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Transcept Pharma (TSPT) Offers an Interesting Biotech Value Play

|Includes:Paratek Pharmaceuticals, Inc. (PRTK)

Transcept Pharma is a small market cap company and has little public awareness. The company has experienced unique corporate changes in the past year. These changes include a 1:5 reverse split & a name change. The market cap is $190m: (15.3 m fully diluted shares x current share price of $12.44)

TSPT has one key product, Intermezzo. "Intermezzo ® (zolpidem tartrate sublingual tablet) is a sublingual low dose formulation of zolpidem that has been developed for use as-needed for the treatment of insomnia when a middle of the night awakening is followed by difficulty returning to sleep."

TSPT has 15.3m shares fully diluted with warrants and options included. Cash balance currently is $98m, which is $6.40 per share, fully diluted.

On August 2nd Purdue Pharma and TSPT agreed on terms to commercialize Intermezzo within the US. The terms include an initial, unconditional on Intermezzo approval, $25m TSPT received from Purdue Pharma.

The product, a 3.5 mg zolpidem forumlua, is to assist people who have insomnia-symptoms and occasionally wake up in the middle of the night and can not fall back to sleep. Ambien is typically given for users to take nightly in a 10 mg formula.

Intermezzo is up for FDA approval by 10.30.09. The patient takes Intermezzo and on average falls asleep within 14-minutes. The insomnia market currently does not have a market which serves this specific need.

The Intermezzo FDA ruling was delayed from June 30 to Oct 30. The FDA requested TSPT to provide additional info on how the user should take the product. There are zero requests for additional studies, and user instructions on Intermezzo usage is the key issue in FDA dialogue.

Purdue has excellent relationships with primary physician doctor sales. The company's core sales product is the pain-killer Oxycontin. Purdue is currently working to establish their internal sales reps to prepare selling Intermezzo upon approval.

Purdue Pharma is a private company with $2b in sales. Purdue will pay TSPT a specific percentage of Intermezzo royalties for US sales. The specific terms of payout percentages of revenues ranges between 10-25% depending upon undisclosed milestones. Purdue, as a private company, has not publicly divulged what the specific terms are, and TSPT has refrained from detailing the exact contractual terms. TSPT's 8k states what is public information and is non-specific about Purdue royalties figures - other than management referring to a range of approximately (MY INTERPRETATION) 10-25% of revenues.

Upon Intermezzo approval, Purdue Pharma is planning to immediately be up and running to sell Intermezzo in the US. TSPT, after the 1-year anniversary of Intermezzo commercial launch, retains co-promotion rights to psychiatric & sleep disorders. Purdue Pharma will pay all Intermezzo marketing costs. Intermezzo is ready to be sold immediately upon NDA, with the PDUFA action date scheduled no-later-than 10.30.09.

TSPT stated on the 08.03.09 conference they expect 110-120 TSPT sales reps will be required for Intermezzo sales within the US psychiatric market, after the 1-year wait upon Intermezzo commercial release.

MY QUESTIMATE: Peak US sales are expected to run $500m with an initial yearly sales of $75m - $125m a baseline. Analysts have projected US Intermezzo sales at $250m within 3-4 years post approval. TSPT will retain psychiatric and US sleep disorder co-promotional sales after 1-year in Pharma Prod agreement. The psychiatric market is approximately 15% of all insomnia-related prescriptions.

Countries outside the US have various degrees of regulatory oversight and approval.

TSPT has Canada & Mexico Intermezzo rights up for contract negotiations as deemed timely and appropriate. Purdue Pharma - per the private negotiations - will retain right to an unspoken "1st right of refusal" for an agreement to sell in Canada and Mexico. I assume Purdue will pay an undetermined price for this right.

TSPT retains control over the remaining countries. Europe has an approximately 50-70% expected sales figure of the US sales expectations. Europe is the key focus because the area is conservative in drug approval and Ambien and Ambien generics are established within this market.

I anticipate TSPT to establish a Intermezzo deal with an established Europe distributor, similar to the Purdue Pharma contract. Management has stated that exploratory research has been conducted.

TSPT has patents pending upon Intermezzo delivery with US Patent office. The outcome of this decision, presumably but not announced, will effect Purdue's royalty payment structure to a certain degree.

I am long TSPT common.

Stocks: PRTK