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The Risks and Rewards of Javelin Pharmaceuticals, Inc.

|Includes: HSP, Javelin Pharmaceuticals, Inc. (JAV), MYRX

Shares of the Javelin Pharmaceuticals Inc (AMEX: JAV) plunged 30% to close at $1.26 after the company announced that Therabel Pharma UK Limited ("Therabel"), a subsidiary of Therabel Pharma N.V. and Javelin's licensee of commercial rights to Dyloject™ (diclofenac sodium) in the European Union recently informed Javelin and publicly announced that it is withdrawing all batches of Dyloject (diclofenac 75mg/2ml) from the UK market with a Drug Alert Class 2 Medicines Recall.

As per UK’s Medicines and Healthcare products Regulatory Agency, these batches may be contaminated with small amounts of white particles. The particles are not readily visible and work is ongoing to determine the nature, size and risk posed by this contamination. In order to minimize risk to patients, all remaining stock is being recalled. A review of pharmacovigilance information, carried out by the marketing authorization holder, does not appear to indicate any detected safety concerns and these batches have been in use since 2008.

Last month Javelin announced that Hospira, Inc. (NYSE: HSP) and Javelin Pharmaceuticals, Inc. have entered into a definitive merger agreement providing for the acquisition of Javelin by Hospira for $2.20 per share in cash, or approximately $145 million. Upon the news the share price of Javelin rallied from $1.34 to close to the tender offer price (from Hospira) of $2.20. However, on May 19th 2010 the stock price took a beating after Hospira, Inc. announced the extension of the tender offer to purchase all outstanding shares of the common stock of Javelin Pharmaceuticals referencing to some unsatisfied conditions. The offer, which was scheduled to expire at 12:00 midnight, New York City time, on May 18, 2010 (the end of the day on May 18, 2010) has been extended until 12:00 midnight, New York City time, on June 2, 2010. Javelin Pharmaceuticals disagreed with the statement by HSP and believes the latter is using a DYLOJECT supply chain issue in the UK as the basis for extending the tender offer. However after the expiration of the offer on June 2nd 2010, if all conditions of the tender offer have been met, Hospira intends to acquire all of the remaining outstanding shares of Javelin common stock by means of a merger under Delaware law for the price of $2.20/share.

DYLOJECT is marketed in the UK and a NDA is currently pending in US with a PDUFA action goal date of 10/3/2010 under a standard, 10-month review. Last month, JAV terminated an all-stock merger agreement with Myriad Pharma (NASDAQ:MYRX) in favor of the higher all-cash bid from Hospira. If approved, Dyloject will be the first IV non-steroidal anti-inflammatory drug (NSAID) marketed in the U.S. as a single agent for the management of acute moderate-to-severe pain in adults since ketorolac in 1990. The active ingredient in Dyloject is diclofenac sodium, a widely prescribed oral NSAID.

Given the stock price already plunged to the pre-merger agreement levels and trading close to 52 week lows and the tender offer still in place as of current (Note that Hospira extended the offer to June 2nd 2010 even after knowing that there are DYLOJECT supply chain issues in the UK), this clearly could be an excellent speculative play which may pay off 74% premium on the current share price within less than 10 days if the merger deal with Hospira closes without any further issues.

By Venkat Nukala and Philip Runfeld

Disclosure: Mr. Nukala has long position in JAV.