Why Columbia Laboratories Collapsed

Before noon, shares of Columbia Laboratories (NASDAQ:CBRX) have already exchanged hands at more than ten times average volume, and the stock is down 40%. The blow comes after Columbia and partner Watson Pharmaceuticals (NYSE:WPI) announced that CBRX’s lead candidate, Prochieve, was denied an appeal for further FDA review and approval. Prospects for Columbia Laboratories look bleak without its single developmental product, and the future of the company falls to its line of Women’s Health products or a major strategic maneuver.

Prochieve is a topical gel to reduce the risk of pre-term birth in women with premature cervical shortening. Columbia and Watson submitted a New Drug Application to the FDA in April of 2011, which met resistance at a subsequent Advisory Committee meeting, and then received a Complete Response Letter from the FDA in February of 2012. Watson – which by then owned rights to the NDA – appealed the denial through a Formal Dispute Resolution Request (FDRR) in August; a response to the FDRR was announced Friday, causing CRBX’s dive. Watson plans to “review possible options related to the continued pursuit of the NDA.” What exactly that means – another trial? – is yet unclear, but for now, Columbia Laboratories holds little growth prospect outside of its existing product franchise; investors see – or saw – Prochieve as the major value-driver for CBRX.

Analysts estimate FY12 revenues of $26.9M and FY13 of $37.2M. With $23M in cash, equivalents and short-term investments as of June 30 (3Q results due Nov. 8), the market now values CBRX – a $59.5M market capitalization – at cash plus forward revenues. Even revenues are unstable considering that $32.5 million in potential milestone payments are off the table if Prochieve development is scrapped entirely. Management has been guiding for growth in its lead product, Cronine, but both net revenues and product sales have fluctuated significantly in the last few years as the company pursued product out-licensing and reached small milestones. On top of these complications, the company faces a Nasdaq delisting if it can’t improve share price before April 2013.

CBRX hired a consulting firm, Cowen and Company, earlier this year to evaluate strategic alternatives, and in March the company cut 42% of employees to streamline the business. Management specifically guides for a cash flow neutral-to-positive operation in the foreseeable future unless the company makes a costly strategic transaction – presumably a product acquisition. The company will report 3Q financials on November 8, but don’t expect much upside unless Columbia pulls off a significant earnings beat. If management can deliver on neutral cash flow, share price will most likely continue to move sideways until some sort of strategic transaction is announced or the Prochieve story continues -for better or worse. Downside risk is limited by cash and product revenues, and any investors still interested will be banking on a major strategic maneuver from CBRX.