NPS Pharmaceuticals, Inc. (NASDAQ:NPSP)

zzlangerhans (99.76) Submitted: 11/21/2011 11:13:54 PM : Start Price: $5.25 NPSP Score: +144.51

Recent bad news from the STEPS 2 extension study of Gattex in short bowel syndrome got me out of the red zone and into a winning red thumb on NPS. The company reported three cases of cancer occurring in the 37 patients who received Gattex. The company pointed out that two patients developed lung cancer and had a long smoking history, while a patient with a gastrointestinal adenocarcinoma appeared in retrospect to have already had a liver metastasis prior to initiation of Gattex treatment. Clearly, the company is promoting a narrative that these cancers were stochastic events unrelated to treatment with Gattex.

My green thumb indicates that I'm siding with the company on this, at least for now. These were advanced cancers, and in two of the cases the advanced stage at diagnosis is simply not consistent with Gattex being a causative agent. I did find it irritating that NPS chose to add that the local site investigator believed there to be a higher incidence of lung cancer in short bowel syndrome patients, without any substantiation provided for this self-serving observation.

Somewhat more worrisome to me than the cancer reports is the unresolved question of whether Gattex is sufficiently effective and well-tolerated to justify premium pricing for SBS patients. The company is basing their upcoming NDA submission on the STEPS phase III study, in which 27/43 patients receiving Gattex achieved a 20% reduction in weekly volume of parenteral nutrition vs 13/43 receiving placebo. That was statistically significant and met the primary endpoint, but I'm seeing a small study and an endpoint of questionable real-world significance. I'm not sure how much a 20% reduction in TPN improves quality of life. Furthermore, an earlier phase III study of Gattex in 2007 had mixed results.

Since the cancer reports, NPS stock has traded in a narrow range and didn't get much of a lift this month when the company reported positive results of the REPLACE phase III trial of NPSP588 in hypoparathyroidism. Once again, an ultra-orphan indication, a small study, and a questionable endpoint (reduction in calcium supplement requirement). Anyone who believes that Gattex and NPSP588 provide a straight and clear road to profitability is deluding himself.

NPS has relatively complex finances for a baby biotech. They have a large cash reserve of 190M but a heavy long-term debt burden of 247M. The company earns over 20M per quarter in royalties, mostly from Amgen's Sensipar for secondary hyperparathyroidism. The company recently increased their cash position and retired some of their debt with a large advance on their royalties from Amgen. Trying to decipher the finances gives me a headache, so I just keep an eye on them while I focus on upcoming catalysts.

The cancer reports won't affect the upcoming Gattex NDA submission or a likely FDA acceptance of the application. An NDA submission for NPSP588 may also come in the near future. With two novel compounds under FDA review and a history of getting other profitable drugs approved, I believe NPS stock is likely to recover significantly leading up to the first PDUFA. Hopefully, this green thumb will be closed before the actual PDUFA.