Oscar Schafer: Flamel Tech Has Room To Run (FLML, GSK)

Includes: AVDL, GSK
by: Oscar Schafer

In the annual Barron's Roundtable of leading investment pros, Oscar Schafer, proprietor of O.S.S. Capital Management, sees ongoing opportunity in the stock of biopharmaceutical firm Flamel Technologies (FLML):

In June 2003 I recommended Flamel Technologies at $11.65. Since then, there have been several positive developments only partially reflected in the stock at $19.72. A world-class board has been put in place. A new CFO has joined from Aventis. The company is financially stronger and has nearly $4 a share in cash. Its two technologies have completed additional human clinical trials, and the first major product is expected to launch later this year.

Barron's: Remind us, what does Flamel do?

Schafer: It has two ways of modifying drugs. The large pharmaceutical companies are facing patent expirations on major drugs. Anything they can do to minimize generic competition is money in the bank. One strategy is to modify existing drugs and switch patients to the new formulation, so that when the old drug's patent expires, there are no patients on it. Flamel's most important partnership is with GlaxoSmithKline [GSK], which manufactures Coreg. The drug has sales of $1 billion in the U.S. alone. The patent expires in late 2007, and Glaxo's CEO has predicted the company will launch once-a-day Coreg CR in late 2006, a new formulation that uses Flamel's technology.

Royalties in this type of arrangement usually are 5% to 10%. We think Flamel will earn close to $2 a share from this partnership. Assuming the company is successful in obtaining R&D milestones to cover its overhead, royalties and potential revenue streams from future partnerships will be all profit. Although the timing is always uncertain in this industry, within two or three years the company will earn $3 to $5 a share and could be two to three times its current price. It will be cash-flow positive.

FLML 1-yr chart:

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