October 14, 1998
RECOMMENDATION: BUY
CYPRESS BIOSCIENCE, INC. (NASDAQ: CYPB)
"Important Milestones Approaching"
| MARKET
DATA:
Exchange Symbol: CYPB (NASDAQ) Price of Common Stock (10/13/98): $2.53 30-Day Average Trading Volume: 168,000 Shares Outstanding: 39.3 mm 52-Week High/Low: $3.81/$1.15 |
CYPB CORPORATE
INFORMATION:
Address: 4350 Executive Drive, Suite
325 Telephone/Fax: 619-452-2323 / 619-452-1212 Chairman & CEO: Jay D. Kranzler, M.D., Ph.D. President & COO: Debby Jo Blank, M.D. |
SUMMARY INVESTMENT CONSIDERATIONS
Cypress Bioscience, Inc. ("CYPB") develops, manufactures and markets medical devices and therapeutics for certain types of immune diseases and is engaged in the development of a novel blood platelet substitute. CYPB is currently awaiting FDA review of its completed PMA submission for the ProsorbaÒ column for Rheumatoid Arthritis ("RA"), and recently announced that the FDA will review this submission at an October 29, 1998, Advisory Panel meeting. We believe there are several key milestones over the next several months that could positively affect the share price. We believe CYPB is undervalued based on Prosorba for RA alone, without regard for the significant potential of its Cyplex technology, and are recommending purchase for investors tolerant of risks associated with small-cap and micro-cap investments.
- Valuation and Timing
- We believe CYPB shares offer very good value at current levels based on the potential for Prosorba for RA alone; likely milestones in 1998 should positively affect institutional interest, Wall Street sponsorship and, ultimately, the share price. We have a 12-month target price range of $5 to $7 per share.
- Prosorba for RA
- We believe CYPB will receive FDA approval for Prosorba for RA in 1998. We estimate that the US target market alone represents a $2 billion opportunity.
- The Company is actively seeking alliances with marketing partners for Prosorba for RA. We believe the Company will establish one or more such alliances this year.
- Diversifying Technology Base - Cyplex Product
- CYPB has an active corporate development effort aimed at identifying and acquiring or in-licensing synergistic products and technologies to broaden its portfolio.
- In 1997, CYPB acquired Cyplex, a substitute for traditional platelet transfusions. The potential US market for this product is approximately $600 million.
- Strong Management Team
- Since taking over two years ago, Drs. Jay Kranzler and Debby Jo Blank have been taking the appropriate steps to drive shareholder value. We believe patient investors are soon to be rewarded.
COMPANY DESCRIPTION & HISTORY
Cypress Bioscience, Inc. ("CYPB") develops, manufactures and markets medical devices and therapeutics for certain types of immune diseases and is engaged in the development of a novel blood platelet substitute. CYPB is currently awaiting FDA review of its completed PMA to the FDA for the Prosorba column for Rheumatoid Arthritis (RA). Given the positive results of its pivotal Phase III trial, favorable comments about the column’s use by leading rheumatologists involved in the study, and the fact that the Prosorba column is already approved for another indication and its safety profile is well established, we believe the Prosorba column will be recommended for approval at the October 29th panel review meeting. CYPB currently markets the Prosorba column for treatment of idiopathic thrombocytopenic purpura (ITP), an immune disorder where platelets are depleted, reducing the clotting potential of blood. CYPB is also in Phase II clinical trials for Cyplex, a substitute for blood platelets which offers substantially longer shelf life and a greater safety profile than traditional platelet alternatives.
The Company was established in 1981 under the name IMRE, went public in 1983 and received FDA approval for the Prosorba column in 1987 for the treatment of ITP. New management assumed control in January 1996, and has executed a turnaround strategy which has included raising over $30 million in private equity, renaming and relocating the Company, reacquiring marketing rights for the Prosorba column for ITP from Baxter, initiating a pivotal trial of the Prosorba column for RA, and acquiring the rights to Cyplex. As we believe the value driver for CYPB is Prosorba for RA over the intermediate term, we provide an overview of the disease, current therapies, and CYPB’s target market below.
RHEUMATOID ARTHRITIS — THE DISEASE AND CURRENT THERAPIES
Rheumatoid arthritis is a chronic disease that causes pain, swelling, stiffness and loss of function in the joints of the body, and inflammation and other problems in other areas of the body. According to the American College of Rheumatology, RA afflicts approximately 1% to 2% of the worldwide population, totaling approximately 2.4 million Americans. More than 60% of those afflicted are women. There have been many studies published on the direct medical costs, and total costs, attributed to RA, and we estimate that the direct medical costs in the US (excluding financial losses) exceeds $5 billion.
The cause of RA is unknown. The disease is very complex, difficult to diagnose, progresses at very different rates in different patients, and affects different joints and organs. Although treatment has improved over the past 20 years, there is no cure for this debilitating disease.
Current Therapies: Current approaches to treating RA attempt to alleviate pain, reduce inflammation, prevent joint damage and slow or reverse disease progression. Many of the approaches are initially effective, but patients commonly switch therapies and try multiple therapies simultaneously as the drugs effects lessen over time and side effects, sometimes severe, become intolerable. The two most commonly prescribed therapies are as follows:
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NSAIDs |
Non-steroidal anti-inflammatory drugs ("NSAIDs") such as aspirin, ibuprofen and naproxen are used to decrease inflammation and lessen pain. These drugs, typical first line therapy, are prescribed to patients with mild to moderate RA. Most NSAIDs decrease in efficacy over time, and patients do experience side effects such as gastrointestinal irritation. |
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DMARDs |
Disease-modifying anti-rheumatic drugs ("DMARDs") include methotrexate, azathioprine, cyclosporine, and gold compounds, among others. Methotrexate is the most commonly used DMARD. However, these drugs can be extremely toxic, and many patients discontinue use over time. Most patients with severe RA will try many DMARDs over time. |
Recently, there has been considerable press about the market opportunity for new drugs for RA. Three new drugs have garnered a significant amount of attention. Hoechst Marion Roussel recently had a new drug called Arava approved for the RA indication. ENBREL, from Immunex, was recently recommended for approval by its FDA panel for severe RA patients. And Remicade, from Centocor, is anticipated to be approved for RA within the next twelve months. Remicade and ENBREL are known as TNF Inhibitors:
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TNF Inhibitors |
TNF, tumor necrosis factor, is a substance in the body that has the ability to kill tumor cells. Normally, the body releases this substance following an injury or infection. However, TNF has been detected in high concentrations in the joints of RA patients, and it is theorized that TNF may be contributing to the destruction of joints. Remicade and ENBREL are two new anti-TNF drugs that have been shown to be effective in advanced human clinicals. Both companies are hoping to have approvals for these drugs in the next 12 months. |
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COX-2 Inhibitors |
NSAIDs work by inhibiting an enzyme called cyclo-oxygenase (COX), which is involved in inflammation. COX-2 Inhibitors have a similar efficacy to NSAIDs, but with fewer side effects. At least two COX-2 Inhibitors are expected to be approved in late 1999 and early 2000. We expect these drugs to be successful, especially with the less severe cases of RA. |
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Other Approaches |
As mentioned, there are numerous new drugs in clinical trials targeting the large RA market opportunity. Most are in early human clinical trials, and are at least three years or more from FDA approval, assuming the trials show a requisite level of efficacy and safety. |
ESTIMATING THE MARKET FOR PROSORBA FOR RA
The American Rheumatism Association (ARA) has developed a system to categorize RA patients based upon their functional ability, and has estimated the percentage of patients in each category. The table below provides some information on the different categories of patients:
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Category |
Characteristics |
Likely therapy |
% patients |
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Early (Class I) |
No functional disabilities; no joint or tissue destruction |
NSAIDs |
36% |
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Moderate (Class II) |
Some discomfort with normal activities; some soft tissue damage and muscle atrophy |
NSAIDs DMARDs |
32% |
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Severe (Class III) |
Functional capabilities greatly diminished; joint deformity, cartilage and bone destruction, extensive soft tissue and muscle damage |
NSAIDs DMARDs |
22% |
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Terminal (Class IV) |
Incapacitated |
NSAIDs DMARDs |
10% |
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Source: Therapeutic criteria in rheumatoid arthritis, JAMA, 140:659-662; Company and Industry Sources |
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Studies estimate that the annual direct medical costs of RA, defined as doctor visits, drugs and surgery, to range from approximately $4,000 to $99,000 per patient (with $70,000 being the 75th percentile). Indirect costs attributed to care taking and lost wages are roughly the same magnitude. The more severe the case of RA, the higher the average annual costs. CYPB is targeting the "Severe" and "DMARD refractory" patients. These patients are the most critical ill, have typically tried and become refractory to one or more DMARD drugs, and frankly have few other possible treatment alternatives. CYPB estimates its US target market as approximately 160,000 to 260,000 patients. This base includes approximately 100,000 patients that are refractory to DMARDs, and 100,000 patients that it characterizes as DMARD "switchers," or those that have tried and failed a second line DMARD drug such as methotrexate. Based on industry sources and other market surveys, we believe the target market domestically is probably higher, perhaps two to three times higher than the Company estimates. However, our earnings model uses the Company’s conservative estimate of 160,000 as a starting point (see Financial Projections and Valuation Analyses).
Naysayers comment that the administration of the Prosorba column will greatly limit its use. Although treatment with the Prosorba column does require twelve, 2-hour apheresis procedures (once weekly for 12 weeks), many rheumatologists surveyed have stated that the critically ill patients will tolerate the perceived inconvenience of the treatment because there’s simply no alternative. There is a certain patient population that has no other viable alternative therapy.
Impact of Arava, ENBREL and Remicade: Depending upon the timing of FDA approval and subsequent product roll-outs, Arava, ENBREL and Remicade are anticipated by many Wall Street analysts to generate hundreds of millions of dollars in revenues over the next few years. And like the Prosorba column, these drugs are targeted at the severe and refractory patient population. Does this mean there isn’t room in the market for the Prosorba column? We don’t think so. Firstly, we don’t believe that any of the drugs in development will be universally efficacious in Cypress’ target market due to the complex nature of the illness, nor has interim clinical data shown this to be the case. Nor should we expect that the new drugs will have the same benign safety profile as the Prosorba column. In fact, Arava has known potential side effects of diarrhea, hair loss and liver damage. Recall that the Prosorba column has been used for several years for the ITP indication without any significant side effects. Lastly, there has been a question about patient’s tolerance to undergo the apheresis procedures, versus other therapies. Note that ENBREL is administered through twice weekly subcutaneous injections (self-administered), and Remicade is administered by intravenous infusion every four to eight weeks. These routes of administration will not be universally acceptable to patients either. Again, we believe that the market is large enough that CYPB’s Prosorba column can successfully gain share and generate significant revenues. Additionally, as patients fail these new drugs, they become eligible for Prosorba treatment as well. There will be significant competition in this segment of the market.
CYPB PRODUCTS AND PRODUCT PIPELINE
CYPB is currently working on two products: the Prosorba column and Cyplex Platelet Alternative. Below is a review of both products and their target markets.
The Prosorba Column
The Prosorba column is a small plastic cylinder filled with a reagent called Protein A. Although the method of action is not completely known, the column may work in part by binding to antibodies, removing them from the blood. In the case of RA, it is believed that antibodies contribute to the inflammation in the joints. To use the column, a patient is hooked up to an apheresis machine that separates the cellular components of the blood from the plasma. The plasma is passed through the column, thereby treating it, and is recombined with the cellular components of the blood and reinfused into the patient. A single treatment process takes about 2 hours. Apheresis procedures are quite common and safe, and cause little discomfort to the patient.
Prosorba for RA: On July 21, 1998, CYPB announced it had completed its submission of a Premarket Approval Application (PMA) with the FDA for Prosorba for RA. The PMA is based on results of a pivotal Phase III clinical trial in RA that was concluded in January 1998. At that time, an independent Data Safety and Monitoring Board recommended an early cessation of the Phase III trial due to the achievement of favorable safety and statistically significant efficacy results. We believe this was the first time that a clinical trial on a RA drug was halted early due to positive results.
The Phase III pivotal trial had enrolled 109 patients prior to cessation. These patients were the most severely afflicted RA patients, having suffered an average of 15.5 years, and having failed an average of over 4 different DMARDs, including methotrexate in most cases. Over 40% of the patients were classified as Severe, Class III (see previous table). In the trial, patients were randomized to receive treatment with the Prosorba column or a sham apheresis procedure. The patients received 12 treatments, once weekly for twelve consecutive weeks. Of the patients who completed the treatments, 45% were clinically improved (as measured by stringent American College of Rheumatology criteria). The average duration of the response is approximately 40 weeks (or 24 weeks after the last treatment), with some patients able to remain off all RA specific medication for as long as 75 weeks. And, there was no evidence of increased side effects due to Prosorba therapy versus the sham procedure.
Prosorba for ITP: ITP is a serious platelet disorder which is characterized by episodes of acute bleeding. Current courses of treatment include steroids and intravenous IgG. CYPB received FDA approval for Prosorba in December 1987. Since that time, more than 3,000 patients have used Prosorba for ITP, without any significant side effects. We believe this is one of many important considerations when trying to handicap the likelihood of FDA approval of Prosorba for RA; clearly the Company’s ability to manufacture the device to cGMP standards, and the device’s safety profile across a broad patient population, is well established at the FDA.
CYPB has been generating revenues of approximately $3.0 million annually on Prosorba for ITP. The market opportunity in ITP is not large, nor do we expect CYPB to put a significant amount of resources into growing its marketing efforts for this indication. In our financial projections, we have reflected a modest level of revenues for the ITP indication.
Patent Position on Prosorba: CYPB has 11 issued US patents and 6 international patents on the Prosorba column that expire between 2004 and 2009. The patents cover the use of the column for ITP and RA, and the process used in the manufacturing of the column.
Cyplex Platelet Alternative
CYPB is developing Cyplex as a substitute to platelets for the treatment of bleeding due to thrombocytopenia, or an abnormal decrease in platelet level. Cyplex is manufactured from small platelet membrane fragments, from either fresh or outdated human platelets. These fragments can be virally inactivated similarly to certain other blood-derived products, and then lyophilized, or freeze-dried, which provides for a longer shelf life and ease of handling and administration. Cyplex offers many benefits over fresh platelets:
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Platelet Problem
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Cyplex Solution |
There are a number of medical disorders and procedures that result in significant bleeding or the body’s inability to produce a sufficient level of platelets in the blood. In such cases, clinicians prescribe transfusions of large concentrations of platelets. The Company estimates that the total US market for platelets is 8.3 million units, or approximately $600 million, split roughly equally between the surgical market (for trauma, open heart procedures, organ transplantation, etc.) and the medical market (for treatment of certain cancers and certain blood disorders).
Clinical status: CYPB has completed a small Phase II multi-center trial to evaluate the safety and effectiveness of Cyplex. Thirty-one patients were enrolled in seven centers. Of the twenty-six patients that received Cyplex, seventeen were observed as having improved based on a pre-defined evaluation scale. Of these patients, twelve met the criteria of being refractory to platelet transfusions, and seven of these twelve responded favorably to Cyplex. CYPB is currently planning another Phase IIb study to evaluate dosing of Cyplex. Approximately 100 patients will be enrolled at up to ten different leading institutions across the country. We anticipate this study to begin in late 1999.
We believe that Cyplex will be a very significant product for CYPB. We have not included it in the current financial model, as we don’t believe Cyplex will contribute significantly to top-line revenues before the year 2003. The current timetable calls for additional studies in 1999, a Phase III trial in 2000, with a filing of a Biologics License Applications (BLA) with the FDA sometime in 2001, with commercial sales beginning sometime in 2002. However, we believe there will be important interim milestones, such as clinical results of studies and corporate partnering activity, that will benefit the CYPB share price over the near and intermediate term.
Patent Position on Cyplex: CYPB has 4 issued US patents and 3 pending US patents relating to platelet therapeutics that expire between 2010 and 2014.
CURRENT STRATEGY
Currently, management is focused on preparation for the launch of Prosorba for RA. Central to this launch is establishing an alliance with a corporate partner that has a national presence in the apheresis market. The likely corporate partners are the major manufacturers of apheresis equipment: Baxter, COBE (Gambro) and Fresenius. The Company has indicated that it is actively speaking with potential partners, and we are confident that one or more alliances will be forthcoming in the near term.
The Company recently announced that it has raised $4.5 million in a private placement, which together with a current cash position of approximately $4.0 million, would be enough to get Prosorba for RA launched. We anticipate that a potential corporate partner could bring financial resources to bear as well. We anticipate that the Company will need to raise additional funds over the next 12 months. Given their financing track record, and the anticipated announcements over the next twelve months, we are optimistic that the financing will be available despite the current difficult market conditions for small-cap and micro-cap stocks.
MANAGEMENT
Jay D. Kranzler, M.D., Ph.D., has served as Chief Executive Officer of the Company since December 1995 and took on the added title of Chairman of the Board in April 1998 after formerly serving in the capacity of Vice Chairman. During his tenure at Cypress, Dr. Kranzler has been instrumental in raising over $30.0 million through private placements, renaming and relocating the Company, reacquiring marketing rights for the Prosorba column for ITP from Baxter, initiating and completing a pivotal trial and filling an NDA of the Prosorba column for RA indication, and pursuing acquisitions to broaden the Company’s technology base. Before joining Cypress, Dr. Kranzler served as CEO of Cytel Corporation for seven years. Previously, he was a management consultant at McKinsey & Co.
In December 1995, Debby Jo Blank, M.D. was appointed President, Chief Operating Officer and Director of Cypress Bioscience. Dr. Blank heads CYPB’s marketing sales groups, which have steadily increased sales of the Prosorba column. Dr. Blank served as Senior Vice President of Marketing of ATL Ultrasound prior to joining Cypress. Previously, she was a Vice President in charge of marketing and business development at the DuPont Merck Pharmaceutical Company.
Michael Gendreau, M.D., Ph.D., has worked at Cypress since 1994 and, in December 1996, assumed the title of Vice President of Research and Development and Chief Medical Officer. Dr. Gendreau is currently heading CYPB infusible platelet research (Cyplex). Prior to joining the Company, Dr. Gendreau served as Vice President of Research and Development and Chief Medical Officer of MicroProbe Corporation.
FINANCIAL PROJECTIONS AND VALUATION DISCUSSION
We have prepared financial projections for CYPB. As mentioned previously, we have focused on Prosorba for RA as the real value driver over the next few years. As a starting point, we have used the Company’s estimates for the size of the target market (severe and refractory patients), which we believe to be conservative. We have made assumptions as to achievable share, and used a pricing scheme based upon guidance from the company and industry estimates concerning the costs of comparable therapies. While we have reflected modest revenues for Prosorba for ITP to continue, and show a modest level of Cyplex revenue in year 2003, the valuation (and the near term investment case) is based on Prosorba for RA.
With respect to valuation analyses, we have calculated future earnings per share and used traditional multiple analyses. Again, both with respect to P/E multiples and operating income multiples, we believe we are being conservative given the risk profile for Prosorba, and we are being sufficiently punitive in using discount rates that range from 30% to 38%.
We are recommending purchase of CYPB shares at their current levels for investors tolerant of small-cap and micro-cap equity risk. We have a 12-month price target range of $5 to $7 per share.
FOR ADDITIONAL INFORMATION
Contact SmallCaps Online LLC — 212-554-4158
For corporate inquiries: Jeffrey B. Davis
For investor inquiries: Jennifer LaVin
For media inquiries: Jeni Gray
RISK CONSIDERATIONS
This section of the document is to remind potential investors to undertake a prudent level of due diligence prior to making an investment in securities of Cypress Bioscience, Inc. For a complete description of risks and uncertainties to CYPB’s business, see the Risk Factors section in CYPB’s SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the internet. Other potential risks include:
- Market risk: Like many small-cap and micro-cap stocks, CYPB’s share price is trading near its 52-week low. Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence on key personnel, and dependence on single products or technologies.
- Business risk: CYPB has limited experience in the marketing of the Prosorba column for the RA indication. Although it is seeking a corporate partner to assist in marketing of Prosorba for RA, there can be no assurance that such an alliance will materialize, or that the market will accept the product.
- Regulatory risk: There can be no guarantee that Prosorba for RA will be approved by the FDA. In addition, after commencing its Phase II clinical trials for Cyplex, there is no indication the FDA will approve the initiation of a Phase III trial or approve Cyplex for use by the general public.
- Competitive risk: There are many new drugs in development targeting the RA indication, and we anticipate the competition to be intense. Many of CYPB’s competitors may be larger, better capitalized and hold dominant market positions.
SOURCES FOR ADDITIONAL INFORMATION
The following are website addresses offering related information, and links to other sources of information.
www.CypressBio.com CYPB’s corporate website
www.SmallCapsOnline.com SmallCaps Online’s site for company information and research
www.FDA.gov US Food and Drug Administration homepage
www.rheumatology.org American College of Rheumatology homepage
www.arthritis.org Arthritis Foundation homepage
www.WHO.int World Health Organization homepage
www.AABB.org American Association of Blood Banks homepage
www.AMA-Assn.org American Medical Association homepage
www.SEC.gov U.S. Securities and Exchange Commission, with links to EDGAR filings
The information in this report has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opionion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC has performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC or persons associated with SmallCaps Online LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. This material, or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document which is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1999.