Joseph Ramelli's  Instablog

We recently finished buying a position in Emisphere.  We have done a ton of due diligence and networked with some of the smartest biotech minds on the street and think that the stock should be trading at $5 now and that it will be well above $50 within a couple years.  

 A couple weeks ago, news came out that Emisphere had been granted provisional GRAS(Generally Regarded as Safe) approval for their SNAC carrier to use with vitamins, supplements and minerals.  They will get the full approval this summer when the the two articles are published in medical journals.  This eliminates the need for any approval from the FDA for putting vitamins, minerals and supplements into the Eligen oral formulation and opens up big opportunities for Emisphere to commercialize Eligen very soon.  The first product that they are working on is B12.  They have already proven that B12 delivered via Eligen in pill form has much higher absorption rates than standard B12 vitamins.  They are working on a low dose B12 for the retail channel and a high dose B12 to replace B12 shots.  The low dose will be ready when they get the full GRAS approval this summer and Emisphere is in talks with companies to find a partner to market the product.  The high dose product is going to go through a very short clinical trial to prove the absorption rates.  The B12 Eligen is very well understood by Emisphere and we are confident that they will prove great absorption rates when they finish the trial sometime later this year. They will probably also market this product through a partner.  Recently Par Pharmaceutical paid $54.5mm to buy a nasal B12 spray from QOL Medical.  Sales of the product were only $8mm last year, but the opportunity is huge given that there were 44 mm B12 injections prescribed in the U.S. alone in 2008.  Emisphere has some interesting info on their website about B12 here:  www.emisphere.com/oral_vit...; We feel that an oral delivery is far superior to a nasal spray(I don't think anybody would argue with me on this) and because of this the market potential is probably 5 times the size compared to the nasal spray.  We think that Emisphere is worth more than the current market capitalization of the company just based on the B12 given the price of Par Pharmaceuticals acquisition of what we think is an inferior product.  Emisphere's CEO said on the conference call that he has been contacted by many companies, both large and small, about opportunities for partnering with Emisphere for B12 and other vitamin, mineral and supplements.  Iron, polyphenols and glucosamine are a few that come to mind that are difficult for the body to absorb and would work well in Eligen formulation. 

So, I have established why we think that the stock is undervalued already and I haven't even gotten to why we are so excited and why we are confident this is going to be a huge winner.  Emisphere's partner, Novartis, is currently underway in three phase 3 trials of Oral Salmon Calcitonin.  One trial is for treating Osteoporosis and the other two are for treating Osteoarthritis.  Salmon Calcitonin is already a standard of care for treating Osteoporosis so they don't need to prove efficacy, they just need to prove that the oral version is absorbed similarly to how it is absorbed in nasal sprays.  The other huge risk in any clinical trial other than efficacy is always toxicity.  Salmon Calcitonin has no toxicity risk and in fact they have never reached a maximum tolerable dose(now you are probably starting to see why we can have so much confidence in something as risky as a biotech company).  The salmon calcitonin market is already huge with the global market recently estimated to be $750mm dollars annually and it is certain to grow with the aging of the population around the world.  We think that the market for Oral Calcitonin will be bigger because of the previously discussed superiority of oral delivery compared to nasal sprays.  We estimate that peak sales of Emisphere's Oral Salmon Calcitonin will be greater $1 Billion just for the Osteoporosis market.  Emisphere's royalty on this will be over 10% which will all flow to the bottom line.  If they also get approval for treating Osteoarthritis the peak sales could peak at closer to $10 billion.  There are currently not very many effective options for treating Osteoarthritis, especially with the much publicized implosion of Vioxx and if the clinical trial is successful we see this as being a blockbuster drug.

We are extremely confident that these trials will be successful.  As I previously stated toxicity is not a risk and efficacy is not an endpoint in the Osteoporosis trial.  The other huge factor that gives us such a high level of confidence is that Novartis is probably spending over $200 mm on these three phase 3 trials.  They went forward with the trials after seeing the yet to be published phase 2 data.  The data had to have been overwhelmingly positive for them to spend so much money on these trials.  Novartis has an incredible track record of success with Phase 3 trials.

So why is the stock so beaten down?  Well, there were 2 huge fund liquidations that drove the stock price way down.  We are confident that those are behind us now and the movement in the stock price confirms this assumption.  The other issue is that the company needs to raise some money.  They have cash through August.  The CEO said on the call that he has a lot of options and that he is confident that he will resolve the cash issue in a manner that will make shareholders happy.  Novinski has done a great job of cutting expenses and the cash burn rate is currently running at $7-8mm.  We are confident that the company will be successful in raising money on favorable terms, possibly without any dilution, but if they do a secondary we think that they will only raise a small amount and it would actually be a catalyst for the stock to move higher.  They have a lot of potential to bring in money soon with the B12 and other new nutritional products, new partnerships, and milestone payments and therefore there is no point in raising a bunch of money now before these things have a chance of happening. 

So given our base case $100mm pretax earnings for 2012(assuming only B12 and Osteoperosis sales) and allowing for 50mm fully diluted shares outstanding and a 25X pretax earnings multiple, the stock would trade at $50 per share!  Keep in mind that the Osteoarthritis market would be 10X the market size.