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BioSante: A Penny Stock Still Overvalued

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LINCOLNSHIRE, Ill. ( TheStreet) --Don't look any deeper than momentum-fueled day trading to explain the dramatic rise in BioSante Pharmaceuticals' (BPAX) stock price. Real numbers don't justify the company's valuation.

BioSante shares rose 27% to 96 cents Wednesday -- and were up as much as 62% intraday -- after U.S. regulators approved Bio-T-Gel, a testosterone replacement therapy for men who have low levels of natural testosterone. Teva (TEVA - Get Report) is in charge of marketing Bio-T-Gel and will pay BioSante a small single-digit royalty (think 6%) on sales.

Bio-T-Gel's fundamental problem is that five existing testosterone gels already compete in a crowded U.S. market. None of these products are materially different from each other, so Bio-T-Gel faces serious challenges coming in as testosterone gel number six.

For that reason alone, BioSante is an expensive stock. Even trading for less than a buck per share, the company's market value of $106 million is too rich by at least a third, perhaps as much 50-60%.

Abbott (ABT - Get Report) is the testosterone gel market leader. Worldwide sales of Androgel totaled $875 million in 2011, a company spokeswoman said, although she declined to break out U.S. sales.

That's a lot of testosterone gel, but once you get past Abbott's 74% U.S. market share, according to IMS Healthcare, the numbers drop off fast.

Auxillium Pharmaceuticals (AUXL) has reported $150 million in sales of Testim through the first nine months of the year, making it the second-largest testosterone replacement gel in the U.S. Testim sales in 2010 totaled $190 million -- it took eight years for the product to reach that level.

Behind Testim, none of the other testosterone gels sold in the U.S. -- from Watson Pharmaceuticals (WPI), Eli Lilly (LLY) and Endo Pharmaceuticals (ENDP), respectively -- cracks $100 million in sales, according to IMS Healthcare.

Remember, all these testosterone gels are basically the same, giving doctors and patients have very little reason or incentive to switch. Abbott's Androgel was the first gel approved in 2000 and it remains the market leader. Testim was the second gel approved and lags badly. The other gels are almost non-factors in the market.

Realistically, Bio-T-Gel doesn't stand a chance, but let's give Teva the benefit of the doubt and assume its marketing muscle and know-how actually makes a dent in the T-gel market. How generous should we be? Let's say Teva manages to pull in $100 million in Bio-T-Gel sales five or six years after launch.

That puts $6 million in BioSante's pocket -- not even enough to cover half a quarter's cash burn at the company's current rate of spending.

I generally counsel investors not to follow the advice of sell-side analysts because their forecasts are usually way too optimistic but let's make an exception for BioSante.

The Roth analyst forecasts $200 million in Bio-T-Gel sales by 2015 (I told you, these analysts can be crazy optimistic) but that only brings $11.6 million in royalty revenue to BioSante. Roth has the company losing $3.5 million in that year.

The Jefferies analyst is a bit more realistic, forecasting $6.8 million in Bio-T-Gel royalty revenue for BioSante in 2015. [That infers $113 million in actual Bio-T-Gel sales.] On that revenue, BioSante would lose $13.2 million in 2015, Jefferies says.

The Jefferies analyst also does a sum-of-the-parts valuation analysis on BioSante in which Bio-T-Gel is worth today just 59 cents per share. The entire company today is worth 70 cents per share.

In case you were wondering, Leerink Swann's current fair-value calculation on BioSante: 11 cents per share.

However you spin it, BioSante at 96 cents per share is grossly over-valued.

One last word: No mention of Libigel? And what about the cancer vaccine programs? Libigel is an expensive placebo. Two failed efficacy trials in female sexual dysfunction proved that fact beyond any argument. BioSante continues to run a Libigel safety study, but demonstrating that a placebo does no harm isn't exactly a value-creating feat of drug development. Libigel is a zero.

Likewise, BioSante's cancer vaccine programs are worthless. BioSante gained control of the cancer vaccines when it acquired the defunct Cell Genesys for its cash. Cell Genesys blew up because its cancer vaccines failed phase III studies. Another zero.

--Written by Adam Feuerstein in Boston.

>To contact the writer of this article, click here: Adam Feuerstein.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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