NeurogesX, Inc 2009 Review

7/28/2019 NeurogesX, Inc 2009 Review

1/12

November, 2009


2/12

NeurogesX, Inc. (Ticker Symbol: NGSX),is a development stage biopharmaceutical company focusing on

the development and commercialization of novel pain management therapies.

The Company has recently received an FDA approval on their lead product Qutenza from the U.S.

FDA (announced Monday 11/16/2009) and holds five additional potential products in the development

pipeline.

Strategy

Risks and Problems

Solutions and Market Potential of Growth

It is hereby recommended to acquire a long position in NGSX at the current closing price of $8.38 as arecent valuation analysis reveals an upside of +19% with a near term target price of $10.00.

Executive Summary

Company: NeurogesX, Inc.

Ticker Symbol: NGSX

Closing Price: $8.38 (at 11/19/09)

Recommendation: BUY

Target Price: $10.00

KEY INVESTMENT POINTSRECOMMENDATION
http://finance.yahoo.com/echarts?s=AKRX


3/12

NeurogesX, Inc. (NGSX) is a development stage biopharmaceutical

company located in San Mateo, CA focusing on developing and

commercializing novel pain management therapies. The Company was

founded in 1998 by a Stanford University anesthesiologist researching the

pain therapy uses of capsaicin. Today, an experienced management team

of scientific, medical, technical operations, regulatory, financial, and

commercial personnel has been assembled as part of the transition to

commercialization of their discovery. The FDA recently approved their

lead product, Qutenza, and the Company also maintains a synergistic

product portfolio. The Company will be commencing marketing, sales,

and manufacturing in the second half of the 2010 annual period.

Company Overview

Mr. Anthony A. DiTonno, CEO: Joined in April, 2003. He was EVP of Sales &

Marketing for a medical device company from 2000 to 2002 and CEO of a medical

device company from 1997 to 2000 with a career history in healthcare and an

M.B.A. from Drexel University.

Mr. Stephen F. Ghiglieri, CFO: Joined in October, 2003. He was CFO of a medical

device company from 2002 to 2003 and CFO of a software company from 2000 to

2002 with a career background in healthcare technology and a C.P.A. licensed

business graduate.

Jeffrey Tobias, M.D., CMO: Joined in November of 2005. He brings more than 18

years experience in domestic and international clinical drug development,regulatory submissions and strategic planning.

Qutenza is a capsaicin patch administered in a procedure

to treat peripheral neuropathic pain. Nov. 16, 2009 the

U.S. FDA approved usage for the management of

neuropathic pain due to postherpetic neuralgia (PHN).

The Company also completed two phase III trials for

HIV-distal sensory polyneuropathy and phase II data for

painful diabetic neuropathy. The Company has various

other products in the development pipeline including:

NGX-1998, a non-patch alternative of a liquid form of

capsaicin, and opiod and acetaminophen based prodrugs

for treatment of acute chronic pain conditions.

Peripheral neurological pain is a chronic pain condition

caused by the damage of the nerves sending signals of

pain to the brain without the pain receptors actually being

stimulated.

DESCRIPTION

PRODUCT PORTFOLIO

MANAGEMENT


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Public Market

Overview

CUMULATIVE MARKET RETURNS

05/02/07 12/31/07 06/30/08 12/31/08 06/30/09 11/19/09

NGSX 100.0 62.0 29.4 11.4 55.0 81.8

S&P 500 Index 100.0 98.2 85.6 60.4 61.5 73.2

S&P Healthcare Index 100.0 97.0 84.0 73.3 72.6 82.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

NGSX S&P 500 Index S&P Healthcare Index

KEY MARKET DATA

MARKET PRICE HISTORY

Price $8.38

% of 52 Week High 91.1%

% of 52 Week Low 941.6%

Shares Outstanding 17,617,209

CAPITALIZATION ($ thousands)

Equity Value $147,632

Total Debt $740

Less: Cash ($48,468)

Enterprise Value $99,904

FINANCIALS ($ t housands 2008A 2009E 2010E

Revenue $0 $7,699 $48,227

% Growth 0.0% 0.0% 526.4%

EBITDA ($26,105) ($21,424) $12,330

% Margin 0.0% -278.3% 25.6%

EPS (basic) ($1.49) ($1.20) $0.47

TRADING MULTIPLES TTM 2010E COMPS

EV / Revenue 830.2x 1.9x 18.2x

Price / Book 36.5x 14.5x 4.2x

Price / Earnings (7.0x) 17.9x 18.2x


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Investment

Considerations

New Product Growth: The lead product was FDA approved this

week with a potential market in excess of $3 billion within the

United States and the European Union.

Superior Product Attributes: Qutenza provides peripheral

neuropathic pain relief for an extended period of up to 3 months

from a 60 minute procedure with great results. Alternatives are

daily applications of Lidocaine patches, NSAIDs, or Opioids (all

of which have less effectiveness or shorter duration of relief).

Formidable Management Team: The Company has recently

assembled a very experienced and multi-disciplined management

team of scientific, medical, technical operations, regulatory,

financial, and commercial personnel.

Strong Liquidity Position: The Company current has over $48

million of cash with a current burn rate of $21 million per year.

Notwithstanding the revenue generation beginning on the 2010

annual period, the Company has sufficient liquidity to continueoperations for 2.3 years.

Healthy Product Portfolio: The Company has additional product

candidates under development and trials which could have future

value, including a liquid form of Qutenza, an opiod prodrug for

chronic pain conditions, and an acetaminophen prodrug for

treatment of acute pain.

KEY INVESTMENT HIGHLIGHTS

New Product Risk: Qutenza is a new product, and

notwithstanding the clinical trial results, has a slight risk of causing

unexpected negative side effects. This risk could and may result in

the FDA forcing the Company to pull the drug out of the market.

Product Acceptance Lower than Expected: Qutenza has

superior attributes, however requires doctor training for

administering Quetenza and patient switching of current

treatments. Patients might not choose this new treatment due toeither not being informed by their doctors or their comfort level

with the current lower standard of neuropathic pain relief.

Operational Risk of New Operations: The Company will be

manufacturing and marketing a product for the first time, which

requires new operations and capacities and a shifting of the

business model. Despite the experienced management team, there

are operational risks with establishing stakeholder relationships

and deploying staff teams for timely execution of the new product.

Potential Dilution of Equity: Should any of the above events

occur, this could put a negative position on the liquidity of the

Company, given the necessary capital investments for

manufacturing and marketing of a new product. The Company

will not be at an effective stage to service traditional debt capital

sources, and will more than likely require an additional equity

capital injections diluting current share value.

PRIMARY INVESTMENT RISKS


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Valuation Summary

Revenue Growth and Market Share: It is

projected that Qutenza will achieve a 30% market

share of PHN cases within the United States

within 5 years by 2015. Alternative usage

approvals for Qutenza in the near future within

the U.S. are not included.

Product Pricing: A target product price of

$450.00 per unit is assumed due to an analysis of

the opportunity cost of the next best alternative

product. This is calculated by taking the cost of

Lidocaine patches as a regular usage throughout

the same period of relief time as Qutenza, less the

cost of the doctor in treatment.

Current and Forward Comparables:

Comparables valuation was utilized for an

average of the prior business model of a

development stage pharmaceutical manufacturer

and the near future business model of a revenue

generating manufacturer. This is accurate due tothe Company being in a transition.

Comparable Cost Structures: A gross profit

margin of 60% on manufactured product is

assumed due to comparable companies gross

profit margin of 68%. An average cost as a

percent of revenue for SG&A and R&D is

estimated above comparable peers of 1% to 2%.

VALUATION ASSUMPTIONS

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00

52 WK

RANGE

FWD COMPS

COMPS

DCF

SUMMARY

$0.89

$3.46

$3.92

$8.35

$5.00

$4.62

$10.80

$9.08

$12.37

$10.00

ESTIMATED FAIR VALUE PER SHARE

VALUATION SUMMARY

$18.00

$20.48

$14.11

$19.35

$9.20

C

urrently $8.38

Target Price of $10.00: This implies a premium of 19.3% over the current trading price. The

low estimate is $5.00, and the high estimate is $18.00. This implies a valuation range

representing a downside discount of (40.3%) and an upside premium of 114.8%.

Additional Considerations: NGSX is a stock with a historically high Beta of 3.26 and has

displayed significant systematic risk to the overall capital markets multiples. It is the view of

the author that the current valuations of equities hold significant risk of decline due to the

overall unfavorable economic environment. As such, the investment recommendation in this

security is one with a downside hedge and/or option with a long position in NGSX.

RECOMMENDATION: BUY


7/12

Valuation Summary

NeurogesX, Inc.Valuation Summary

Low High Average

Forward Comparable Companies Method:

Enterprise Value to EBITDA 5.47x 38.90x 16.64x

Price to Earnings Multiple 7.9x 29.7x 18.2x

Price Book Multiple 1.87x 8.63x 4.16x

Enterprise Value to Revenue 1.07x 7.39x 3.41xValuation by Forward Comparable

Companies:$3.46 $14.07 $10.78

Comparable Companies Method:


Price to Sales Multiple 1.4x 8.4x 5.1x


Enterprise Value to Revenue 1.33x 5.71x 3.36x

Valuation by Comparable Companies: $3.92 $20.48 $9.06

Discounted Cash Flow Analysis:Exit Year EBITDA Multiple 4.0x 6.5x 5.0x

Exit Year Growth Rate 2.00% 4.50% 3.50%

Ending Market Penetration of PHN at 2015 20.00% 45.00% 30.00%

Product Price $350.00 $600.00 $450.00

Valuation by Discounted Cash Flow: $8.35 $19.02 $12.16

Average of Valuation Approaches: $5.24 $17.86 $10.67

Summary of Valuation Approaches: $5.00 $18.00 $10.00

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00

52 WK

RANGE

FWD COMPS

COMPS

DCF

SUMMARY

$0.89

$3.46

$3.92

$8.35

$5.00

$4.62

$10.80

$9.08

$12.37

$10.00

ESTIMATED FAIR VALUE PER SHARE

VALUATION SUMMARY

$18.00

$20.48

$14.11

$19.35

$9.20

Currently $8.38


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Discounted

Cash Flow AnalysisDiscounted Cash Flow Analysis

(in US$ Thousands including shares & except per share amounts)

Projected

Period Ending 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Unlevered Free Cash Flow:

Earnings Before Interest & Taxes (EBIT) (21,546.5) 11,999.2 37,829.4 78,723.7 124,885.4 159,005.2 191,582.4

Depreciation & Amortization 122.3 330.7 622.3 997.3 1,455.7 1,997.3 2,559.8

Deferred Revenue 44,483.0 (6,354.7) (6,354.7) (6,354.7) (6,354.7) (6,354.7) (6,354.7)

Deferred Taxes - 64.3 136.2 214.1 291.1 361.4 419.5

Changes in Working Capital 4,147.6 (10,368.5) (10,470.5) (14,455.5) (13,356.4) (9,907.9) (9,221.6)

Capital Expenditures (1,000.0) (2,500.0) (3,500.0) (4,500.0) (5,500.0) (6,500.0) (6,750.0)

Taxes 0.0 (4,199.7) (13,240.3) (27,553.3) (43,709.9) (55,651.8) (67,053.8)

Total Unlevered Free Cash Flow 26,206.4 (11,028.8) 5,022.4 27,071.7 57,711.1 82,949.5 105,181.5

Present Value (PV) Calculation:

Period (Year) 0.5 1.5 2.5 3.5 4.5 5.5 6.5

Discounted Cash Flow 29.37% 23,040.8 (7,495.5) 2,638.6 10,993.9 18,116.7 20,128.6 19,729.8

Total Present Value 87,152.8


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Historical Stock

Price Performance


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Comparable

Company Analysis

Comparable Companies Analysis=

(in thousands) Enterprise Value/ Revenue

Enterprise Value/EBITDACurrent

Stock

Price$

Market

Capitalizatio

(Value)$

Enterprise Price / Sales Price / Book

alue TTM 10E MRQ 10E TTM 10E TTM 10E

Company $ x x x x x x x x

NeurogesX, Inc. $8.38 147,655.6 91,415.6 1302.8x 3.06x 36.5x 14.5x 830.2x 1.9x (4.7x) 7.4x

Pain Therapeutics, Inc. $4.90 206,927 29,447 8.4x 8.4x 2.0x 2.0x 1.3x 1.3x (4.3x) (4.3x)

NexMed Inc. $0.16 14,221 15,751 2.2x 2.2x 7.8x 7.8x 2.5x 2.5x (8.9x) (8.9x)

Alexza Pharmaceuticals Inc. $2.25 74,813 53,053 7.5x 7.5x 2.8x 2.8x 5.3x 5.3x (1.0x) (1.0x)

ISTA Pharmaceuticals Inc. $4.14 137,779 152,829 1.4x 1.4x (1.8x) (1.8x) 1.5x 1.5x 46.0x 46.0x

Durect Corp. $2.33 202,128 156,708 7.4x 7.4x 5.8x 5.8x 5.7x 5.7x (4.1x) (4.1x)

Valeant Pharmaceuticals Intern $34.15 2,777,761 2,990,811 3.6x 3.6x 8.3x 8.3x 3.9x 3.9x 10.0x 10.0x

Lannett Co. Inc. $5.90 196,352 211,402 1.2x 1.2x 1.9x 1.9x 1.1x 1.1x 5.6x 5.6x

Mean 166.8x 4.3x 7.9x 5.2x 106.4x 2.9x 4.8x 6.3x

High 1302.8x 8.4x 36.5x 14.5x 830.2x 5.7x 46.0x 46.0x

Low 1.2x 1.2x -1.8x -1.8x 1.1x 1.1x -8.9x -8.9x

2010 Expected & Discounted: The

comparable company analysis utilized

2010 financial figures for the

Company and discounted the TTM

multiples using the WACC. 2009 is

not a fully operational year and was

significantly skewed. The 2010E

multiples are duplicated TTM due to

date limitations.

Price to Sales: The TTM P/S is

skewed due to no real revenue

generation within 2009 for the

Company. The 10E is a (29%)

discount on the mean P/S.

Price to Book: The TTM P/B is

skewed due to the Company having a

near breakeven book equity value

comparatively to the other COMPS.This effectively reduces with the 10E,

and even further so with the 2011

period. The 2010E period is priced at

a 179% premium due to the expected

growth of revenues.

Enterprise Value to Revenue: The

TTM was skewed due to beginning

operations, and the 10E of current

multiple of 1.9x is a (34.5%) discountfrom the mean average.

COMPS OF NEGATIVE EPS

Comparable Companies Method:


Price to Sales Multiple 1.4x 8.4x 5.1xPrice Book Multiple 1.99x 8.25x 5.33x

Enterprise Value to

Revenue1.33x 5.71x 3.36x

Valuation by ComparableCompanies:

$3.92 $20.48 $9.06


11/12

Forward Comparable

Company Analysis

2010 Expected & Discounted: The

comparable company analysis utilized

2010 financial figures for the

Company and discounted the TTM

multiples using the WACC, except

the P/E multiple. 2009 is not a fully

operational year and was significantly

skewed. The 2010E multiples are

duplicated TTM due to date

limitations.

Price to Earnings: The 2010E P/E is

currently priced at a (1%) discount

from the COMPS.

Enterprise Value to Revenue: The

TTM was skewed due to beginning

operations, and the 10E of current

multiple of 1.9x is a (34.5%) discount

from the mean average.

Enterprise Value to EBITDA: The

TTM was skewed, however the

2010E is currently priced at a (48%)

discount from the mean, showing

potential upside.

COMPS OF POSITIVE EPS Forward Comparable Companies Analysis

(in thousands) Enterprise Value /Revenue

Enterprise Value/EBITDA

Current

Stock

Price$

Market

Capitalization

(Value)$

Enterprise Price / Earnings Price / Book

Value TTM 10E MRQ 10E TTM 10E TTM 10E

Company $ x x x x x x x x

NeurogesX, Inc. $8.38 147,655.6 91,415.6 -7.0x 17.9x 36.5x 14.5x 830.2x 1.9x (4.7x) 7.4x

Endo Pharmaceuticals Holdings $22.69 2,660,629 2,501,979 13.6x 7.9x 2.0x 2.0x 1.8x 1.8x 5.5x 5.5x

Cumberland Pharmaceuticals, In $14.53 289,874 283,754 61.6x 29.7x 8.6x 8.6x 7.4x 7.4x 38.9x 38.9x

Lannett Co. Inc. $5.90 144,314 126,274 22.3x 16.9x 1.9x 1.9x 1.1x 1.1x 5.6x 5.6x

Mean 22.6x 18.1x 12.3x 6.8x 210.1x 3.0x 11.3x 14.3x

High 61.6x 29.7x 36.5x 14.5x 830.2x 7.4x 38.9x 38.9x

Low -7.0x 7.9x 1.9x 1.9x 1.1x 1.1x -4.7x 5.5x

Forward Comparable Companies Method:


Price to Earnings Multiple 7.9x 29.7x 18.2x


Enterprise Value to Revenue 1.07x 7.39x 3.41x

Valuation by Forward Comparable

Companies: $3.46 $14.07 $10.78


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Growth

Benchmarking

(100.0%)

(50.0%)

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

NGSX CPIX ISTA VRX LCI ENDP DRRX PTIE ALXA

NeurogesX, Inc 2009 Review

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