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.
- 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
- 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
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.
Aim At The Osteoporosis
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
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
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.
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.
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
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.
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.
52-Week Price Range:
52-Week Target Price:
Value: $557.7 million
Outstanding: 38.7 million
Fiscal year: December
Book Value Per
Past 5Yr EPS Growth:
2005E 12 mos
($0.80) ($0.47) ROE:
N/A N/A N/A
($1.00) ($0.93) ROA:
N/A N/A N/A
($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
will do no better than the market in the next 6-12 months.
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
The meanings of the investment ratings used in this report as of 9/9/02
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 expected to outperform the relevant broad market benchmark
over the next 12 months.
Industry expected to perform in-line with the relevant broad market
benchmark over the next 12 months.
Industry expected to underperform the relevant broad market benchmark
over the next 12 months.
*Broad market benchmark is
defined as S&P 500
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The company discussed in this report is or was within the last 12
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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
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%
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
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