January 10, 2008
Zacks Research Digest
Research Associate: Richika Bhandari, M.Fin
Editor: Kinjel Shah, CA.
Sr. Ed: Ian Madsen, CFA, imadsen@zacks.com; 1-800-767-3771, x9417
www.zackspro.com
NPS Pharmaceuticals
111 N. Canal Street, Suite 1101
(NPSP - NASDAQ)
Chicago, IL 60606
$3.80
Note: All new or revised material since the last report is highlighted.
Reason for Report: Minor changes in estimates
Prev. Ed.: November 14, 2007; 3Q07 Earnings Update
Brokers’ Recommendations: Neutral: 100.0% (4 firms); Positive: 0.0% (0); Negative: 0% (0)
Brokers’ Target Price: $5.25 (↔ as the last edition; 3 firms)
Prev. Ed.: 5; 0; 0
Brokers’ Avg. Expected Return: 38.2%
Recent Events
On November 1, 2007, NPSP announced its 3Q07 financial results. The company reported total revenue
of $29.2 million and pro forma EPS of $0.28 per share in 3Q07.
Overview
Utah-based NPS Pharmaceuticals, Inc. (NPSP) is engaged in the discovery, development, and
commercialization of small molecules and recombinant proteins. The company’s products are primarily
used for the treatment of bone and mineral disorders, gastrointestinal disorders, and central nervous
system disorders. Its products include Calcilytic Compounds that are in Phase I stage; PREOS for the
treatment of osteoporosis; Cinacalcet HCl for Hyperparathyroidism and Parathyroid Carcinoma; and
Teduglutide, a Phase II stage product for short bowel syndrome or Crohn’s Disease. The company’s
website is http://www.npsp.com.
Analysts have identified the following factors for assessing the stock:
Key Positive Arguments
PREOS offers distinctive $500 million peak sales
opportunities.
Key Negative Arguments
NPSP is expected to report higher operating expenses
as a result of late-stage development and drug
launches.
Analysts are enthusiastic about the potential of
Teduglutide.
Besides the two high-profile late-stage drugs (PREOS and Teduglutide), NPSP has a number of earlystage development products. The leading pipeline drug is ALX-0600 (Teduglutide) for the treatment of
gastrointestinal diseases, such as, short bowel syndrome, Crohn’s Disease, and ulcerative colitis.
Note: The Company’s fiscal year coincides with the calendar year.
November 1, 2007
© Copyright 2008, Zacks Investment Research. All Rights Reserved.
Revenue
Revenue for 3Q07 grew 190% y-o-y to $29.2 million from revenue of $10.1 million in 3Q06. Increased
revenues are primarily the result of higher royalty revenue earned from Amgen on sales of cinacalcet HCl
and increased product sales, royalty and milestone revenue earned from Nycomed on sales of Preotact.
Revenue ($ in
million)
Revenue
Digest High
Digest Low
2006A
1Q07A
2Q07A
3Q07A
4Q07E
2007E
2008E
2009E
$48.5
$48.5
$48.5
$10.0
$10.0
$10.0
$13.1
$13.1
$13.1
$29.1
$29.2
$29.0
$23.7↓
$46.7↓
$11.0
$80.2↓
$99.0↓
$68.0
$71.1↓
$79.0
$61.1
$84.7
$89.4
$80.0
The graphical representation of revenue segments is given below:
3Q07A Key Drugs
Preotact
Royalty
30%
Research
and
License
Revenue
70%
2008E Key Drugs
2007E Key Drugs
Preotact
Royalty
20%
Preotact
Royalty
7%
Research
and
License
Revenue
80%
Research
and
License
Revenue
93%
Specific Products
Note: Recent significant developments are noted for those products marked with an asterisk (*).
Sensipar
Indication: Hyperparathyroidism (HPT), a disease characterized by the over-secretion of parathyroid
hormone that results when calcium receptors fail.
Stage of Development: Mature, widely sold and distributed; Approval for chronic renal insufficiency
(CRI) also.
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Partners: The drug is licensed to Kirin sale in Asia and to Amgen for sale in the rest of the world (ROW).
NPSP earns royalties from Sensipar.
PREOS
Indication: Osteoporosis
Stage of Development: NPSP has been advised by the FDA to conduct additional trials. PREOS has
been approved in the EU under the name Preotact.
Importance: PREOS is a recombinant human parathyroid hormone that plays a role in calcium
regulation and bone development. Peak PREOS sales, according to one analyst (Goldman), are
estimated to be $500 million.
Partners: NPSP and Nycomed have entered an agreement expanding and amending rights and
responsibilities under the Preotact license originally entered into in 2004. Under the new agreement,
Nycomed will gain the right to commercialize Preotact in all ex-US territories, excluding Japan, for which
NPS retains commercial rights, and Israel which is the subject of a pre-existing distribution agreement
with Israel-based Neopharm, Ltd. Upon registration and approval in the US, rights to Canada and
Mexico will revert to NPS. The agreement provides for the transfer of manufacturing responsibility from
NPSP to Nycomed for drug supply in its territories. Additionally, the agreement grants NPSP the right to
monetize the royalty stream from Preotact sales. As part of the manufacturing transfer, Nycomed will pay
NPSP $11 million for a significant portion of the existing bulk drug supply.
Regulatory Issues: On September 19, 2007, the drug was granted Orphan Drug Status for the
treatment of hypoparathyroidism. The company is currently supporting a two-year study with PREOS in
patients with hypoparathyroidism.
Competitors: PREOS faces direct competition from Forteo (LLY). The key for PREOS’s success will be
to differentiate the product from the black-box labeled Forteo (approved). Further, NPSP stated that the
PREOS injection may offer an advantage to Lilly’s Forteo since it does not require refrigeration for up to
seven days, and therefore, provides greater convenience. In contrast, Forteo is packaged as a pre-filled
syringe that requires refrigeration for storage. The improved convenience of the newer bisphosphonates,
like Roche/GlaxoSmithKline’s Boniva may prove to be highly competitive, especially if NPSP attempts to
target early stage osteoporosis patients.
Additional Studies: In line with the company’s new business plan of focusing on specialty indications,
NPSP announced it was supporting a Phase II trial of PREOS as a hormone replacement treatment for
hypoparathyroidism. The trial, initiated under an investigator IND, has enrolled 30 of 50 patients to date.
Patients in the trial receive PREOS every other day for two years.
PREOS Sales
2006A
2007E
2008E
2009E
Est. Growth
$2.7M
$6.8M
$10.6M
$15.8M
-
Pipeline Drugs
Teduglutide (ALX-0600/Gattex)
Indication: Gastrointestinal disorders
Stage of Development: Phase II/III trial
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Importance: Teduglutide is a propriety glucagon-like peptide 2 (GLP-2) compound, which is under
development by NPSP for gastrointestinal disorders. Preclinical studies have indicated that treatment
with GLP-2 could produce significant increases in both the mass and absorption of surface area on the
cell lining of the small intestine. NPSP has genetically altered key amino acid sequences of Teduglutide
to increase biological activity. The drug has potential for the treatment of gastrointestinal diseases, such
as Crohn’s Disease (CD), ulcerative colitis (UC), inflammatory bowel syndrome, intestinal mucositis, and
short bowel syndrome (SBS).
Partners: NPSP and Nycomed entered into a partnership for the development and commercialization of
Gattex outside North America. Under the terms of the partnership agreement, Nycomed will pay the
company $25 million up-front payment balance due and receive licensing rights to develop and
commercialize Gattex outside the US, Canada, and Mexico for the treatment of gastrointestinal disorders.
NPSP will retain the right to develop and commercialize Gattex in North America.
In addition to the $35 million total up-front payment, NPS has the potential to earn up to $150 million in
payments related to the attainment of certain regulatory milestones for the SBS indication, the successful
development of new indications, and the achievement of sales-based milestones. Additionally, the
agreement provides for double-digit royalties on Gattex sales in the Nycomed territories. The agreement
also provides for development cost-sharing equally for indications which are pursued jointly.
Additional Studies: NPSP is also conducting preclinical studies with teduglutide as a potential
treatment for chemotherapy-induced gastrointestinal mucositis in cancer patients and necrotizing
enterocolitis in preterm infants.
New Data: On October 11, 2007, NPSP reported topline results from the Phase III study of Gattex in
which 83 patients with short bowel syndrome (SBS) received a low dose of Gattex or placebo. The goal
of the study was a reduction in parenteral nutrition, or being fed intravenously, of at least 20%. The
company claimed Gattex showed a highly statistically significant reduction compared with placebo in the
low dose group. The criteria required, however, that the results for the high-dose group show statistical
significance before the results for the low-dose group could be considered. However, given the drug's
orphan designation in SBS and the statistically strong and clinically meaningful findings in the low-dose
group, the company intends to meet with the FDA to discuss the path to regulatory approval for Gattex.
Metabotropic glutamate receptors (mGluRs)
Indication: For central nervous system disorders
Stage of Development: Phase I trial
Partners: NPSP has ended its collaboration with AstraZeneca to discover and develop drugs targeting
metabotropic glutamate receptors (mGluRs). AstraZeneca agreed to pay NPSP $30 million to acquire
the assets related to the companies' research collaboration to discover and develop the compounds.
NPSP intends to use the proceeds to support further development of its late-stage product pipeline.
Under the terms of the agreement, NPSP will no longer provide research support or maintain interests in
any drugs developed and marketed under the program. The company will instead focus on its late-stage
pipeline products, including osteoporosis drug Preos and gastrointestinal disorders drug Gattex.
Calcilytics 751689
Indication: Osteoporosis
Stage of Development: In Phase II study with the investigational Calcilytic compound 751689 in postmenopausal women with osteoporosis.
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Partners: NPSP and its partner, GlaxoSmithKline (GSK), are developing small molecule oral Calcilytics
for the treatment of osteoporosis. NPSP is eligible to receive milestone payments from GSK, and retains
rights to co-promote in North America.
Regulatory Issues: NPSP has received the approval of cinacalcet hydrochloride by the Japanese
Pharmaceuticals and Medical Devices Agency for the treatment of secondary hyperparathyroidism. As a
result, NPSP will receive a milestone payment plus royalties from Kirin Pharma, a wholly owned
subsidiary of Kirin Holdings, which will market the drug in Japan. Kirin has licensed cinacalcet from
NPSP for development and commercial sale in Japan, China, North and South Korea, and Taiwan.
Other Pipeline Drugs
NPSP’s partner, Jannsen, is continuing clinical development on glycine reuptake inhibitors (GlyT-1).
Jannsen is conducting Phase I studies for schizophrenia. Under the agreement, Jannsen will pay NPSP
milestone payments of up to $20.5 million and royalties.
NPSP selected 156 as a candidate for preclinical development from its anti-epileptics program. 156 is a
D-serine analog, which the company plans to develop for epilepsy, neuropathic pain, and other central
nervous system disorders.
Please refer to the Zacks Research Digest spreadsheet on NPSP for further details on revenue.
Margins
The cost of goods and royalties was $2.0 million in 3Q07. NPSP pays a royalty to Brigham and
Women’s Hospital on net Sensipar sales, which was initially 1% of Amgen’s net sales for Sensipar.
Research and development expenses for 3Q07 declined 61% to $5.4 million versus $13.7 million for
the same period of 2006. The decline was primarily due to decreased clinical development activity for
PREOS, reductions in personnel, and associated cash and stock compensation, and lower pre- approval
manufacturing expenses associated with PREOS, offset by higher pre-approval manufacturing expenses
associated with Gattex. According to the Zacks Research Digest, R&D expenses in 3Q07 were $5.4
million versus $13.7 million in 3Q06, a decrease of 60.9% y-o-y.
Selling, general and administrative expenses for 3Q07 declined 23% to $5.7 million versus $7.5
million for the same period in 2006. This decrease is primarily due to reductions in personnel and
associated cash and stock compensation. According to the Zacks Research Digest, SG&A expenses in
3Q07 were $5.7 million versus $7.5 million in 3Q06, a decrease of 23.3% y-o-y.
Restructuring charges for 3Q07 were $1.0 million versus $2.2 million for the same period in the prior
year. Restructuring charges in 2007 relate primarily to initiatives to restructure operations announced in
March 2007, while restructuring charges in 2006 related to initiatives to restructure operations announced
in June 2006.
Excluding the net proceeds generated by new business development activities and financial transactions
executed in 2007, NPSP expects to have a 2007 cash burn in the range of $70 to $80 million, a decrease
from the earlier guidance of $80 to $90 million. The company reiterated guidance for 2008 cash burn of
$35-$45 million.
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Margins
Gross
Operating
Pretax
Net
2006A
1Q07A
2Q07A
3Q07A
4Q07E
2007E
2008E
2009E
92.5%
-170.0%
-210.7%
-210.7%
80.1%
-88.1%
-140.2%
-140.2%
83.4%
-55.1%
-97.8%
-97.8%
93.0%
61.1%
35.9%
35.9%
92.4%↓
63.0%↑
32.1%↑
32.1%↑
87.7%↑
20.8%↑
-11.0%↑
-11.0%↑
85.7%↑
11.0%↑
-21.1%↓
-21.1%↓
85.6%
8.2%
-19.7%
-19.7%
Please refer to the Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings per Share
NPSP reported net income for 3Q07 of $14.1 million, or $0.28 per share, a 162.2% y-o-y reduction from
its net loss in 3Q06 of $21.1 million, or $0.45 per share. The reduction in net loss reflects the 2007
restructurings which called for aggressive expense reduction measures, increased revenues from
royalties and product sales, and gains from the sale of fixed assets. According to the Zacks Research
Digest, proforma EPS in 3Q07 was $0.21 versus ($0.43) in 3Q06, an increase of 148.8% y-o-y.
EPS
Digest High
Digest Low
Digest Avg.
2006A
1Q07A
2Q07A
3Q07A
4Q07E
2007E
2008E
2009E
($2.04)
($2.43)
($2.31)
($0.30)
($0.30)
($0.30)
($0.27)
($0.29)
($0.28)
$0.28
$0.16
$0.21
$0.59
($0.13)
$0.16
$0.19
($0.50)
($0.19)
($0.18)
($0.51)
($0.31)
$0.03
($0.69)
($0.30)
Please refer to the Zacks Research Digest spreadsheet for more details on margin estimates.
Target Price/Valuation
The average Zacks Digest price target provided by the analysts is $5.25 (↔ as the previous report). The
price targets range from $4.75 (Lehman) to $6.00 (Jefferies). Two firms lowered their target prices after
the 3Q07 earnings release.
All the four firms reporting have assigned Neutral ratings to the stock and, significantly, none of the firms
have assigned a Positive or a Negative rating to the stock.
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Digest High
Digest Low
No. of analysts with target
price/Total
0.0%
100.0%
0.0%
$5.25
$6.00
$4.75↓
3/4
Please refer to the Zacks Research Digest spreadsheet on NPSP for further details on valuation.
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Capital Structure/Solvency/Cash Flow/Governance/Other
As of September 30, 2007, the company had 46.4 million shares outstanding and $302.2 million in cash,
cash equivalents and marketable investment securities versus $146.2 million as of December 31, 2006.
The FY07 cash balance guidance was increased to a new range of $130 to $140 from a prior range of
$$65 to $75 million, primarily due to reduced cash burn, recent transactions and gains on facilities sales.
On July 3, 2007, as part of its effort to restructure and consolidate operations, NPSP announced the sale
of its former headquarters in Salt Lake City, Utah to the University of Utah and the closing of the sale of
its Mississauga, Ontario pilot manufacturing and laboratory facility to Transglobe Property Management
Services LTD. The Ontario, Canada facility sale will net approximately $4 million. The company will
receive approximately $21 million from the sale of its Utah facility and associated equipment. NPS
recently purchased the Salt Lake City facility for $20 million in order to exit from the long-term lease
obligation of the sale-leaseback transaction it had entered in 2006. NPSP plans to vacate the Salt Lake
facility and additional research laboratories it leases at the MaRS Centre in Toronto and consolidate its
operations at a new headquarters location in Bedminster, New Jersey later this year.
November 1, 2007
Potentially Severe Problems
There are none other than those discussed in other sections of this report.
November 1, 2007
Long-Term Growth
Long-term growth is always difficult to calculate on small loss making biotechnology companies. Hence
none of the firms have provided a long-term growth rate. One analyst (Goldman) believes both Sensipar
and PREOS offer separate $500 million peak sales opportunities. The profitability to NPSP should be
higher on PREOS as analysts expect the royalty rate (should NPSP sign a co-promotion alliance) to be
roughly 20%, instead of the current 10% deal with Amgen. The company has filed the NDA for PREOS
after the European filing. Teduglutide offers another $500 million opportunity, but it is admittedly still in
mid-stage development. Though the possibility of positive Teduglutide data in Crohn’s Disease remains
a wildcard, analysts cannot predict when data will be forthcoming.
Without PREOS, brokerage firms see a few catalysts for the company as most of the pipeline products
either represent relatively smaller market opportunities (i.e. Teduglutide for short bowel syndrome), or are
still in Phase II studies or earlier stages of development. Although the company receives royalties on
Sensipar sales from Amgen, these royalty payments are passed through to bondholders of a nonrecourse bond that was secured by Sensipar.
November 1, 2007
Individual Analyst Opinions
POSITIVE RATINGS
None
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NEUTRAL RATINGS
Goldman – Neutral ($5) – November 2, 2007. INVESTMENT SUMMARY: The firm increased its target
price from $5 to $6 but maintains a Neutral rating.
Jefferies – Hold ($5) – November 5, 2007. INVESTMENT SUMMARY: The firm decreased its target
price from $7 to $5 and downgraded the stock from Buy to Hold as it is concerned that Gattex may face a
high hurdle at the FDA, given recent pivotal trial results.
J.P. Morgan – Neutral – November 1, 2007. INVESTMENT SUMMARY: The firm is cautious about
approval of Gattex in the US and therefore remains on the sidelines anticipating further clarity later this
year.
Lehman – Equal Weight ($4.75) – November 2, 2007. The firm decreased its target price from $7 to
$4.75. INVESTMENT SUMMARY: The firm states that NPSP has made significant progress in
addressing balance and extending cash flows but remains apprehensive about approvability of the lead
product Gattex following mixed data in SBS.
NEGATIVE RATINGS
None
DROPPED COVERAGE
Oppenheimer – January 8, 2008. The firm has ceased coverage on the stock due to the analyst's
departure.
Research Associate: Richika Bhandari
Copy Editor: Sudipta Mukherjee
Content Ed: Vivek Singh
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