Is Cypress backing the wrong horse?

Analysis

The hope must be that the business development team at Cypress Bioscience have done their homework and seen something special in the recently licensed phase IIb antipsychotic agent, CYP-1020 (BL-1020), that the market is failing to appreciate.

Since acquiring North American rights to the candidate two days ago from Israeli group BioLineRx for $30m upfront, Cypress’ shares have lost 43% to trade at a seven-year low of $2.46. This values the California company at $94m, lower than its cash balance of around $130m, suggesting investors are seriously unimpressed by the decision to license such a high risk and high cost project for an incredibly competitive and increasingly generic schizophrenia market. Cypress clearly has a job on its hands to highlight the merits of CYP-1020 and restore battered confidence, which is unlikely to happen until the company secures the services of a big pharma partner.

Tried and tested, limited success

Cypress’ strategy of licensing a pipeline candidate from an innovator company and sub-licensing it on to a bigger partner has been achieved, with modest success so far, with the company’s only approved product, Savella. It licensed the treatment for fibromyalgia from Pierre Fabre in 2001 when the product was in phase I trials before passing development and commercial responsibility over to Forest Laboratories in 2004 at the start of phase III trials.

Savella finally gained FDA approval early last year (Forest, Cypress win approval for new fibromyalgia drug, January 15, 2009) but initial demand was disappointing as Forest struggled to gain beneficial formulary cover; some analysts however are predicting an uptick over the next 12 months and sales in the first quarter of $17m were encouraging.

At the time of FDA approval analysts were predicting Savella sales of $563m by 2014, a forecast that has since been slashed in half to a current estimate of $281m, according to archive consensus from EvaluatePharma. Expectations for the royalties that Cypress receives from Forest have also been cut with current estimates of $72m in 2014 significantly lower than the $120m predicted almost 18 months ago.

Nevertheless, even at these lowered forecast levels, Savella still has a net present value of $201m to Cypress, double its current market valuation. Indeed, the company is still expected to become profitable by the end of 2011.

So even before this week’s deal Cypress was struggling to convince the market of its potential, which it would hoped to have addressed and improved by licensing CYP-1020.

Risky, costly, tough

Cypress and BioLineRx claim CYP-1020 to be a first-in-class GABA-enhanced antipsychotic, by attaching GABA to the dopamine blocking agent, perphenazine, which was approved back in 1987.

Although CYP-1020 offers a potentially novel approach to treating schizophrenia and results from a 363-patient, phase IIb study comparing the drug to risperdal were definitely encouraging, it seems the massive challenges in gaining regulatory approval and becoming a commercial success in this market has frightened investors.

Two of the biggest-selling antipsychotics, AstraZeneca’s Seroquel and Eli Lilly’s Zyprexa, are set to lose patent protection within the next two years while the market overall is predicted to lose half its value over the next seven years, from $18.3bn in 2009 to $8.6bn by 2016.

Poor record

Investors are clearly questioning Cypress’ ability to identify the right candidate to build on Savella’s modest success, perhaps rightly so given its poor track record so far.

Cypress acquired Proprius Pharmaceuticals in 2008 for $37.5m, a deal that could have significantly bolstered its pipeline with two phase II candidates. However, Cypress has yet to decide whether to take either of the anti-inflammatory compounds, PRO-406 and PRO-515, into phase III and recently AlphaRx, a partner for PRO-406, claimed that Cypress had terminated any plans for further development.

The pressure is therefore on Cypress to clinch a deal with a big pharma partner which will be absolutely essential if CYP-1020 is to be a success. Vanda Pharmaceuticals’ surprising regulatory success with its antipsychotic, Fanapt, which gained FDA approval last year and attracted Novartis as a commercial partner, offers a glimmer of hope.

If Cypress pulls it off the upside could be dramatic, if it does not the company is looking particularly vulnerable to a takeover attempt given its decent cash reserves and respectable Savella royalty stream.

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