Furiex Pharma's Cash Will Likely Run Out Before Investors Feel Secure

Includes: FURX, PPDI
by: Oozing Alpha
Furiex Pharmaceuticals (NASDAQ:FURX), spun off from Pharmaceutical Product Development (PPDI) on 6/14/10, is a $10 stock with net cash (cash minus all liabilities) of $10 per share. It earns royalties on two drugs already in the market with potential milestone payments of $14.40 per share. It has three other programs in its R&D pipeline. According to some Street estimates, the value of Furiex’s royalties & pipeline is $30-$36 per share.

The entire float has traded since the spin-off, and selling pressure may soon begin to recede. As part of the spin-off, 18% of the equity is set aside for management. In addition, the Chairman owns 6% of the outstanding shares.

Spin-Off Background: On June 14, 2010, PPDI, a Contract Research Organization, spun off its drug discovery business to shareholders in a tax free transaction. The main motivation behind the spin-off was to separate a cash flow-generating, service business from a cash-utilizing, biotech division. PPDI has 118 mm shares and for every 12 shares of PPDI, shareholders got one share of FURX.
FURX has a market cap of $100 mm, tiny when compared to PPDI's $2.9 billion equity cap. Hence, the spun-off stock is not likely to have much appeal for PPDI shareholders who are mainly interested in the CRO business or those can’t own a small-cap stock.

Sure enough, FURX began trading in the high teens on June 1 and has dropped to $10 on no new news.

Value Proposition: I was browsing through some old analysts’ reports written when PPDI announced the spin-off to see what they thought of the development business (now Furiex). In a report dated 10/29/2009, Barclays had assigned a value of $1 per PPDI share to Priligy and $1 per PPDI share to Alogliptin + Dermatology portfolio. This translates into $236 mm since PPDI has 118 mm shares out. Add to this net cash of $94 mm injected into the spin off and it adds up to $33 per FURX share. Thomas Weisel, in a report dated 10/27/2009, valued Spinco at $2.50-$3.00 per PPDI share or $30-$36 per FURX share.
Pipeline: Furiex receives royalties from two drugs currently in the market and has three programs under development.
Priligy, the first and only approved premature ejaculation drug, is currently being sold by Janssen-Cilag (subsidiary of J&J (NYSE:JNJ)) in 15 countries in the EU, Asia and Latin America. The drug was not approved by the FDA in 2005. In order to re-file, Janssen is conducting Phase III-b clinical trials. If successful, the Company could receive $65 million in future regulatory and sales milestone payments (likely 2013 event). It is difficult to gauge potential sales due to a lack of comparable drugs. The Company estimates that 29 million men in the U.S. between the ages of 25 and 80 suffer from PE. Furiex has no further R&D cost commitments for Priligy. However, it is obligated to pay 5% royalty to Eli Lilly (NYSE:LLY) (original licensor) on any sales in excess of $800 mm each year.
Alogliptin, a drug used to treat type-2 diabetes, was recently launched in Japan by Furiex’s partner Takeda (OTCPK:TKPHF) Pharmaceuticals. The drug is undergoing trials for approval in the EU and the US (the outcome is likely a 2013 event). FURX could receive $77.5 million in milestone payments in addition to mid-single to low double digit royalties.
There are three additional programs in various stages of development which will consume a significant portion of the Company’s current cash balance in 2010 and 2011.
Fluoroquinolone (antibiotic) and Mu Delta (IBS-Diarreahal) are undergoing Phase II trials. PPD 10558 is a cholesterol lowering statin which has completed Phase I.
I expect that Furiex will end 2010 with $50-$60 million cash and will spend $40-$50 million in 2011.
Significant Insider Ownership: Approximately 18% of the total shares outstanding have been reserved for issuance to management and employees, under the Company’s 2010 Stock Plan. Of that, 9% were issued at the time of the spin-off.
Dr. Eshelman, PPDI/FURX’s founding chairman, owns 6% of FURX shares. In addition, he was granted an option to purchase 2% of the new shares struck at $9.11 per share and will be granted an option to acquire an additional 1% on the 2nd anniversary of the spin-off.

Risk: There is no significant potential milestone payment due to the company in the near term. Therefore, Furiex’s cash balance will most likely be significantly depleted before investors find out whether Fluoroquinolone and Mu Delta Phase II trials are successful.
The other risk is the limited number of shares outstanding (9.9 million). If a large percentage of these shares end up with a concentrated ownership, it could limit liquidity.

Disclosure: Long FURX

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