volatility through a variety of stock and option strategies. I am still watching the stock with no position, but will likely take a small long position closer to the probable catalyst dates based on the history of use for the drug in Europe and the approval of Cymbalta for FM.

Disclosure: None

Comments

[AmesTiedeman]

The stock is behaving quite well as of late. We shall see. These are always a speculation.