PropThink’s Biotech Roundup: A Few Stories from the Week

Endo Health Solutions (ENDP) announced plans on Tuesday to purchase Paladin Labs (PLB.TO), a Canadian specialty pharmaceutical manufacturer, for $1.5 billion. ENDP fell significantly in 2012 on concerns about declining sales for its opiate painkiller, Opana ER, which we called a major buying opportunity. Since, the stock has rebounded by more than 135%, and a few of our predictions have come to pass almost perfectly. Get the story, here.

On Friday morning, DURECT Corp. (DRRX) priced a previously announced $10M equity financing before the market open. The deal priced at $1.40 per share, and while the stock opened at the tape, DRRX rallied to $1.50 by the close. Mr. Napodano outlined the DRRX bull case (here) on Tuesday following the company’s third quarter earnings. Although we’re split on the FDA’s approval decision on Posidur in February of next year, the stock still appears undervalued on a risk-adjusted basis due primarily to the market opportunity for Remoxy, Pfizer’s (PFE) abuse-deterrent oxycodone. If Posidur meets a complete response letter on its February 12, 2014 PDUFA date, we believe that the company can quickly move forward with a phase 3 gall bladder removal study in 2014 and re-file the following year.

Keryx Biopharmaceuticals (KERX) announced on Tuesday that a phase 2 study of Zerenex (ferric citrate) in non-dialysis dependent chronic kidney disease (CKD) patients achieved both its co-primary and secondary endpoints (read our analysis). Holding KERX since PropThink first opined on the stock late last year has returned more than 450%, and in mid-October Mr. King suggested owning the stock through November and the ongoing Kidney Week meeting – that buy has netted 40% in three weeks.

On October 22 in an alert to PropThink Premium subscribers, we suggested going short Galectin Therapeutics (GALT). Here’s part of the note:

We’ve had an eye on Galectin for quite some time given the company’s poor developmental track record (explained below) and impressive performance this year (+450% YTD), but we believe the valuation has come unhinged from the fundamentals – not unlike many small-cap biotech names in the second half of this year. GALT has a market capitalization of $197 million. The company had cash at October 17 of $10.3 million, enough, says the company, to make it through the second quarter of 2014 and the results of the ongoing phase 1 NASH study. The stock’s performance in the last six months and large valuation are more a product of the biotech landscape than quality, fundamental progress at Galectin.More importantly, Galectin had a dark history as Pro-Pharmaceuticals before changing its name to Galectin in 2011. . . the stock provides an interesting hedge as high-fliers in the biotech sector begin to correct – see Celdex (CLDX) and Clovis (CLVS) as an example. 

The sector has outperformed brilliantly this year, and while it remains to be seen whether the performance continues, we find it prudent to hedge against a market turn, and this is one of a few places in which we’ve initiated a small short position given what we consider an outlandish overvaluation for the company’s stage of development and history. . . Galectin brought in a few million in additional cash through the exercise of warrants in the second half, but the company will need to raise more before mid-2014. Given the stock’s performance, we would not be surprised to see a below-market secondary offering soon.

Galectin put in place a $30 million At Market Issuance sales agreement through MLV & Co. on October 25, and the stock has dropped from $11.79, when our note went out, to $8.75 at Friday’s close. We sold our Nov $10 Puts at a 110% gain.

ImmunoGen (IMGN) shares tanked 20% on Tuesday following an announcement that the company was ending its phase 2 trial of IMGN901 in small-cell lung cancer due to infection risk and an apparent lack of efficacy. It’s becoming common knowledge that IMGN has issues with the “linker” technology behind its ADC products, and this news supports the theory that IMGN faces a real uphill battle in the longrun.

Jason Napodano provided an update on Pozen (POZN) this week as the stock fell with the revelation that the FDA had requested a teleconference to discuss the company’s safer aspirin, PA. We continue to believe that the market is missing a few components of the story, especially heading into a potential cash distribution and possible drug approval. Mr. Napodano finds the risk/reward profile attractive in consideration of the downside provided by a strong cash position, and he offers an options strategy for involvement through year-end.

Following the company’s third quarter earnings call, we again suggested to PropThink Premium Subscribers on Wednesday morning that they be involved with Endocyte (ECYT) ahead of a possible European conditional approval for the company’s lead candidate, vintafolide. Our readers who got filled shortly after the open saw a three-day return of 40% as investors breathed a sigh of relief that the EU decision has yet to be made. ECYT closed the week at $11.64. For those unfamiliar with the oncology company, read up on PropThink’s prior coverage, here and here.

In connection with ECYT, KERX, POZN, VPHM, DRRX, PropThink has taken a long position.