Sucampo’s COO Cut Loose; Amitiza Growth Should Now Get More Visibility; SCMP Significantly Undervalued

In an 8k filing posted last night, Sucampo Pharmaceuticals (NASDAQ: SCMP) announced that it would not renew COO James Egan’s employment agreement, which expires on September 14, 2012. Mr. Egan was leading a shoot-to-kill battle against Takeda, the company’s marketing partner for SCMP’s lead product, Amitiza, for lack of performance in marketing the Irritable Bowel Syndrome (IBS) treatment. This could be good news for SCMP shares today as investors may be relieved to see the company pursue a more balanced strategy rather than waging war against its commercial partner. Sales of Amitiza have shown strong growth over the past couple of quarters, as visibility in the IBS segment is increasing, with companies like Ironwood Labs (NASDAQ: IRWD) developing new treatments. IRWD in currently engaged in additional trials in the chronic constipation indication, signaling that if IRWD’s product, linaclotide, is approved, it may not have as broad of a label as Amitiza. Sales of treatments for IBS are expected to rise on the whole, as more products are introduced and marketed in this underpenetrated treatment segment.

Amitiza is tracking at about $250 million annually, and with a royalty rate from Takeda in the high teens range, SCMP trades at just over 3x revenues (less than 3x if one factors in net cash). Amitiza prescriptions have begun to see accelerating growth, suggesting that the product is now getting Takeda’s full attention and that effort is paying off. Additionally, Amitiza was just approved in Japan, and when partner Abbott begins to market the product in that territory, Amitiza royalties to SCMP will continue to grow. Typically, royalty streams with little growth are valued at 5x revenues, so SCMP should be trading with a valuation of more than $300 million, or over $7 per share ($8 including net cash). News of the departure of Mr. Egan could spark the shares today, as the company’s focus shifts from suing Takeda to maximizing the value of Amitiza with its partner. Expect SCMP to trade higher today and until a more reasonable valuation for Amitiza’s growing royalty stream is reflected in the stock.