This is the third and final part of Drew Waight’s guest series evaluating NeurogesX for investment. Thanks to Drew! If anyone else would like to do a guest series about a recent IPO, shoot me an e-mail (it’s in the about section).
NeurogesX financial details (2006):
Burn Rate: $30million
Liquid Assets: $14million
IPO price: $11.00
Raised in IPO:$44million
Fortunately in the case of NeurogesX we are looking at a company completing two secondary phase 3 trials so we don’t have to speculate too much about either the chances of their lead product, NGX-4010, being tolerated or effective. In addition this makes the financials a little easier to read as it’s relatively safe to assume that they will be able to get some revenue should the FDA fast track their NDA application expected to file in 2008.
As of December 31, 2006, NeurogesX has a deficit accumulated during the development stage of $127.5 million, and they further believe there is enough working capital to meet their obligations through the first half of 2007. Management plans to continue to finance the company’s operations with a combination of equity issuances, debt arrangements and revenues from collaborations with pharmaceutical companies, technology licenses and, in the longer term, product sales and royalties. In reference to the IPO, the S-1 states that Neurogesx plans to spend $40 million from the net proceeds to fund R&D. This roughly breaks down into $25 million to finish off NGX-4010 clinical and regulatory program for PHN and HIV-DSP, $10 million for NGX-4010 development for PDN program and the remaining $5 million for a new opioid analgesic product candidate. Looking at the above numbers it’s easy to guess that NGSX didn’t raise as much as expected during their initial public offering of 4 million shares. The shares were offered at $11 (after being reduced from $13) and closed down at $10.25 on the first day. Given the small amount of working capital, this indicates that even if NeurogesX continues to operate at their 2006 levels they won’t even have enough cash for two years. If this isn’t a problem it certainly is cutting it closer than I’m sure the management would have liked. Regardless, as was covered in the last post, NeurogesX plans to file their MAA with the EMEA this year, and, should this be successful, they would theoretically have the funds necessary to take NGX-4010 to the U.S. market at least for PHN and HIV-DSP.
NeurogesX Final Thoughts
NeurogesX stock price decreased nearly 30% in the first week of trading. Even though it is not atypical in biotech to see a drop in price the week following the IPO, it is possible to draw some logical conclusions as to why the stock has fallen. First of all, understanding the product NGX-4010, while actually straightforward, is a convoluted process in terms of gathering together previous studies and intellectual property. Combine this with the fact that there is no publicly available analysis of NeurogesX and very little “buzz” on the trade sites or blogosphere. The result of this marginally unexciting IPO is probably a cursory glance at the financials, which, to say the least, are less than optimal. Therefore from a financial standpoint investing in NeurogesX should give one some apprehension. However, from a market and science perspective this is a company holding the intellectual property license on a topical transdermal patch with high concentration of a natural compound for two underserved medical conditions. Because of this, even without two successful phase 3 trials, I would give NGX-4010 a much better chance of FDA approval than any small molecule or biologic. It is because NGX-4010 is so relatively close to being a product that I firmly believe that the ~$8 share price is substantially undervalued. That being said, I feel it would be less than prudent to bank on NGX-4010 being approved for PDN stateside, (however generously that would effect the market cap) due to the reasons explained previously. Personally I can’t think of a reason high concentration capsaicin should work some neuropathies and not others, but I’m in the business of investing my money and not gambling on unknowns. In summation, the largest risk involved with what I have just described as a bargain share price for a company with post-phase 3 treatments is going to come down to the financials. We all like a little wiggle room should things take longer than expected and I don’t feel that NeurogesX is leaving themselves that much. Conversely, I would be surprised that a company this close to the goal would ever be allowed fall short.
Since writing this article (Editor’s note: I was really slow getting it up) NeurogesX finished the second phase III trial of NGX-4010 for PHN and the stock surged to ~9$. Conversely during the first quarter ending in March they posted a wider loss totaling $11.4 million. Both of these events continue to support my synopsis of NGX-4010 being a promising therapeutic despite NeurogesX’ less than optimal financials.