NPS Pharma Readies Key Bowel Study Data

SAN FRANCISCO ( TheStreet) -- NPS Pharmaceuticals ( NPSP) CEO Francois Nader spent 45 minutes with me here on Tuesday afternoon discussing the company's lead drug Gattex. NPS will release results later this quarter from a pivotal phase III study of Gattex in patients with short bowel syndrome. Biotech catalyst trading junkies take note.

NPS closed Thursday at $8.22. The company has a $550 million market cap, including $154 million in cash at the end of the third quarter.

The drug: Gattex is a recombinant, humanized and longer-acting form of GLP-2, a naturally occurring protein that is secreted by the bowel to enhance the absorption of nutrients and increase blood flow to the gut.

The disease: Short-bowel syndrome (SBS) is a chronic and disabling condition that strikes people, who for various reasons including Crohn's disease, have about 50% of their lower intestines surgically removed. A large majority of patients can adapt or regenerate new bowel to lead normal lives. A smaller group of SBS patients never recover full functionality of their lower intestines, and a result, must spend the rest of their lives attached to an intravenous parenteral nutrition bag that provides the liquid nutrients they need to survive.

How does treatment with Gattex help SBS patients? By boosting the ability of the lower intestine to absorb nutrients, Gattex is designed to reduce the amount of parenteral nutrition required by SBS patients on a weekly basis. In a small percentage of SBS patients, Gattex may eliminate the need for parenteral nutrition entirely.

The Gattex phase III study: Nearly 90 SBS patients relying on parenteral nutrition are randomized 1:1 to receive either Gattex or placebo over the course of 24 weeks. The primary endpoint of the study defines response as a greater than 20% reduction in weekly volume of parenteral nutrition at weeks 20-24 compared to baseline. Key secondary endpoints include the percentage of patients who end parenteral nutritional altogether and the mean volume reduction in parenteral nutrition.

The risks: A previous phase III study of Gattex in SBS patients incorporating a similar design and the same primary endpoint failed -- with an asterisk. This older study tested a low and high dose of Gattex against a placebo. The high dose of Gattex produced a response of 25% compared to 6% for placebo patients, which was not statistically significant. Treatment with low-dose Gattex patients, however, resulted in a 46% response rate that was statistically significant compared to placebo.

Despite the positive results from the low-dose Gattex, the study overall was a failure because the statistical plan mandated that high-dose Gattex results had to be positive in order for the low-dose Gattex results to be considered.

Why did high-dose Gattex perform worse than the low dose? A closer examination of the failed study revealed that patients in the high-dose Gattex arm came into the study using higher volumes of parenteral nutrition compared to patients in the low-dose Gattex arm. This made it more difficult for harder-to-treat, high-dose Gattex patients to be counted as responders and achieve the primary endpoint.

Why will the current phase III study work when the older phase III study did not? It might not, but NPS tried boosting the odds of positive results this time around by only using low-dose Gattex compared to a placebo and making other smaller changes to the way the study is run.

What's the market opportunity for Gattex? NPS estimated there are approximately 15,000 SBS patients eligible for Gattex in the U.S., meaning the condition qualifies for orphan drug status (and potential premium pricing.) Gattex pricing hasn't been disclosed but NPS says the drug's peak sales potential is in the $350 million range.

Analysts who cover NPS with buy ratings, generally, carry peak sales estimates for Gattex in SBS in the $200 million-plus range. NPS plans to sell Gattex on its own in the U.S. and will receive royalties in sales of the drug in Europe, if approved there, under an existing marketing partnership with Nycomed.

Can NPS sell Gattex if approved? Like most small biotech and drug firms without commercial marketing experience, there will be those investors who will want to see tangible proof before buying into NPS' ability to sell Gattex. Working in the company's favor is the fact that parenteral nutrition costs upwards of $100,000 a year, so Gattex, even if priced high, could save insurers money in the long run by lowering parenteral nutrition expenses (not to mention the ancillary medical costs associated with infections and other complications resulting from parenteral nutrition.) NPS should also be able to reach SBS patients with a relatively small sales force targeted at regional medical centers that focus on the care of SBS patients.

Upside/downside in the stock: At $8, NPS has about $2 to $4-a-share upside if the Gattex study is positive and the drug is approved. Estimated approval in the second half of 2012 based on an approval filing completed in the third quarter.

If the Gattex study fails, the stock could drop $2-3 but the company's valuation should be backstopped by royalties received from Amgen ( AMGN) from the sale of Sensipar. A recent, favorable court ruling delayed the launch of generic Sensipar until 2018. NPS also had about $2.30-a-share in cash as of the end of the third quarter.

--Written by Adam Feuerstein in San Francisco.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. 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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