Jefferies analyst Eun Yang nailed it. This is from just a few days ago.
DOV Pharmaceutical [DOVP]
Current stock price reflects perceived high risks for Phase III study for bicifadine. Given the uncertain outcome of the study and a potential big swing in the share price, we propose to use an options strategy to tailor equity risk in the near term. Two major upcoming events for DOVP: (1) an insomnia drug, indiplon, PDUFA date on May 15; and (2) Phase III data for bicifadine (chronic pain) in May.
Key Points
Two events that could cause a large move in the stock this month include (1) indiplon approval or further delay in final approval, and (2) Phase III data for bicifadine.
Indiplon approval likely; expect indiplon to be a steady revenue source for DOV. Two NDAs for indiplon are currently under FDA review, with PDUFA dates set for May 15 and June 27. Upon approval, DOV will book a milestone of $1.5M and receive a 3.5% royalty on sales through 2023 from partners Neurocrine Biosciences (NBIX, $62.81, Hold)/Pfizer (PFE, $24.87, NC).
As we view bicifadine as a major driver for DOV's valuation beyond indiplon, outcome of Phase III chronic lower back pain (CLBP) study for bicifadine is key to near-term success. Open-label extension study (022) clearly shows durable analgesic activity of bicifadine in patients with CLBP. However, given the inherent risks in chronic pain trials (e.g., high placebo effect, high drop-out rate, variable statistical outcome), coupled with lack of placebo-controlled Phase II study for bicifadine, it is difficult to pinpoint the outcome of the study with a high level of confidence.
An options straddle to help reduce risk surrounding uncertain outcome of CLBP Phase III trial for bicifadine. Using a straddle (an option strategy in a position of both a call and put with the same strike price and expiration), one can help reduce risk.
Using a May 06 $15.00 options straddle, once would profit if DOVP shares rise above $20.05 or fall below $9.95. As there is no limit as to how high the price of DOVP shares could rise, the maximum gain is unlimited, whereas the maximum loss would be capped at the premium paid.
Our 12-month price target for the stock of $18 is based on 33x our 2010 EPS estimate of $1.44, discounted back at a 30% annual rate. Risks associated with DOVP shares include, but are not limited to: 1) a delay in FDA approval for indiplon; 2) failure in bicifadine Phase III studies; 3) failure to secure a commercialization partner for bicifadine.
Eun Yang, Ph.D.,
(212) 284-2264 eyang@Jefferies.com |
