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NPS Pharmaceuticals, Inc. (NPSP) Stock Report
Speculative Stock February 14, 2005
  Before the market open

[Financial Data] [Industry Outlook]

Company Business: A biopharmaceutical company focused on discovering, developing and commercializing small molecule drugs and recombinant proteins. Its product candidates, which are in various stages of clinical and preclinical development, are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders.

Summary & Recommendation: 
  • We are initiating coverage of NPSP with an Outperform rating and adding the shares to the speculative category of the Pershing Recommended List.  If our 12-month price target of $22 is attained, the potential investment appreciation could reach 52 percent above current levels.  
  •  NPSP’s most advanced late-stage pipeline candidate, Preos, represents an opportunity to cut into a niche within the osteoporosis market that is currently occupied by one other competitor.  If all goes according to plan, this candidate could be approved by the regulatory agencies in the U.S. and Europe during  the first half of 2006.
  •  In Sensipar, NPSP collects royalties on product sales by its collaborative partners. The product, already approved for treating certain patients with  secondary hyperparathyroidism, should account for a small but growing revenue figure on NPSP’s income statement. New indications and a more favorable reimbursement platform looking ahead could stimulate this product’s sales.  
  • Teduglutide, a pipeline candidate that the company is evaluating in multiple gastrointestinal indications, is in a Phase III clinical trial for short bowel syndrome and in a Phase IIA study for Crohn’s disease.
  •  From a financial perspective, NPSP does have $224 million in cash and cash equivalents as of the third quarter’s end. Although the company’s recent debt offering will be financed with Sensipar royalties, we expect these royalties that NPSP receives to be sufficient for covering the resulting interest expense during the next several years.

Industry Outlook

Biotechnology stocks have not exactly had an inspiring run out of the gate in early-2005. On a year-to-date basis, the AMEX Biotechnology Index, the Dow Jones U.S. Biotechnology Index and the Nasdaq Biotechnology Index are sporting losses of 3.3 percent, 4.5 percent, and 5.9 percent, respectively.

We do not foresee a breakdown in approvals for new molecular entities (NMEs), which could potentially enjoy a third consecutive year of growth in 2005.

Large pharmaceutical firms became increasingly aggressive in 2004 with respect to attempting to fill their pipelines through licensing and collaborative partnerships. As these agreements become more costly to these mature organizations, a trend towards simply purchasing smaller biotechnology companies outright could begin to emerge.

While valuations are not overly-compelling in the biotechnology sector, we believe there continue to be a select group of companies that have intriguing late-stage clinical opportunities that are being ignored.

Taking Aim At The Osteoporosis Market

NPSP’s leading pipeline candidate is Preos, a potential treatment option for osteoporosis. Osteoporosis causes approximately 1.5 million fractures each year in the U.S. alone. According to the National Osteoporosis Foundation, roughly 10 million men and women in the U.S. aged 50 and above have osteoporosis and another 34 million are osteopenic (nearing osteoporosis). These people are at high risk of fractures due to their low bone mineral density. By 2015, some researchers surmise that osteoporosis could affect 41 million Americans. Currently, osteoporosis and fracture-related expenditures tally $17 billion in the U.S. annually. Therefore, a new cutting-edge therapy in this segment could reap significant financial rewards. 

The osteoporosis landscape as it stands today contains significant competition.  Many of the existing therapies, such as Merck’s (MRK-$28.78, Neutral) Fosamax and Sanofi-Aventis Group (SNY-$37.19, Not Covered) Actonel, work towards preventing  incremental bone loss by inhibiting bone resorption. However, many of those therapies do not have a positive impact upon bone mineral density. Eli Lilly & Co.’s (LLY-$54.86, Neutral) Forteo has been shown in clinical trials to have reduced fractures and has provided rapid increases in bone mineral density in post-menopausal women with severe osteoporosis. NPSP hopes that its clinical development program shows comparable or better efficacy with an improved side effect profile.  Forteo has been linked to osteosarcoma in animals (bone cancer) and has a black box warning reflecting this risk on its label.

In March 2004, NPSP reported positive results from its 18-month, 2,600 patient, Phase III clinical trial, TOP.  The TOP study evaluated Preos’ ability to reduce fractures and build new bone in women with osteoporosis. Specifically, the patient population included post-menopausal women who had osteoporosis and who might have suffered a fracture, but were not receiving drug or hormone therapy for osteoporosis.  Women received daily dosing of either Preos or placebo for an 18-month period. The Preos-treated population achieved a 59 percent relative reduction in vertebral fracture risk, as the rate of vertebral fractures within the placebo group was 3.4 percent compared to 1.4 percent in the Preos group. Furthermore, a 68 percent relative reduction in vertebral fracture risk was achieved in Preos-treated patients entering the trial without having a previous fracture. Additionally, patients treated with Preos had fewer total fractures at non-vertebral sites versus placebo-treated patients, but not at a statistically significant rate.

NPSP also conducted a Phase III clinical trial called POWER, which looked at the effects of Preos in osteoporotic women undergoing estrogen replacement therapy. This supplemental, 150-patient study was supposed to conclude last fall but instead was wrapped up six months early due to concerns relating to estrogen therapy. The results from this study have not been published but will be included in the candidate’s regulatory filing.

In addition, the 24-month, 238-patient, PaTH study was coordinated by the University of California and sponsored by the National Institutes of Health (NIH) and tested whether Preos is more effective in building bone mineral density than MRK’s Fosamax, and whether the combination of the two products is more effective than either therapy alone. There was no evidence of the two therapies working better in combination with each other, and Preos appeared to be the superior therapy. Furthermore, NPSP has received  information from the second year of this trial, during which all patients received Fosamax. The company saw evidence of gains in bone volume and newly added bone architecture in patients given Preos during the first year were sustained and further increased with Fosamax treatment during the second year. Specifically, the patients in this treatment arm (Preos in year 1 and Fosamax in year 2) enjoyed bone mineral density improvements in the spine (+12 percent), hip (+5 percent), and trabecular bone (+30 percent). These results were noticeably better than the other treatment arms in study. Sustaining these benefits is a critical element, as there is generally a diminishing effect on bone health following 12 to 18 months of therapy.

Based upon remarks made by management on February 7th, the company now anticipates filing a New Drug Application (NDA) for Preos with the U.S. FDA shortly after submitting its European filing, which is currently expected to occur during March 2005.  The European version of Preos will be marketed as Preotact. Delays associated with Preos filing in the U.S. have recently pressured the shares of NPSP.

Although Forteo (or Forsteo outside the U.S.) is expected to be the chief competition for Preos, NPSP maintains that it will not attempt to outspend LLY.  Rather, the company plans to employ a very targeted marketing effort. NPSP thus far has elected not to partner the product in the U.S., but has selected Nycomed as its European partner.  NPSP feels that the marketing expertise of Nycomed makes it a good complement for Preos. NPSP has a manufacturing agreement with Boehringer Ingelheim to produce its candidate. As a point of reference, Forteo sales amounted to $238.6 million ($198.0 million – U.S.; $40.6 million – ex-U.S.) during 2004 and $65.3 million ($63.2 million – U.S.; $2.1 million – ex-U.S.) in 2003. We anticipate peak annual sales of Preos exceeding $500 million.

On a retail basis, one year’s worth of Forteo therapy costs approximately $7,000.  In terms of use, more than 100,000 patients have used Forteo.  Roughly 42 percent of patients receive treatment for one year, while 38 percent make it 15 months. The inconvenience of injectable therapy and its need to be refrigerated are two limiting factors. Moreover, because osteoporosis is a silent disease, asymptomatic patients who aren’t fracturing regularly can become lazy.
Forteo’s existing label does restrict patient exposure to 24 months of therapy.  There is no evidence suggesting that patients could not switch from Forteo to Preos. More strategically, NPSP is thinking about different regimens such as two shorter therapeutic periods sandwiching a hiatus in treatment.

The Story Behind Sensipar

More than 1 million people in the U.S. suffer from hyperparathyroidism, a condition due to the oversecretion of parathyroid hormone (PTH) by the parathyroid glands. Primary HPT typically affects postmenopausal women while secondary HPT usually affects kidney dialysis patients. Sensipar (marketed as Mimpara in Europe), NPSP’s treatment for secondary hyperparathyroidism (HPT) in kidney failure patients on dialysis, was approved by the FDA in March 2004 and launched by Amgen (AMGN-$63.09, Outperform) the following month. Regulatory clearance for the product in the European Union was obtained in October 2004.  Additionally, approvable letters for Sensipar were also issued last spring for secondary HPT in patients with chronic kidney disease not on dialysis and for primary HPT pending the results of respective studies.

Secondary HPT often develops during the early stages of chronic renal failure before dialysis is necessary. Secondary HPT is characterized by the enlargement of all four parathyroid glands and elevated circulating levels of PTH. When renal function deteriorates, the body cannot maintain necessary levels of free calcium in the blood. Parathyroid glands then enlarge and produce increased amounts of PTH to compensate for the body’s inability to normalize serum calcium levels. However, continuously elevated levels of PTH in the blood can lead to bone loss and pain, bone deformities, and severe generalized itching. Approximately 30 percent of the two million patients in the U.S. with chronic renal failure are affected by secondary hyperparathyroidism.

AMGN has development and commercial rights to Sensipar and related compounds for the treatment of hyperparathyroidism and other indications other than osteoporosis worldwide, excluding Japan, China, Hong Kong, North Korea, South Korea and Taiwan. These countries fall under NPSP’s agreement with Kirin Brewery. If this agreement is terminated, NPSP’s collaboration with AMGN will include these territories. NPSP collects a single-digit royalty each year of its collaboration with AMGN on sales of Sensipar that graduates to a low double-digit rate after passing a certain reasonable threshold. The two-tiered agreement resets at the beginning of each year. We estimate that NPSP receives a 10 percent royalty on sales of this product from its partners, with worldwide peak annual product sales potentially exceeding $500 million.

NPSP’s Gastrointestinal Candidate

Teduglutide is a gastrointestinal candidate that NPSP is developing as a potential treatment for short bowel syndrome and Crohn’s disease. Short bowel syndrome typically arises after a resection of the bowel, and affects the gastrointestinal tract’s ability to absorb nutrients and water. Patients with short bowel syndrome are typically characterized as suffering from malnutrition, severe diarrhea, dehydration, fatigue and weight loss. NPSP believes that there are roughly 25,000 adults and 7,000 children in the U.S. with short bowel syndrome. For this indication, the FDA has granted orphan drug designation for Teduglutide. Crohn’s disease causes inflammation of the gastrointestinal tract, which can lead to intestinal blockage, the development of ulcers, and malnutrition. This candidate could be useful in decreasing patient dependence on intravenous feeding, which is quite costly and can have damaging effects upon certain organs such as the liver.

Currently, NPSP is enrolling patients in a Phase III clinical study for short bowel syndrome. The company has not disclosed any specific timelines relating to this trial, because the scarcity of patients with this condition makes the recruiting process challenging. An earlier Phase II trial had shown improved intestinal absorption and a statistically significant increase in the epithelium lining of the intestine. Additionally, NPSP is enrolling patients in a Phase IIA clinical trial for Crohn’s disease. With a plethora of competing companies conducting trials on Crohn’s disease, enrolling patients in this trial has also been a slow, time-consuming effort.

Financial Outlook & Valuation

NPSP had cash and cash equivalents of approximately $224 million as of the close of the third quarter of 2004. The company has not yet released its fourth quarter and year-end 2004 financials. The firm’s cash balance is likely to be elevated in coming quarters, because the company recently raised additional capital in a rather unique fashion. Instead of utilizing a standard equity offering or convertible debt, the company decided to go ahead with a $175 million non-convertible note offering. Following the initial year of the notes, the company will finance the interest expense with royalties it receives from AMGN relating to Sensipar sales. By foregoing Sensipar royalties for the foreseeable future, NPSP limits further dilution to its common shares. The recently raised capital will be used to fund the advancement of existing pipeline candidates, potential in-licensing opportunities, and the building of its sales, marketing and manufacturing capabilities.

NPSP’s financial obligations appear manageable over the next three years. The company’s $192 million 3 percent convertible debt offering matures on June 15, 2008. 

Lower Preos-related clinical trial expenses should account for lower levels of research and development costs in 2005-2006 than in 2004. We expect sharp increases in general and administrative expenses as the company readies itself for a potential launch of Preos.

In terms of the bottom line outlook, we do not foresee NPSP becoming profitable during the next couple of years. The timing of and whether the firm achieves  profitability will be highly dependent upon the ramp of Sensipar sales and Preos gaining regulatory approval. As such, our 12-month price target of $22 assigns no value to Teduglutide reaching the market. Moreover, we do not view the company’s promotion of Kineret (for rheumatoid arthritis) to be a key catalyst for pushing NPSP closer to profitability. The company’s intentions of going forward with a potential U.S. launch of Preos without a large pharmaceutical partner with deep pockets will be costly.

Recent Price:    $14.30                                             Dividend:       
52-Week Price Range:    $34.15-14.51                      Rate    N/A
52-Week Target Price:    $22                                     Yield    N/A
                                                                         Industry Rank:    Overweight   
Earnings Per Share                                         Market Value:    $557.7 million
2006E    ($3.29)                                       Shares Outstanding:    38.7 million   
2005E    ($4.26)                                    Institutional Holdings:    95%   
2004      ($4.21)                                                Sales (12-mos):    $15.2   
Fiscal year: December                           Sales/Market Value:    0.02x   
                                                            Book Value Per Share:    $1.03   
P/E:                                                                     LTD/Capital:    72%   
2006E    N/A                                                     Current Ratio:    6.92:1   
2005E    N/A                                        Past 5Yr EPS Growth:    N/A       
                                                                                                     2006E    2005E    12 mos
Qrtly EPS:    1Q           2Q          3Q           4Q           Price/Book:    18.5x    16.4x    14.0x
2006E:       ($1.07)    ($0.95)    ($0.80)    ($0.47)        ROE:    N/A    N/A    N/A
2005E:       ($1.26)    ($1.07)    ($1.00)    ($0.93)        ROA:    N/A    N/A    N/A
2004A:       ($0.96)    ($1.11)    ($1.02)    ($1.12)        Rel P/E S&P 500:    N/A    N/A    N/A

Important Disclosures Required by NYSE Rule 472

Referring to 3-year price chart, before 9/9/02, the meaning of investment ratings were:
Buy:  Stock expected to outperform the market, S&P 500, by at least 15% in the next 6-12 months.
Hold/Buy:  Stock will do no better than the market in the next 6-12 months.
Hold/Sell:  Stock will lag the market in the next 6-12 months.
Sell:  Stock is unattractive and will lag the market by 15% or more in the next 6-12 months.

The meanings of the investment ratings used in this report as of 9/9/02 are:
Outperform: The stock’s total return is expected to exceed the industry average by at least 10% (or more, depending on perceived risk) over the next 12 months.
Neutral: The stock’s total return is expected to be in line with the industry average (range of + 10%) over the next 12 months.
Underperform: The stock’s total return is expected to underperform the industry average by 10% or more over the next 12 months.

Industry ratings:
Overweight:  Industry expected to outperform the relevant broad market benchmark over the next 12 months.
Market-weight:  Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
Underweight:  Industry expected to underperform the relevant broad market benchmark over the next 12 months.
*Broad market benchmark is defined as S&P 500

To obtain important disclosure information regarding Pershing's rating system, valuation methods, and potential conflicts of interest with respect to the companies covered in this report, please call (201) 413-4440 or send a request via e-mail to E-mail requests should include the name and date of this report and a list of the companies for which the disclosure information is requested.

As of the date of this report, Pershing Trading Company acts as a specialist on a regional exchange in the securities of the subject company (PFE).
The company discussed in this report is or was within the last 12 months, a client of Pershing, LLC, which has received from each such company securities related non-investment banking fees.

Target Prices are determined using the Least Squared method to calculate historic EPS growth.  This rate is then straight lined looking 3 years forward in an attempt to project the future trend.  The result is then adjusted for the expected rate of inflation and present valued using a 3% discount rate.  The EPS estimate is then multiplied by the 5 year average P/E after eliminating the extremes to establish the theoretical target price.  The analyst has the ability to over ride the past growth rate and historic P/E range to reflect anticipated changes at the company and in the industry.

Risk:  The largest single factor impacting the stock valuation of this company is the progress related to Preos.  This candidate represents a potential treatment for osteoporosis that could address a sizeable population.  New indications for approved product, Sensipar, will also have a baring on the firm’s equity valuation. Regulatory risk also remains a key factor.

As of the date of this report, Pershing Investment Research rates issues followed: 43% outperform (buy); 44% neutral (hold); 14% underperform (sell).
As of the date of this report, this analyst rates issues followed: 39% outperform (buy); 35% neutral (hold); 26% underperform (sell).

Additional information is available upon request.  This report has been prepared by the investment research department of Pershing LLC ("Pershing") from original sources and data we believe to be reliable, but we make no representations as to its accuracy or completeness.  Analysis of past market events may not predict future market activity.  The contents contained herein are owned by Pershing and are protected by the United States Copyright Act of 1976, as amended and the copyright laws of other countries.  The material contained in this report may not be copies, reproduced, republished, posted, transmitted or distributed in any way without prior written permission.  Modification of the materials or use of the materials for any other purpose is a violation of the copyrights and other proprietary rights of Pershing or its third-party information providers.  This report is prepared solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state or jurisdiction where such an offer or solicitation would be illegal.  Pershing, its affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in the securities mentioned herein.  If Pershing is used in connection with the purchase or sale of any security discussed in this report, it may act as a principal for its own account or as agent for both the buyer and seller.  Technical and fundamental opinions expressed herein may differ from each other and from the opinions expressed by research departments of other divisions of affiliates of Pershing.

Copyright 2005 Pershing LLC




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