Pharma IPO: Highlights from Catalyst Pharma's S1 Filing

Includes: CPRX, GSK, NVS, PFE
by: Evelyn Rubin

Key details about addiction treatment developer Catalyst Pharma's IPO filed with the SEC last week. Proposed ticker: (NASDAQ:CPRX). All excerpts are from the full SEC filing:

Company Description

We are a specialty pharmaceutical company focused on the development and commercialization of prescription drugs for the treatment of addiction. Our initial product candidate is CPP-109, which is based on the chemical compound gamma-vinyl-GABA, commonly referred to as vigabatrin. We intend to begin in the fourth quarter of 2006 a U.S. Phase II clinical trial evaluating CPP-109 for the treatment of cocaine addiction. We also intend to develop CPP-109 to treat methamphetamine addiction. We believe that our CPP-109 platform has the potential to produce therapies for other addictions, including addictions to nicotine, prescription pain medications, alcohol, and marijuana, as well as treatments for related addictive disorders, such as obesity and compulsive gambling.

Understanding Addiction

Drug abuse and addiction, including cocaine and methamphetamine abuse, comprise a worldwide health problem that affects millions of people and has wide-ranging negative social consequences. According to the Office of National Drug Control Policy, costs of drug abuse to society were an estimated $180 billion in 2002 in the United States. In 2004, an estimated 19 million people in the United States suffered from dependence on illicit drugs, according to the National Survey on Drug Use and Health, published by the Substance Abuse and Mental Health Services Administration, or SAMHSA. According to the same source, approximately two million people used cocaine in the month preceding the survey, approximately one million were new users in 2004, and approximately 884,000 patients sought treatment for cocaine abuse in 2004. Also according to the SAMHSA survey, approximately 583,000 people used methamphetamine in the month preceding the survey, approximately 318,000 were new users in 2004, and approximately 393,000 patients sought treatment for methamphetamine abuse in 2004. According to the United Nations Office for Drug Control and Crime Prevention, in 2004 there were approximately 3.4 million users of cocaine and 2.7 million users of amphetamine-type stimulants across Europe. Despite the significance of cocaine and methamphetamine abuse as a worldwide public health problem, there are no currently approved pharmaceutical therapies for cocaine and methamphetamine abuse.

Many addictive drugs, including cocaine and methamphetamine, produce feelings of euphoria by increasing the concentration of the chemical neurotransmitter dopamine in specific areas of the brain. Under normal conditions, dopamine levels are relatively constant, increasing temporarily as a result of experiences such as eating or sexual arousal. Over time, the feeling of pleasure is decreased by a reduction in dopamine to its pre-arousal level and through the action of gamma-aminobutyric acid, or GABA, a chemical neurotransmitter that inhibits the effect of dopamine. Substances such as cocaine and methamphetamine cause enormous amounts of dopamine buildup, producing feelings of euphoria. CPP-109 increases the amount of GABA present, which suppresses the responses to the dramatic increase in dopamine levels produced by cocaine and methamphetamine, thereby preventing the perception of pleasure that is associated with their use.

Key Financial Data: From inception in January 2004 through the end of Q2 2006, the company has recorded zero revenues on $3.7 million of OPEX. OPEX for the first six months of the year dropped from $1.3 million in 2005 to $700k in 2006. At the end of June, the company had $3.5 million of cash in the bank.

Key Competitors

  1. According to the S1, there are no approved therapies for cocaine or methamphetamine addiction, however there are a number of therapies under development including: Baclofen from Novartis (NYSE:NVS), Gabapentin from Pfizer (NYSE:PFE) and a slew of others.
  2. There are a number of over-the-counter therapies for nicotine addiction, and one prescription product called Zyban from GlaxoSmithKline (NYSE:GSK).

Notable Issues To Watch For

Dependence on Patent Agreement with Brookhaven:

All of our patent rights are derived from our license agreement with Brookhaven Science Associates, as operator of Brookhaven National Laboratory under contract with the United States Department of Energy, or Brookhaven. Pursuant to this license agreement, we have licensed rights under nine patents and two patent applications in the United States, and 79 corresponding patents and patent applications outside of the United States, that were filed and obtained by Brookhaven relating to the use of vigabatrin to treat addiction. We also have the right to future patents obtained by Brookhaven relating to the use of vigabatrin in treating addiction. These rights are subject to the right of the U.S. government, under limited circumstances, to practice the covered inventions for or on its own behalf. We may lose our rights to these patents and patent applications if we breach our obligations under the license agreement, including, without limitation, our financial obligations to Brookhaven. If we violate or fail to perform any term or covenant of the license agreement, Brookhaven may terminate the license agreement upon satisfaction of any applicable notice requirements and expiration of any applicable cure periods. Additionally, any termination of the license agreement, whether by us or by Brookhaven, will not relieve us of our obligation to pay any license fees owing at the time of such termination. If we fail to retain our rights under the license agreement, we would not be able to commercialize CPP-109, and our business, results of operations, financial condition and prospects would be materially adversely affected.

CFO is on a Consulting Agreement With the Company:

Effective May 2006, we amended our consulting agreement with Jack Weinstein, our Chief Financial Officer. Pursuant to the consulting agreement, as amended, Mr. Weinstein receives a monthly consulting fee of $7,500. As part of Mr. Weinstein’s consulting arrangement with us, he also received five-year options to purchase an aggregate of 300,000 shares of our common stock, all of which are currently exercisable. Options to purchase 200,000 shares of our common stock have an exercise price of $2.00 per share, and options to purchase 100,000 shares of our common stock have an exercise price of $4.35 per share.

In addition, Mr. Weinstein will receive a success fee of approximately $150,000 upon the completion of this offering. Pursuant to the agreement, $2,500 of the monthly consulting fees payable to Mr. Weinstein after April 30, 2006 are being applied towards this fee. The May 2006 consulting agreement amended the previous agreement dated October 2004 pursuant to which Mr. Weinstein received a monthly consulting fee of $5,000, in addition to the stock options described above.

Underwriters: First Albany and Stifel Nicolaus

Offering Details: The company is looking to raise up to $40 million in its IPO.

Bottom line: Though operating in an intriguing space, this is a single product company dependent on third party IP with a multitude of large potential competitors, and zero revenues to date. And why hasn't the CFO committed to join the company as an employee? Looks a little risky.

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