Biotech Stock Mailbag: Adventrx Pharma

BOSTON ( TheStreet) -- Please join me at 12 p.m. ET today for the next Biotech Stock Mailbag Live Chat.

I'll answer your questions and respond to your comments in what I hope will be an informative and fun discussion about the current state of the biotech investment sector. A sign-up link to the live chat is below.

Before I get to your questions, I want to update this week's column on noteworthy biotech stock trades in the second half of 2011. Of course, I forgot to include a couple of stocks.

First, Pacira Pharmaceuticals ( PCRX) is expecting an FDA approval decision on Oct. 28 for Exparel in post-surgical pain management. Exparel is a proprietary, long-acting formulation of the painkiller bupivacaine. FDA extended the Exparel review by three months because Pacira submitted additional information.

I met with Pacira executives a couple of weeks ago and walked out confident in Exparel's approval. The three-month delay sounded much more procedural than anything worrisome.

Second, I failed to include the expected results from a phase III study of Biodelivery Sciences' ( BDSI) BEMA buprenorphine in the third quarter. BEMA buprenorphine is a thin, dissolvable film placed inside the cheek that contains the painkiller buprenorphine.

To your questions: Paul K. asks, "What the bleep is going on with Adventrx Pharmaceuticals ( ANX)? The stock goes up every day."

Let's do some calculations to illustrate why Adventrx is overvalued (perhaps wildly so) on a fundamental basis. Yes, I know, the stock is a trader's chew toy at the moment, and fundamentals don't matter, but at some point, they will.

First, I'm going to assume that exelbine, Adventrx's reformulation of the lung cancer drug vinorelbine, is approved on Sept. 1. I won't even risk-adjust for the possibility of a rejection. I'll also assume that Adventrx retains 100% of exelbine's sales -- that means no partner, no shared revenue.

With exelbine ready for launch, let's figure out the commercial opportunity. A logical place to start, of course, would be U.S. sales of vinorelbine since Adventrx's marketing strategy will be to convince doctors to switch from vinorelbine to exelbine.

Here's where the story gets dicey for Adventrx: U.S. sales of vinorelbine totaled $7 million over the past 12 months (June 2010 through May 2011), according to IMS Health. For calendar year 2010, vinorelbine sales totaled $7.6 million, according to IMS Health.

I'm willing to be generous and assume that Adventrx's exelbine grabs 50% of vinorelbine's market share in two years. That would be a strong performance for a small company with no drug marketing experience, especially selling a new, branded drug against an entrenched, cheap generic.

On pricing, I'll assume that exelbine is double the price of vinorelbine. Adventrx has suggested in regulatory filings that it may price exelbine at an even larger premium to vinorelbine, but for this exercise, let's go with an exelbine price tag double that of vinorelbine.

OK, simple math: 50% of vinorelbine's U.S. sales at twice the price equals $7 million in exelbine sales two years after launch, or the end of 2013.

What is $7 million in exelbine sales in 2013 worth to Adventrx's valuation today?

If I put a five-times sales multiple on those exelbine sales and discount back two years at 15%, I get a fair value of 69 cents a share. (Based on a fully diluted share count of 36 million, per the company's latest regulatory filings.)

Adventrx has about $1.28 a share in cash, so adding that into the valuation mix gets $1.97 a share. Rounded, $2 a share.

Adventrx closed Wednesday at $3.79, which means the stock is overvalued by almost half. Adventrx stock was down about 7% in Thursday intraday trading.

What is Adventrx's valuation if we assume 100% market share for exelbine at twice the price of vinorelbine? That's $14 million in exelbine sales, which is worth $1.38 a share plus the company's cash. The stock is still overvalued.

What if we assume 50% market share for exelbine at five times the vinorelbine price? That's $17 million in exelbine sales, which equates to $1.67 a share plus the cash. Not much better.

And let's not forget, Adventrx's cash should really be discounted further because the company will need to ramp up sales and marketing expenses to launch exelbine. Said another way, Adventrx is going to spend a big chunk of that $46 million soon.

I apologize for all the numbers, but the point I'm making should be clear. Adventrx is seeking approval for a cancer drug (exelbine) that will barely be used because the drug it seeks to replace (vinorelbine) is barely used. Adventrx believes doctors will migrate to exelbine because it causes less vein irritation than vinorelbine. Maybe Adventrx is right, but even if doctors switch entirely to exelbine despite its higher price, the market for exelbine is still insignificant.

Adventrx supporters are crying foul right about now because I'm not including the company's two other drugs in my valuation. ANX-514 is a reformulation of the cancer drug taxotere, which just went generic, so like exelbine, it's a non-starter commercially. Plus, Adventrx still needs to design, fund and conduct a phase III study.

ANX-188, also known as poloxamer 188 or Flocor, is an experimental drug for sickle cell anemia previously owned by CytRx ( CYTR) that failed a phase III study in 1999. CytRx licensed poloxamer 188 to SynthRx in 2004 although the drug's development remained in limbo. Earlier this year, Adventrx acquired SynthRx with plans to restart clinical development of poloxamer 188 (now renamed ANX-188) in sickle cell disease. Adventrx paid the equivalent of about $6 million in stock for SynthRx, with the potential for some additional payments tied to the drug's success.

Adventrx paid nothing for ANX-188, which may seem like smart negotiating but is more likely a true reflection of the drug's staleness and high risk for further failure. If you believe ANX-188 and ANX-514 deserve some value today, add another buck a share to Adventrx's valuation. It doesn't help much.

@chasingthealpha tweets, "How do you think $VRTX is going to act when $VRUS announces PROTON ph2 results?"

Allow me to translate: Mr. Alpha wants to know how Vertex Pharmaceuticals' ( VRTX) stock price will react to Pharmasset's ( VRUS) expected announcement later this year of interim results from a phase II study of its experimental hepatitis C drug PSI-7977.

I might fail miserably at providing a specific answer to this great question, but let me try to provide some context that might help.

Vertex has the best hepatitis C drug in the market today. It's called Incivek, and by all accounts, the drug's early launch is going quite well. Investors will get more details about the Incivek launch when Vertex reports second-quarter financial results on July 28.

The concern investors have about Vertex, however, is that Incivek may not be the best hepatitis C drug for long. A lot of investors believe Pharmasset's PSI-7977 has a shot at being the next great Hep C drug. PSI-7977 data presented so far has definitely impressed -- a big reason for Pharmasset's stock tripling in value this year.

Broadly speaking, Vertex's stock price is going to act badly to any new data -- from Pharmasset or any other drug company -- which threatens to topple Incivek from its current perch atop the Hep C drug mountain.

That sounds obvious, but I do get heated comments from readers who don't like it when concerns are raised about Vertex. They see Incivek as a game-changing Hep C drug that is going to generate billions of dollars in revenue for Vertex. True enough, but you have to understand that the Hep C "game" changes all the time, so the drug on top today isn't going to be there tomorrow. Those billions of dollars in Incivek sales are baked into Vertex's current stock price to some extent, which means investors are looking ahead to see what's next -- two, three or more years down the road.

One very promising Hep C drug that is down the road, among others, is Pharmasset's PSI-7977, which presents potential risks for Vertex. Expect to see new PSI-7977 data in October at a closely watched Hep C research meeting.

I don't want to give the impression that Vertex is helpless in this situation because it's not. Any drug that wants to make a splash in Hep C must outmuscle Incivek, which isn't going to be easy. Vertex's research staff isn't sitting idle, either. The company is also working on next-generation Hep C drugs and combinations to solidify and possibly extend its lead in the market. At the same Hep C meeting where Pharmasset is expected to give an updte on PSI-7977, Vertex will also present new data from a midstage study using a "quad" or four-drug therapy against the Hep C virus.

Dirk P. asks, "I've been looking at Osiris Therapeutics (OSIR) as a potential short candidate and came across your early articles. I'm not a biotech expert but the past data mining issues you highlighted, not to mention the fact that the CEO is an investment banker are both red flags, as is the skyrocketing short interest and option volatility. Genzyme's involvement is a head-scratcher though. I was wondering if you still follow it and have any thoughts good or bad."

Osiris shares are up approximately 22% in the last month (although up just 5% year to date) perhaps in anticipation of the approval decision expected soon by Canadian regulators for Prochymal in graft-versus-host disease (GVHD).

Dirk alludes to my previous columns on Osiris and Prochymal, many of which have pointed out the obvious problems and flaws in the failed GVHD phase III studies. Canadian regulators will reject Prochymal, in my opinion.

The timing of the expected Canada decision isn't clear. On Osiris' last conference call, the company said it responded to questions from Canadian regulators in March, triggering a 90-day review clock. That implies a June decision date, which didn't happen.

Why not? On its May conference call, Osiris CEO said, "As with any regulatory action, all time frames are only targets and should not be viewed as a time certain."

Efforts to get Prochymal approved in the U.S. are still in limbo. I don't expect that to change any time soon. Osiris can't submit failed trials to the FDA, and the company continues to seek short cuts instead of admitting that an entirely new, randomized phase III study will be necessary. Additional clinical trials of Prochymal in Crohn's disease and heart attack are ongoing, but why expect positive results when all the data on Prochymal to date have been negative?

Sanofi ( SNY) is now Osiris' Prochymal partner following the acquisition of Genzyme. Sanofi's continued involvement with Osiris is definitely a head- scratcher. It's shocking, quite frankly. I can only guess that Sanofi has been too busy with other Genzyme issues to divorce itself from Osiris.

--Written by Adam Feuerstein in Boston.

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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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