Re: future prospects of NRI
An interesting analysis of the company's fundamentals
has been posted on the Stockhouse board. It's a worthwhile
read! The post can be found on the Nuvo Research, Inc. forum.
It was posted by "klaatutu" on 3/22.
You asked Feluce some thought-provoking questions, none of them of much interest to the day-traders and TA wizards. It looks like you’ve already made up your mind but for anybody who’s curious about a different take on the fundamentals, here’s a go at some answers.
HG >> 1. This management team is credible.
Too soon to tell. -- Nuvo’s management ran an excellent communications campaign toward year end, boosting the SP on minimal substance. It also did a good job keeping a lid on expectations by promoting its considerable accounting, real estate and negotiating skills, while drawing attention away from any weakness in its grasp of technology and its negligible bizdev progress.
You cannot fault people for sticking with what they know, but in this case, we’re left with big questions. What does this management team know? And, is it enough? The only real product gains have come from Pennsaid, inherited or high-jacked (depending on your bias) entirely from the previous administration, complete with all the scientific support, published research and the most recent Phase III trials, designed and launched long before the 2004 AGM.
Investors who came in at 12 cents are understandably enthusiastic. Those who rode the price down from above $10, if any are left, and new investors interested in a self-sustaining biotech, are still in the dark. They’ll just have to cross their fingers, hoping a management team that’s never been tested by the inevitable scientific, regulatory or marketplace setbacks, can educate itself. Aside from a couple (part-time?) consultants, the senior people seem to have little grounding in running an actual pharma, and with operating management taking up almost half the board seats, it’s unclear what impact the handful with even nominal industry experience might have on ongoing strategy and decision-making.
The new management has put together an attractive balance sheet, largely by stripping assets. It has yet to show any ability to build an organization that can invent marketable drugs or shepherd them through development. When it comes to Nuvo’s core strategy, current management has no track record and as a result, no credibility. That’s not to say it won’t earn respect some day. At this stage, however, predictions about whether it will, have more to do with religion than demonstrated performance.
HG >> 2. Reaching all end-points in Clinical Phase III tests is excellent.
Yes. -- It’s also slightly behind where the company was in the summer of 2002 after submitting all Phase III data as recommended by the FDA, and after presumably getting unofficial assurance that approval was around the corner. According to Nuvo’s news advisory, the upcoming 12-month results are expected to add little new information. The shorter, 3-month portion already adds next to nothing. We now know there’s no extra risk in combining oral diclofenac with Pennsaid. Following the FDA’s input, Study 112 was designed to answer a question along the lines of:… is an elephant significantly heavier after a fly lands on its rump.
So, the company says that the latest Phase III will provide no surprises: good but underwhelming news. If the anticipated results merely confirm the original data, we have to wonder why the added research was necessary. For bureaucratic or political reasons, it was of course essential. But as for resolving bona fide medical concerns, who can say? The FDA did not ask the company to repeat any work. It wanted something new, mostly data that had not been required for oral arthritis drugs.
Long-term safety is typically evaluated through post-marketing studies, so patients can get treatment sooner and regulators can get piles of data (well beyond 12 months if they want) without sending developers into the financial weeds. The company’s four-year open-label trial with thousands of patients, while not statistically rigorous, provided a huge hint that Pennsaid was safe over the long haul. A more formal Phase IV might very well have given the FDA whatever additional info it needed. The fact that the agency elected not to go this route is either aggravating or worrisome, depending on whatever axe you want to grind.
Based on publicly available information, it’s impossible to judge whether the FDA acted reasonably. We cannot overlook the fact that results, positive or negative, are only part of the story. Pennsaid is the first topical OA treatment to try proving itself against a scientifically recognized yardstick. Which means that regulators have been forced to try inventing that yardstick. Other than basic principles of good science, there’s no cookbook, no product-specific research template, no surefire path to regulatory approval—not for the first product down the chute. If anything, the interminable delays suggest that few reviewers, including the FDA, have had a firm idea about what kind of data might be needed to establish safety and efficacy for this particular drug.
Some shareholders will feel extra confidence knowing that the latest Phase III design conforms to the FDA’s most recent input. Unfortunately, the company has been here before. There’s nothing to stop the FDA from waiting till the final seconds of the game and then moving the goal posts. Today’s set of expert reviewers is perfectly capable of deciding that the methods recommended yesterday don’t really cover what they thought. You cannot say: but we followed the rules; we did everything you asked, as the company almost surely argued, last time around. When it comes to health care, fairness alone doesn’t cut it—not in an industry where technology marches on and reviewers can always counter righteously that lives are at stake. We just have to trust that regulatory decisions will be motivated by legitimate, patient-centered concerns.
It’s logical to think that the regulatory climate has changed with the demise of Vioxx and Bextra, and the increased pressure on Celebrex. The odds for FDA approval are arguably better now because there’s a greater need for alternatives. On the other hand, the Vioxx debacle also reinforces a lesson that erring on the side of caution might save everybody a lot of grief, an observation that doesn’t improve Pennsaid’s chances.
So it’s not as if Nuvo will be standing in line waiting for a new driver’s license. The six-month timeline following an NDA is an estimate, not a guarantee. Today’s uncertainty is perhaps less acute than in the past. The company should be able to survive unexpected delays more comfortably than it used to. But the uncertainty can be expected to linger until US doctors start writing Pennsaid scripts and Nuvo starts collecting licensing revenues in amounts large enough to fund new product development.
That’s one area where management performance has been disappointing to dismal: the marketing deals signed so far have failed to generate enough dollars to even begin executing on the stated R&D plans. Maybe covering the phone bill was the best it could do for now, without risking a drop in popularity by going to the street for more financing. A US agreement should obviously be a lot more lucrative, but if Nuvo is having trouble selling a vision larger than Pennsaid revenues, its career as a biotech could be fairly short.
HG >> 3-7. The potential return on capital is very high… The potential for high earnings yield is there... Nuvo actually has a useful product that works... The Osteoarthritis market is huge,($6.5 billion)... The demographics is [are?] right…
Yes. -- The cost of drug development is also very high, $500-900 million for each of the rare products that make it from lab to market, sometimes more depending on the number of failed trials along the way. Pennsaid development was so much less expensive than normal that profit should be a slam-dunk after entering the US. But how much Nuvo might spend on new products is unknown, and development costs appear to be rising throughout the industry.
At some point Nuvo will have to decide whether it really wants to become a functioning biotech or simply coast along on Pennsaid revenues, maybe improving the packaging or delivery mechanism, and occasionally tossing out some cursory R&D with other products just to keep certain investors happy. We don’t know if that decision has been made. We won’t get a clear signal about management’s true commitment until we see what happens with Pennsaid Plus and W10 over the next year or two, and the extent to which future partnerships are weighted toward marketing or development. A single-product, Pennsaid-dependent company is not necessarily a bad thing, but it’s a different beast than a biotech, with a different financial model. For now, investors interested in anything more enduring than tomorrow morning’s SP will have to guess at what kind of company they’re buying.
HG >> 8. The competition (Vioxx, Bextra, Celebrex) is stifled.
Maybe. -- Merck, more so than Pfizer, seems to be lying low at the moment but these companies are hardly amateurs. Abandoning the arthritis market completely would be out of character, if large money-making opportunities exist. Notice how Pfizer has weathered the storm, wringing out the last few Celebrex $millions until it can move on to something better, if that’s what it wants to do. No doubt losing Bextra has hurt, and fighting the lawsuits will take a bite. Dumping Celebrex in the later days of its normal product cycle isn’t necessarily such a big deal.
Merck faces a stiffer challenge. Yet, damaging as the Vioxx fallout might be, the possibility of launching a drug that turns out to cause harm is an everyday reality in pharma. These companies understand that nobody is invulnerable, and you can bet they have contingency plans. Merck and Pfizer also have a long list of successes, credibility to spare, plus powerful product-generating and marketing machinery. And they have deep pockets, both financial and scientific.
If consumer demand and the ROI make sense, you’d be kidding yourself to rule out all competition, including competition from drugs unrelated to NSAIDs or COX 2s, as well as existing NSAID-PPI combinations (misoprostol), variations on our old buddy Phlojel, and other treatments we haven’t heard about, whether or not they’ve been invented. Competition might not come next week but it will come eventually, and all the sooner if Nuvo can put some blood in the water. Ironically, Pennsaid’s success in the face of COX-2 failure could get the company clobbered, particularly it Nuvo signs marketing agreements that require it to cover shortfalls or return upfront money if sales targets aren’t met.
In the short term, the current treatment vacuum plays to Nuvo’s advantage and should help attract a US distributor that’s interested in a quick fix and isn’t bothered by the expired patent and limited exclusivity period, or someone who sees opportunities for flipping the rights.
The longer-term outlook is something else. Effective as it is, Pennsaid is less convenient than pills. And like it or not, we North Americans are pill poppers. There are still patients with arthritis and other conditions who miss their Vioxx dearly. And there are doctors who would prescribe it tomorrow if they could, not because they’re stupid or reckless but because it works, it’s easy to take, and they’ve never personally run across Vioxx side effects, cardiac or otherwise. (Witness the on-again, off-again FDA response when evidence questioning COX 2 safety was finally released publicly, months and years after researchers began raising flags.)
In contrast, Pennsaid will enter the market with a smaller number of medical uses, and most likely only one approved indication. More to the point, applying Pennsaid requires discipline until it becomes embedded in a normal routine. (Even pumpers on this board have shown a reluctance to follow the label instructions, some of them claiming benefits after dropping the dosage so far below therapeutic levels, they might as well be slapping on distilled water.) Switching to a topical, and using it properly, involves more than buying a new drug. It calls for a degree of culture change—easy for a few and often difficult for the majority. Such a change takes time; and that leaves the door open for any competitors smart or lucky enough to push treatments better-suited to our short attention spans and desire for instant relief.
HG >> 9. The barrier to entry for this market is very high.
Yes and no, depending on what you’re driving at, although neither scenario gives Nuvo much of an edge. In a business/marketing sense, development costs are about the same for every drug maker. Somewhat less if you’re marrying two familiar compounds. A whole lot less if you can find ways to do that on a shoestring like the original DMX. If you’re talking about resistance from regulators, doctors, patients, insurers or distributors, putting Pennsaid on US shelves will probably make things easier for everybody. If you’re talking about another pharma introducing DMSO- or MSM-enhanced drugs, the height of the barrier depends partly on how much Nuvo or its partners can lock up access to raw materials. With patent protection gone, it’s not hard to cobble together a DMSO-diclofenac solution and if it’s generic competition, manufacturers can piggyback their R&D on Nuvo’s data, so they’re likely to enjoy a much faster and cheaper time-to-market, assuming US sales show that it’s worthwhile mimicking Pennsaid.
However, if you’re talking about starting from scratch with non-DMSO, topical treatments, this is where we get into the nasty technology stuff and where you are absolutely correct. The barrier is very high for everybody. Nuvo included. If you imagine that Nuvo’s proposed super-penetrant offers a leg up, you’ve taken a turn toward wishful thinking.
Penetrating the skin is the easy part. There are dozens of solvents that can do it. Some are toxic, maybe lethal. The trick is to get through in a way that leaves an active drug unaltered, avoids the GI and circulatory systems, and delivers therapeutic amounts of payload with minimal side effects. Worldwide, you can guess how many companies have done it. One: the original DMX. Some who have tried, (e.g. Macrochem in the US), have crashed and burned. Others (e.g. Novartis) have claimed to do it but have never bothered proving clinical efficacy and safety—something that could change if topicals catch on in the US. For the time being, Nuvo, or rather its predecessor, stands alone.
We don’t know what’s in Pennsaid Plus, only that it must differ enough from the original carrier to be patentable. That’s the whole point: getting a patent and giving development partners something worth buying into. (OA sufferers could care less about how much diclofenac gets through the skin. What matters is that their pain stops; and the existing product already does the job. The marketers might, as an afterthought, try making hay out of “faster, longer-lasting relief”, “fewer applications/lower cost”, etc. but you’ll notice how little attention the company has paid to those kinds of messages, even as development goals. Full marks to management for its restraint because nobody has a clue how Pennsaid Plus will behave in the body.) This is a business-driven initiative aimed at pulling in development dollars. Ending up with a better product would be a nice, but secondary, bonus.
However, regulators want to see drugs that work in actual patients and show measurable improvement over what’s already available. Reformulating Pennsaid kicks the company back to approximately square-one: invent something, do all the preclinical testing, clear Phase I, II and III, and get marketing authorization. Typical timeline: 10 to 15 years. The odds against success: astronomical. Nuvo doesn’t necessarily have to finish the course, but it must get far enough along to convince other companies to join in or accept a hand-off.
Where is Nuvo, now? It claims to have an idea on paper and some early test-tube data with a solution that might, or might not, see daylight. If the company has in fact nailed it, nobody including potential partners and Nuvo itself will get the slightest hint until the first Phase I/II trial. Regulatory approval to run the trial has not been announced, but assuming it comes and the drug performs as hoped for, long-term investors can break out the champagne. Management will finally get a shot at building a company with a future beyond Pennsaid’s estimated three-year period of exclusive access to the US market. Nuvo won’t need fqubed, at least not for developing Pennsaid Plus.
If the trial fails, there’s nothing to sell. Nuvo will have a tough time leveraging Pennsaid’s success if the new drug depends on a substantially different carrier. It could try leveraging fqubed’s expertise and the potential to quickly find another, more workable, solvent. Except, it’s also tough leveraging a reputation that may not exist. The San Diego lab has been pretty tight-lipped about whether its high-capacity screening and database of a million-plus molecules have ever led to a single commercially successful product, much less a drug that can stay out of the bloodstream.
Like many inventions, the original Pennsaid was the product of guesswork, inspiration and luck. It got rolling on the basis of documented scientific observations and a new theory about how substances get into cells. The microtubule transport model, while unconventional—some would say goofy—at least provided a rationale for formulating the carrier and expecting that what worked in the lab would work in patients. By comparison, fqubed’s scattergun approach might very well uncover hundreds of drug candidates but nobody, not even big pharma, can run hundreds of Phase I/II trials as the primary tool for weeding out duds, particularly with the clock ticking on the only tangible revenue source and nothing else in the pipeline. That may account for fqubed’s shyness in talking about any real-world successes.
WF10 and Oxoferin are unlikely to come to the rescue any time soon. The Penecure antifungal based on Pennsaid’s proven carrier had genuine promise, but management has held off running a startup clinical trial and has suggested it may scrap the original formulation in favor of the new super-penetrant. There might be good reasons for doing that. The downside is that Nuvo’s drug development future may be left hanging on one, as yet completely unproved, and possibly phantom, product. On the technology front, management could be headed toward making a risky business all that much riskier.
So yes, there’s some truth in every one of your points: high entry barrier, competition temporarily subdued, large and growing markets, proven product, great potential for return on capital, successful Phase III studies and credible, or semi-credible, management. The trouble is, you listed these things as if they were all good reasons for being gung-ho. Ain’t necessarily so. Nobody outside Nuvo, and certainly not you or I, can know everything we should—the traditional downfall of fundamental analysis. Investors don’t always get the full picture and they can easily fool themselves into taking whatever information they have and spinning it in whatever direction they want. Some will find it more intellectually satisfying than TA or astrology. Does it provide a better forecast for Nuvo? Depends on what floats your boat.
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