AspenBio Pharma Poised for a Breakout Year

Includes: NVS, RIOT
by: Dan Weiss

In my last report on AspenBio Pharma (APPY), titled “Bursting with Possibilities” dated July 18, 2009 I discussed the very large potential of the firm’s development of a diagnostic test for the detection of appendicitis which would allow for faster diagnosis (15 minutes) and prevent a large number of unnecessary and expensive CT scans. The new diagnostic test developed by the company is a blood based diagnostic test, which the company has termed AppyScore that acts as a rapid assay system for the aid in detection of appendicitis.

In June 2009, AspenBio Pharma filed for 510(k) approval with the ELISA format that will act as a predicate device for the rapid assay device which will include the cassette and reader. In August 2009, the FDA requested additional information from the company prior to approval of the ELISA format.

In the late summer of 2009, AspenBio began an additional clinical study to support the usage of the device which has enrolled 450 patients across 13 hospitals throughout the United States with a goal to receive statistical significance of the data. The company has announced that they will be meeting with the FDA in January to answer any final questions the agency has and hopes to have the FDA questions answered in full prior to the deadline of February 10, 2010.

Note that the primary purpose of the additional study is to improve the negative predictive value of AppyScore in combination with a white blood count to more than 90% which would be an improvement over the prior reading of 87%, which is still significantly above that of a CT scan at approximately 78% and would likely signal wide scale acceptability of the test by emergency room physicians.

Following the approval of the ELISA device, AspenBio will file for approval of the instrument and cassette with the ELISA as a predicate device after an additional clinical study with final approval estimated in late 2010 or early 2011.

According to independent reports, the potential market for the appendicitis test across the globe is around $1 billion per year. In addition to the appendicitis test, the company also has a veterinary science unit where they are collaborating with Novartis Animal Science (NYSE:NVS) on health reproductive products that according to AspenBio Pharma have a potential market size of $230 million although these are rather early in the process.

Considering the potential life-saving features of the device assisting in the detection of appendicitis along with the favorable political and regulatory environment for lower cost medical diagnostic tests the stock has the potential for very significant upside to current levels of around $2.18 per share. The company’s shares currently trade with a market capitalization of just north of $80 million with a relatively healthy balance sheet with approximately $15 million in cash and relatively low levels of debt. The company raised more than $8 million in an equity offering in October 2009 which should give them sufficient capital through the launch of AppyScore.

Given the potential large market for the appendicitis test shares could reach $12-16 per share if given full approval of the device by the FDA early in 2011 with potential additional catalysts of foreign approvals thereafter. It is also very possible that the company develops partnerships or is potentially acquired prior to the approval. The management team of the company led by Daryl Faulkner who started as the interim CEO of the company in early 2009 is highly experienced in developing strategic relationships and in building companies from early stages to commercialization of products. Mr. Faulkner’s prior background includes 15 years at Abbott Laboratories and with two biotechnology companies- Diagen and Invitrogen who were both acquired for substantial premiums.

The largest potential risks to my thesis are a decision by the FDA to either delay or reject the AppyScore product or a failure of the soon to be released additional studies to show strong enough results for emergency rooms to utilize the device. Due to the ability of AspenBio to identify the type and terms of patients for the new clinical studies and the successful results with the device combined with a WBC in patients in past studies I find the odds of the clinical study not being found to be clinically significant to be highly remote.

In terms of the FDA decision, I anticipate approval of the ELISA device in either February (if FDA finds new study to be large enough) or April (if additional patients are required to be included in the study) of this year with full approval of the rapid assay device in late 2010 or early 2011.

Despite these risks, I consider AspenBio to be one of the best ideas within the biotechnology industry for the coming year.

Disclosure: Author holds a long position in AspenBio