Merrill, looks like they were caught with a buy rating hanging out there.
Dov Pharmaceutical Inc.
Downgrading on failed trial
Downgrading to Neutral; bicifadine misses on all endpoints
We are downgrading DOV to Neutral from Buy after the company reported that
bicifadine for chronic lower back pain failed to show a statistically significant
benefit over placebo in the Phase III Study 020. Based on a lower probability of
bicifadine success, longer time to approval & likely more than expected dilution
from equity raises, we estimate a fair value for DOVP of $10-13.
Possible long-term value for bicifadine, but near-term risks
Although bicifadine may have long-term value, there are several risks: 1) Study
021 may fail or be discontinued because of its similar design, increasing the
likelihood of near-term negative catalysts, 2) at least 2, if not more, additional
Phase III trials will be required for approval, and 3) a highly dilutive raise in the
next 6-9 months is more likely, diluting investors more than expected, so Indiplon
may now be worth only $7-9 per share, suggesting further potential downside.
Post-mkt weakness overdone, but DOVP could settle at $7-9
After market trading may have been overdone (last price of $8.33) and we would
expect a rebound on Tuesday, but without solid data and a negative biotech
market, the stock may drift back to the $7-9 level in the next 3-6 months. We
would view the stock as a good value opportunity if it was trading closer to the low
end of the Indiplon range, or about $7, and investors could get the pipeline “for
free.”
Large raise likely to dilute investors more than expected
Based on the negative trial, and with about 18 months of cash, DOV may have to
do a large, dilutive raise at a lower than expected stock price in the next 6-12
months. Given the negative state of the sector, DOVP may take a bigger than
expected haircut on valuation in an equity raise and the per share value of the
Indiplon royalties and pipeline would be lower than projected. |
