My Playbook for Emisphere

| About: Emisphere Technologies, (EMIS)

Everyone runs with a playbook. Bill Belichick leading the Patriots to a Super Bowl title, Joe Torre throwing signs out during a World Series or Phil Jackson running his triangle offense to another championship. Like the professional coaches in sports, I too have constructed a playbook to lead me and my Seeking Alpha followers to our own championship with a speculative biotech.

The company is Emisphere (EMIS) which holds an oral delivery technology, Eligen, that two large pharmaceutical companies Novartis (NYSE:NVS) and Novo Nordisk (NYSE:NVO) are trying to leverage to win drug approval in significant markets.

Here's my X's and O's for a 2011-2012 championship run.

Emisphere is fast approaching an inflection point in its quest for a championship. In August, their partner Novartis will complete a 3 year 4,500 patient comprehensive Phase III study for osteoporosis (OP). Osteoporosis affects over 75 million people worldwide and is estimated to be over a $10 billion market today and could approach $13-15 billion by 2016. Novartis has publicly disclosed that they'll be filing with the FDA for OP in 2011. They already showed superb safety and efficacy in reduced bone fractures in the two 1 year interim looks by the Data Monitoring Committee, so an FDA approval is a high probability in early 2012.

Emisphere and Novartis have worked for over 10 years to bring the world a safe and effective drug for OP. Novartis by my calculations has spent over $150 million in bringing this drug to closure, so the stakes are high for Novartis and Emisphere in the months ahead. Novartis should garner 15-20% of the overall OP market by 2016 and EMIS has a royalty agreement with Novatis which some put at 10-12%. The market potential for Novartis is $1.5-3.0 billion. Back of the napkin math puts $100-300 million into Emisphere's arms if the OP trial goes strong.

Emisphere is in need of cash. They only have cash until the end of June per their last conference call. Do not panic, they've been there twice before over the past two years. I believe the chances of a dilutive financing is better than 70%, but the chance for a last minute non-dilutive financing is still possible. The company just finished two phase I trials with Novartis and Novo Nordisk in April, so the company could present a discounted milestone arrangement to either party to avoid further dilution.

How do we play the stock from here?

I would start to accumulate Emisphere right here at $103 million market capitalization (73 million shares outstanding), a complete steal if positive news arises. I would put a third of the proceeds to work here and after a dilutive deal or a non-dilutive deal I would put the other two thirds of the investment to work. I see EMIS being $10 on positive results from OP and $0.50 on negative results.

Here's the other potential catalysts:

Novartis finished two phase III trials for osteoarthritis (OA) in August of 2010 for Europe (EU) and one in April 2011 (U.S.). The trials passed the safety profile and met 2 out of the 3 primary endpoints. The x-ray end point failed but the MRI, an additional measure by Novartis, indicated strong cartilage growth in the joint spaces which could be used in place of the x-ray. There have been cases where the FDA will accept the MRI data in place of the x-ray. I think Novatis is awaiting the OP data in August before deciding how they work OA. OA could be filed post OP and could bring significant milestones to Emisphere. An approval for OA would add another $100-200 million in revenues to Emisphere.

Novartis finished phase Ib for PTH/OP in April and the start of Phase II or a fast track notification should lead to a "generous" milestone payment for Emisphere.

Novo Nordisk finished phase I for GLP-1 in April and the start of Phase Ib or a phase II should bring a milestone payment to Emisphere.

Novo Nordisk signed a partnership in Jan 11 for an oral insulin pill, the start of Phase I should bring awareness to Emisphere.

Emisphere received GRAS approval for a high dosage oral B12 pill in 2010 and the company is awaiting patent extension to 2027 which could be announced in the next 2-4 months. The extension could bring a tier one partner/acquirer or allow them to bring it to market themselves. The market is estimated at $1 billion for high dose injections in the U.S. alone.

Who can we compare Emisphere to?

One company that comes to mind is Amarin (NASDAQ:AMRN). Amarin received positive phase III data on their drug on April 18th, 2011 sending the shares from $7 to $19 per share. The shares had been trading in the $1 range for 3 months in 2010 as the company battled to get their drug to market and stay funded. The company did a few dilutive financings prior to their successful result.

Prior to FDA approval AMRN had 98 million shares outstanding, EMIS has approximately 73 million shares outstanding. Now, AMRN has (fully dilutive) 165 million shares outstanding and a $3 billion market cap, I see EMIS as a mirror image of AMRN after the OP approval by the FDA.

Who are the investors in Emisphere?

One group owns 44% of the 73 million shares. That group is MHR. In 2010, MHR had two companies that they were top shareholders in bought out. Those two companies were L-1 Identity Solutions (NYSE:ID) and Pride International (NYSE:PDE). Two other companies that they are top holders in are Leap Wireless (LEAP) and Metro PCS (PCS). They are both rumored to be bought out after the AT&T (NYSE:T) and T-Mobile merger. They do not sell their shares on the way up, so they keep the float tight for existing shareholders. They buy their companies at deep discounts and exit via buyouts. I see my work equaling MHR's on EMIS, so do not be surprised to see Novartis bidding for Emisphere or for the OP & OA programs in the next 12-24 months or Novo Nordisk bidding for the GLP-1 or oral insulin program in the years ahead.

The season ends with a dilutive or non-dilutive financing in the weeks ahead and the playoffs start after Novartis releases the data on their phase III trial for OP in September/October. The championship occurs for each individual that sells for a gain, but I'm not ruling a dynasty out over the next 5 years on the Emisphere playbook.

Disclosure: I am long EMIS.

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