Aspreva Goes on Sale

The stock tumbles after another drug setback. Time to buy.
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When a stock takes a huge hit from an earnings miss or some other event, you can be sure the sell side will do one of two things -- downgrade the stock before it opens or tell you that it's a great buying opportunity.

The first approach is just plain crooked. The second, I question the motive. Is it an attempt to save face? Are the bankers telling them to defend it, or does the analyst truly believe it?

With that said, I admit I feel a bit hypocritical writing that while

Aspreva Pharmaceuticals

(ASPV)

is taking another drubbing Friday, I do think that it's a good opportunity for investors to get in at lower prices.

In August, I wrote a

bullish column on Aspreva. The company licenses CellCept from Roche and is researching the drug's effect on autoimmune diseases. It looks especially encouraging in lupus nephritis and pemphigus vulgaris.

However, Thursday night, Aspreva announced that CellCept failed to meet its preset endpoints in a phase III trial for myasthenia gravis, a neuromuscular disease. Following the study's results, Aspreva's shares sank 11.6% to $19.59.

This is the second major setback for the stock in the past few weeks. Earlier in the month, Aspreva dropped 11% after the company

preannounced disappointing revenue in the third quarter. At the current price, Aspreva is 44% below its 52-week high.

Karen Yiu, an analyst with Morningstar, says the company still has a good chance of seeing CellCept approved for lupus nephritis. "It's almost the standard of care," she says.

But even assuming that CellCept is approved for lupus nephritis and pemphigus, Yiu wants to see Aspreva line up another large pharma partner because CellCept is the only drug in its pipeline. "If we see any more failed trials, they're going to be in a lot of trouble," the analyst suggests.

I agree. Of course, maybe I'm looking at this as a glass-half-full situation -- rare for me. Should Aspreva get the green light in lupus nephritis and pemphigus, I believe you will see large pharmas partner with Aspreva as a way of getting additional revenue from existing drugs. Once Aspreva proves that it can bring a drug to market in a new indication, added opportunities should come along.

Yiu worries that if Aspreva is successful with CellCept, it will inspire other pharmaceutical companies to search for their own additional indications in rare diseases. I instead argue that teaming up with Aspreva is a low-cost way to bring in additional revenue for an existing drug.

Yiu dropped her fair value estimate on Aspreva to $16 from $19 as a result of the failed trial, and she's taking down her 2007 revenue estimate to $236 million from $260 million. According to Merrill Lynch, Aspreva's management estimates that 10% to 15% of CellCept prescriptions are from neurologists, with myasthenia gravis cases accounting for the largest portion.

So far, only one sell-side analyst has cut his earnings estimate. Banc of America's David Maris, who previously had the high view at $3.67 a share, reduced his expectation to $3.20, making it the lowest on Wall Street. That reduces the consensus estimate to $3.37 from $3.50.

However, Aspreva's story isn't whether it beats or misses earnings estimates by a nickel. The stock should be successful if it can bring effective and profitable products to market and repeat the process with new partners. If it's able to do that, investors won't believe this stock ever traded at just 6 times earnings.

Furthermore, the company has more than $5.50 a share in cash and no debt.

Hey, at least I didn't downgrade the stock to hold.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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