Tuesday, December 20, 2005

INDEVUS: Not Just A Man's Buy!

Indevus Pharmaceutical, Inc. (IDEV - $4.54) has a stated goal to become a manly man's company. This biopharmaceutical company is focused on urology, gynecology and men's health. Management is looking to acquiring strategic products and product candidates with differentiating features and defined specialty markets within its core focus area.

In order to increase its odds of commercial success', Indevus either licenses the U.S. rights to FDA-approved compounds or shepherds the development of compounds through research, pre-clinical development, clinical testing and regulatory review activities with the goal towards commercialization. Depending on the products' developmental and marketing costs, Indevus follows a familiar biotech pattern of top-line currency collection, including royalty payments, profit-splitting arrangements, or sales-back volume discounts.

For the fiscal year ended September 30, 2005, revenue surged 78% to $33.3 million, compared with last year's $18.7 million. The Company's net loss decreased $15.0 millionto $(53.2) million, or $(1.13) per share in fiscal 2005 from $(68.2) million, or $(1.43) per share in the prior year. This reduced loss was primarily the result of increased revenues from Sanctura and decreased sales and marketing expenses, partially offset by increased research and development expenses.

The Company's lead product, Sanctura, for use in overactive bladder treatment, had about 300,000 prescriptions written in fiscal 2005, and the product's sales to pharmacies totaled $23 million. In July, Indevus received U.S. rights to Nebido, an injectable testosterone preparation for the treatment of male hypogonadism--a lack or reduced amount of hormones in the sex glands, or gonads.

Indevus also is closing the deal on another another testosterone drug, Delatestry, from Savient Pharmaceuticals Inc., to increase its revenue base and to leverage sales force utilization. According to management, Indevus' internal sales force is already positioned to effectively promote Delatestryl. The acquisition of Delatestryl is expected to increase the Company's revenue base by about $3.5 million in 2006, without development or significant promotional costs.

The key drivers to biotech valuation eventually come down to time and cost. What are the developmental costs and marketing odds of success? And what are the risk-adjusted future revenue projections, discounted to present day?

Indevus has an interesting future, with six products in various stages of development. The balance sheet is clean, with cash and equivalents totaling $101 million, and a current ratio of 3.2.
The Company has $2.15 per share in cash. Delatestryl is valued at $36 million [3.6x potential annual revenue of $10 million], Sanctura has patent/market exclusivity in the U.S. through May, 2009, and we suspect that top-line growth of this product could exceed 30% per annum. A current valuation is pegged at $168 million (or 6x 12-month forward sales estimates of $28 million).

Sanctura XR, the once-daily formulation, is valued at $95 million, the aggregate of milestone payments for FDA approval, and other related development efforts. The Company anticipates filing an NDA for Nebido in the first quarter of calendar 2007. We currently value this product at $42.5 million [ existing costs of milestone agreements to Schering], and the remaining early-stage programs at $100 million. In addition to the current 47.8 million shares of common stock outstanding, there is potential dilution in the next year of an additional 28.6 million shares, reserved for various issuances. Despite this dilutive concern, Indevus' assets are still worth share-net of $7.10--or a premium of 56.4% above the existing stock price.

A major risk in buying Indevus shares is that the Company derives substantially all of its revenue from a third-party under a Sanctura licensing agreement. As Sanctura is Indevus' only FDA-approved product, the loss of Sanctura would have a negative material affect on the Company.

One important milestone event upcoming over the next year that could enhance investor visibility is the FDA-approval of an extended-release version of Sanctura. Given the aforementioned share-net discount, Indevus looks like a cheap, speculative buy for biotech bulls.

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