Sunday, December 12, 2010

OREX vs VVUS: How Does This Make Any Sense???

As of close on Friday, Orexigen Therapeutics has a stock price of $8.41 or a $400M market cap. Using Yahoo Finance they have a net cash position (cash less debt) of $97M. Subtracting that they have a $303M enterprise value.

VIVUS closed at $9.39 and has a $763M market value. Take away their net cash position of $143M and you are left with an enterprise value of $620M for their pipeline. One company has a drug recommended by the FDA, the other does not.

Now comparing VVUS and OREX straight up is not fair. Orexigen's got two drugs in the pipeline, but they are both obesity drugs that share some of the same compounds so really it's like they have one. Vivus' Qnexa programs are targeting Diabetes and Sleep Apnea as well so to compare the two companies we have to take the perceived market value of that portion of their pipeline out.

How can we do this? A way to try is to take a look at Arena Pharmaceuticals. Although they also have some drugs in their pipeline, the only one at a later stage is Lorcaserin so the company pretty much lives or dies off of the success of that drug. They have $177M in cash and $123M in debt so their net cash position is $54M. They have 121.4M shares outstanding. On September 13th their closing price was $6.85 a share. That's $832M in market cap, $778M in enterprise value. Once the dust settled, on September 17th they closed at $1.99, a $242M market cap and $188M enterprise value. The FDA concerns over Lorcaserin cost them 76% of their enterprise value.

Now let's look at VVUS. They have 81.2M shares. Initial reaction on their FDA non-approval caused them to drop from $12.11 on July 14th to $5.41 on July 16th. A drop from $983M to $439M in market cap or $840M in enterprise value to $296M in enterprise value. If VVUS' obesity drug lost the same 76% of its value as ARNA, it would have dropped from $717M to $173M. The value of their pipeline not related to the obesity program is 983M-717M or 439M-173M or $266M.

Going back to the start of this blog, VVUS' current enterprise value is $620M. Subtract the non-obesity part of the pipeline you're left with $354M of which the market currently thinks Qnexa Obesity is worth. That is WITHOUT any approval, just the excitement over possible approval after what happened to Orexigen.

So Orexigen's soon to be APPROVED drug Contrave is worth $303M while VVUS not yet approved Qnexa Obesity is worth $354M. I know that the data points on Qnexa are stronger, but to me an FDA approval is worth more than the data points.

If Contrave was given the same enterprise value as Qnexa of $354M, the market value of OREX would be $354M+$97M= $451M. with 47.58M shares outstanding, that's a $9.48 share price. If Contrave is worth 25% more (I think that's a fair assumption of where they should be given the relative state of each drug) that's $443M in Contrave and $540M in market cap, $11.35 share price. Assuming 50% more value over Qnexa, and the stock price is $13.20. You get the point. I think OREX is hugely undervalued right now when looking at VVUS.

Then you think about ARNA and how before the FDA concerns it was trading at a $832M market cap with $43M less in the bank than OREX. A market cap of $875M for OREX leaves it with a stock price of $18.39.

Take a look at what I think about ARNA and ETRM 

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1 comment:

  1. One of my best calls of all-time I'll tell ya! Good thing I didn't listen to myself and dumped this for a very small profit back when it was trading at $9 :/