NPS Pharmaceuticals' recovery gathers momentum


The critical pieces are starting to fall into place for NPS Pharmaceuticals, one of the biggest share price gainers so far this year (Mixed bag of small cap winners and losers in first half, July 2, 2010), as the New Jersey group looks to make the transition from essentially a royalty-based player into a significant orphan drug company in its own right.

NPS’ shares have almost doubled in value so far this year to $6.48, valuing the company at a respectable $382m, triggered by the sale of an underappreciated royalty stream for $38m in March and a well received $53m share sale in April. With almost $150m in the bank NPS is now well placed to meet its next clinical milestones, and phase III data due later this year or early next from Gattex (teduglutide), a much-needed treatment for short bowel syndrome (SBS), is exciting investors and analysts the most.

Gradual recovery

Since a pipeline setback in September 2008, when development partner GlaxoSmithKline terminated phase II trials of osteoporosis drug ronacaleret due to a lack of efficacy, NPS has staged a gradual recovery which has gathered momentum in recent months.

Before the ronacaleret failure NPS’ shares were trading at around $8.50 and the subsequent sell-off on the news seemed a little on the harsh side (NPS Pharmaceuticals' fall looks hard, September 29, 2008).

The sale in early March to DRI Capital of royalty rights on Japanese sales of hyperparathyroidism and hypercalcaemia drug, Regpara (cinacalcet), due from Kyowa Hakko Kirin, appears to have sparked renewed investor interest in NPS.

This monetisation of a royalty stream that the market appeared not to fully appreciate illustrates the potential benefits of such a move, naturally advocated by other royalty stream acquirers such as Paul Capital (EP Vantage Interview - Investors in search of a silver lining, March 16, 2009).

In the rest of the world cinacalcet is sold by Amgen as Sensipar, sales of which were $651m last year and projected to reach $920m by 2016; NPS receives around 10% of these sales as royalties. However, the future for the drug remains in the balance, with proposed bundling of payments for dialysis centres in the US likely to reduce reimbursement rates and Teva posing a generic threat having recently received tentative FDA approval; a patent litigation trial is expected to start in September. Therefore, clarity on the payment bundling and resolution of Sensipar’s patent situation could increase investor confidence further.

Evidence that confidence appears to be returning to NPS could be seen in the successful sale of ten million shares at a minimal discount to raise $53m, which failed to halt share price growth despite a 20% dilution to stockholders.

All eyes on Gattex

SBS is mainly caused by the surgical removal of the small intestine, for example as an intervention to treat Crohn’s disease or remove tumours, although some children are born with a congenital short bowel.

As a result, SBS patients suffer from malnutrition, severe diarrhoea, dehydration, fatigue, osteopaenia and weight loss, due to a reduced ability to absorb adequate amounts of nutrients and water. SBS sufferers therefore require parenteral nutrition (PN), essentially an intravenous nutrient drip, but this can lead to serious side effects such as infection or liver damage.

Gattex is an analogue of the naturally-occurring human glucagon-like peptide 2 (GLP-2), a peptide involved in the regeneration and repair of cells lining the small intestine, thereby expanding the surface area for absorption of nutrients.

Headline results from a pivotal phase III trial, Steps, to assess Gattex’s ability to reduce PN dependence in 86 SBS patients, are expected in the fourth quarter or early next year.

Assuming the results are positive, analysts have pencilled in regulatory approval in 2012 and sales to reach $227m by 2016. According to EvaluatePharma’s NPV Analyzer, Gattex alone could be worth $586m to NPS and is the company’s most valuable product.

The table below shows the total potential value of NPS’ product portfolio, at $1.3bn almost three times the company’s current market capitalisation.

NPS Pharmaceuticals - NPV Analysis (risk-adjusted)
Status Product Therapeutic category WW sales in 2016 ($m) NPV ($m) NPV as % of Market Capitalisation
Marketed Sensipar/ Mimpara Other hormone preparations  royalties  361  94%
Preos Bone calcium regulators  137 (+ royalties)  290  76%
Nucynta Narcotic analgesics  royalties  14  4%
Sub-total  137  664 174%
Phase III Gattex Anti-spasmodics & anti-cholinergics  170  586  154%
Total NPV  307  1,251 328%

In addition to Gattex, NPS’ parathyroid hormone, Preos, is also undergoing phase III trials to treat hypoparathyroidism, another rare disorder with limited treatment options.

Results from the Replace trial are expected in the middle of next year and positive data should spark decent share price gains.

All of which means that NPS, which has sufficient cash to last well into 2012, should be well placed to build on already impressive share price gains so far this year.

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