NEWS
Market Features
Aspreva Readies for Prime Time
By Marc Lichtenfeld
Senior Columnist
8/28/2006 10:35 AM EDT
http://www.thestreet.com/markets/marketfeatures/10305906.html
Finding a biotech company that makes money is rare, especially
if it's not one of the established giants like Amgen (AMGN)
, Genentech (DNA) or Gilead Sciences (GILD) .
Of the 227 stocks classified as biotech by Yahoo! Finance,
only 28 of them have a price-to-earnings ratio. Why then, in
a sector where investors are constantly panning for gold, is
Aspreva Pharmaceuticals (ASPV) ignored when it appears to be
on the verge of breaking through?
Aspreva's strategy consists of purchasing the rights to approved
drugs from large pharmaceutical companies and finding new uses
for them.
The company's first effort appears to be going well. In 2003,
Aspreva licensed Roche's CellCept, an immunosuppressant approved
to prevent the rejection of organ transplants. Since then, Aspreva
has been testing the drug for use in the rare autoimmune diseases
myasthenia gravis, pemphigus vulgaris and lupus nephritis, a
kidney ailment afflicting lupus patients. The drug has performed
well in trials and approval for all three indications is expected
in 2007.
Dr. Ellen Ginzler, professor of medicine and chief of rheumatology
at State University of New York Downstate Medical Center in
Brooklyn, ran a trial comparing CellCept to Cytoxan to treat
lupus nephritis. Cytoxan is a long-time chemotherapy agent from
Bristol-Myers Squibb (BMY) that has been the standard for treating
lupus nephritis.
The goal of the study was to see if CellCept was less toxic
than Cytoxan. Not only did patients in the program suffer fewer
side effects, CellCept performed better than Cytoxan.
With no new lupus drug in the past 40 years, the medical community
already appears to be adopting CellCept. Ginzler says the drug
"is already considered the first line of therapy"
for people with the illness, despite the fact that it has yet
to be approved in the U.S. or Europe for lupus nephritis. CellCept
was approved in Malaysia last month.
Ginzler believes once the FDA gives the green light to CellCept,
at least 50% of the 200,000 patients in the U.S. suffering from
lupus nephritis will be prescribed the new drug.
A representative from Aspreva says roughly 70% of the company's
CellCept revenue comes from lupus, with the rest stemming from
the other indications and rheumatoid arthritis. In other words,
this is a biotech company with $176 million of royalty revenue
over the past 12 months, despite having no product approved
yet.
The royalties all come from off-label uses of CellCept. During
that time frame, Aspreva's net income was $100 million and cash
flow totaled $32 million. Additionally, the company's balance
sheet is clean with $191 million in cash and short-term investments,
and lists practically no debt. Aspreva's cash on hand can cover
all current liabilities.
Aspreva closed Thursday at $22.40, giving it a market cap of
around $776 million. The stock, though, is trading at less than
7 times projected 2006 earnings of $3.37 a share. One hedge
fund manager, who is long the stock, explains why that is. "The
street is obsessed with the patent expiry," says the fund
manager, who didn't want to be named. CellCept's patent is set
to expire in May 2009 in the U.S. and November 2010 in Europe.
The Aspreva representative says the company isn't aware of
any filings for competing products, but with $1.4 billion in
worldwide sales of CellCept, the company fully expects there
to be some on the horizon. Aspreva's management is working at
ways to protect the patent, but there are no guarantees that
they will be successful.
To continue fueling its growth, Aspreva's main objective is
to partner with another company with an existing drug and repeat
the same procedure it's used with CellCept. The advantages of
this strategy over discovering a new compound are lower costs
and an established safety profile.
With its strong balance sheet, Aspreva would also likely consider
an acquisition of a similarly positioned company. Additionally,
it could look to expand CellCept's label beyond the three new
expected indications, although that could depend on the patent
situation.
Wall Street expects Aspreva's earnings to balloon to $5.55
a share in 2008, but without a new agreement or label expansion,
the consensus drops to $3.90 in 2009. Still, the stock is absurdly
undervalued. Aspreva trades at less than 6 times projected 2009
earnings, while its peers are trading at a 16 multiple, according
to Pacific Growth Equities.
Aspreva's management won't disclose their timetable for landing
a new partnership, but obviously they know they need to put
a little giddyap in their efforts. The hedge fund manager, who
wished to remain anonymous, believes it's a matter of when,
not if.
"They've done so well," he says. "Other people
would have to note their success."
Shares of Aspreva are down from a high of nearly $35 in June
as investors are likely on the sidelines, waiting for a new
partnership to be announced. Once it happens or a patent extension
is granted, the rush into the stock will look like the '49ers
sprinting in to northern California. Profitable biotech stocks
with prospects don't stay cheap for long.
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