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CBRX Makes an Interesting Trade

|Includes:Juniper Pharmaceuticals, Inc. (JNP)

CBRX is set to report top line data for the Phase III PREGNANT Study of PROCHIEVE 8% in the “second half” / by ”year end” 2010.  The company claims the potential annual market opportunity for PROCHIEVE 8% in preterm birth/short cervix indication at around $1.7 billion(1).  At CBRX’s current “option”-like share price of around $1, this may be an interesting medium term trade. 


First off, the company’s recent deal with Watson Pharmaceuticals (assuming it is approved by shareholders(2)) appears to provide traders medium term downside protection on into Phase III data.  Here is what I like about the deal:


* CBRX lowers operating cash costs(3) and removes cash funding risk on into Phase III results

* Watson has “skin in the game” by acquiring 11.2 million shares in CBRX

* CBRX receives a $47 million up-front cash payment and uses these and other funds to pay off all of its debt(4)

* $45.5 million further milestone payments related to PREGNANT Study


Under the deal, however, CBRX loses a large portion of the upside from positive results for PREGNANT – value from positive results and subsequent approval and marketing of the product will be limited to said milestone payments and an escalating 10% ~ 20% royalty.  Despite this, there seems to be a decent trade here.  Based on current shares outstanding, positive results, as mentioned, could result in $45.5 million additional royalty payments(5).  On a per share basis, this amounts to nearly $0.70 per share(6) -- CBRX shares closed at $1.03 as of April 12, 2010 implying a 65% upside at least (assuming said value is not already priced into CBRX shares).  Of course, this excludes the value from royalties on future product revenues.  I will not calculate said additional upside here – however, given that CBRX has already provided an annual total market value estimate of $1.7 billion and CBRX’s 10% ~ 20% royalty, all a diligent reader needs to do is make a few a assumptions on market share, discount rates and terminal values and divide by shares outstanding to ascertain a rough estimate of where this stock could trade on positive results and eventual approval.


One final note: the interim CEO recently purchased 100,000 shares(7).



(1)    Source: Page 16, April 2010 Corporate Presentation, provides information related to value estimate.  Company website.

(2)    Expected to close June 2010 if approved. Source: Page 30, March 11, 2010 presentation at Cowen and Company Healthcare Conference.

(3)    Source: Page 32, March 11, 2010 presentation at Cowen and Company Healthcare Conference. Cash burn rate decreases to $1.0 million per quarter through the completion of the PREGNANT study. Watson and CBRX will also collaborate on completion of the PREGNANT study; CBRX out-of-pocket costs to be capped at $7 million.

(4)    Source: Page 26, March 11, 2010 presentation at Cowen and Company Healthcare Conference. CBRX to pre-pay $16 million PharmaBio debt and all of the $40 million 8% Convertible Notes.

(5)    $30 million specifically related to positive trial results according to investor relations.

(6)    Shares outstanding of 65.6 million as of March 12, 2010 per 10-K.  Assumes market “prices in” total value of milestone payments on positive results - a big assumption.

(7)    Per SEC Form 4.

Disclosure: Long CBRX shares
Stocks: JNP