Neurogesx: A speculative possibility

Since I've started this blog, I've been scouring the Internet for other ideas for investing in biotech. Recently, Baby Biotechs ran a three-part piece featuring small biotech firm NeurogesX (NGSX). I was intrigued. The company has a late-stage drug candidate with some potential to fill a hole in medical need. However, the stock has struggled since its IPO. After reading Baby Biotech's take on the stock, I looked into it, and to say the least, I'm tempted to buy it.

NeurogesX develops pain management therapies, specifically in the area of neuropathic pain relief. Is main candidate is NGX-4010, which is in separate Phase III trials to treat Post-Herpetic Neuralgia (pain associated with shingles) and HIV-associated Neuropathy. It is also in Phase II trials to treat Painful Diabetic Neuropathy. Based on my research, I've estimated the PHN and PDN markets to be around $1.5 billion each. While I estimate the HIV market to be around $500 million. For more information on neuropathic pain, go to Baby Biotech's post.

I like this stock for speculative purposes only for several reasons. First, the company announced in June that it had completed the enrollment for its Phase III trial of PHN, which means that data should be announced within the next couple of months. This gives the stock a catalyst. Positive data will definitely move the stock. However, negative data is also at risk, as this would send the stock lower. Secondly, the data up to this point has been positive, which gives reason to believe that the final Phase III data will be too. Thirdly, I like the fact that the Street is starting to catch wind of this stock. TheStreet.com ran a piece in June about the stock and two analysts have rated the stock a buy with price targets at $12 and $13. Finally, a like the stock because it appears undervalued. This was the same conclusion Baby Biotechs came to. Using conservative market share estimates, I found a fair value of $9.50 for NGSX using my rNPV template, with $6.61 coming from NGX-4010's treatment of PHN.

However, there are some risks that we need to be aware of here. First, the stock (trading around $7) has had significant selling pressure since its IPO. The stock priced at $11 in May, but have never traded above that mark. That is very negative for an IPO. Secondly, even after the positive data release in June, the stock has resumed its move to the downside. Lastly, there are many pain treatments on the market, including generic treatments that will compete with NGX-4010.

I believe my fair value takes into account the potential competition, possibly even more than necessary (I estimate a 10% market share), so I believe that the stock is fairly undervalued here. I also believe that this stock carries very significant risk and should only be invested on a speculative basis and only by those individuals that are risk tolerant. I am placing a speculative buy rating on this stock with a price target of $11. I will revisit this stock after its Phase III data is released later this year.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not.