CuraGen Caught in the Middle

Includes: CRGN, MRK, NVS
by: Zacks Investment Research

Recently, CuraGen Corp. (CRGN) declared that it is undertaking a review of a broad range of strategic alternatives to enhance shareholder value.

The company revealed that these alternatives may range from selling or licensing CR011, the company’s lead drug candidate, to acquiring additional assets or business lines, to selling the company. CuraGen will retain an investment bank to assist the Board with its strategic review.

The company has retained JSB-Partners to identify potential acquirers of its drug candidate CR011-vcMMAE. CR011-vcMMAR is under phase II studies for advanced melanoma and breast cancer. In an ongoing phase II multi-center study in heavily pretreated patients with breast cancer, CR011 is well tolerated and there is early evidence of activity. Phase II program in melanoma also continues to show promising activity.

We believe the current financial market and economic downturn triggered the strategic initiative. The company’s cash position remains a concern, especially if the company wants to move CR-011 into advanced phase III studies.

Apparently, CuraGen is caught in the middle. The company doesn’t have enough cash to advance CR-011 into advanced phase III studies. At the same time, it would be very difficult to raise any additional funds at current financial and economic environment.

It seems that partnership or collaboration may be the best option to provide needed funds to advance CR-011. However, with very limited phase II data for both breast cancer and melanoma, it would be very hard to attract potential partners.

The strategic review will put the company’s fate into uncertainty, in our view. Although the company insists that during the evaluation process management will remain focused on executing the current business plan, the strategic review may distract management from their normal fiduciary duties.

Financial Position Remains a Major Concern

As of December 31, 2008, CuraGen had cash, restricted cash and investments of approximately $88 million.

CuraGen received an upfront of $39 million from the sale of Belinostat at the end of April 2008 (including the $12 million from sale of 5 million shares). In mid May, 2008, CuraGen used $43.2 million to retire its 4% convertible subordinated notes due February 2011. Recently, the company retired another $4.8 million notes for $3.8 million. The company currently has $14 million of the 2011 notes outstanding.

During the three month period ended December 31, 2008, CuraGen utilized $3.8 million of cash for operations. CuraGen expects to utilize an average of $3.5 to $4 million of cash per quarter through June 2009. The company expects to end the second quarter of 2009 with approximately $76 to $77 million in cash and investments. CuraGen generates no revenue.

As CuraGen advances CR011 into advanced clinical studies, R&D costs will be increasing sharply. We believe cash burn will skyrocket in 2009 and beyond if the company moves CR011 into advanced clinical trials. With pending $14 million debt due 2011, the company must raise additional funds to fund advanced clinical studies.

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