Savient Pharmaceuticals' Impressive Run May Continue Higher

Savient Pharmaceuticals (NASDAQ: SVNT) enjoyed a blistering third quarter, as shareholders racked up an impressive 363% gain, making it the largest Q3 gainer in ahead of other companies such as Sarepta Therapeutics (SRPT) 313%, Hemispherx Biopharma (HEB) 188%, Catalyst Pharmaceutical Partners (CPRX) 185%, and StemCells (STEM) 154%.

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As Savient heads into its earnings release date of October 29th, let's take a look at their chances of continuing their torrid run. An encouraging reorganization plan, a revamped and more focused sales strategy, favorable technicals, an imminent short squeeze, pending European approval for Krystexxa, and a possible partnership/buyout catalyst looming are all reasons to believe Savient Pharmaceuticals is poised to head higher, possibly much higher.

Savient Pharmaceuticals, Inc. operates as a specialty biopharmaceutical company in the United States. It engages in developing and commercializing KRYSTEXXA for the treatment of chronic gout in adult patients refractory to conventional therapy.

Shares of Savient Pharmaceuticals reached a high of over $23 a share in October of 2010. With a newly approved drug and buyout talks swirling, shareholders were buzzing. Unfortunately, when the buyout talks broke down, Savient made good on its threat to bring Krystexxa to market by themselves. To say the company was ill-equipped to handle the product launch is quite an understatement. The management team blindly flooded the market with a large, expensive, and poorly trained sales force which wasted quite a bit of time with general practitioners, instead of focusing on Rheumatologists. The slow learning curve and long sales cycle led to a very disappointing start for Krystexxa. The downward spiral was pushed along by the hiring and defection of a CEO, continued mismanagement of expenses, and the Tang creditor lawsuit attempting to force liquidation. Ultimately, the share price reached a low of $0.48 on July 17th, and many assumed the writing was on the wall for Savient.

However, just as original expectations for immediate market penetration and profitability were exceedingly optimistic, so it seems now that predictions of Savient's demise, including my own, were premature as well.

Let's take a look at a few of the steps that the company has taken to right the ship and lend promise to the future:

• Entered into definitive financing and restructuring agreements with the Company's existing 2018 convertible note-holders that raised approximately $43.1 million in net cash proceeds and extended maturity by approximately fifteen months.

• Promoted and established CEO Louis Ferrari who brings over 30 years of experience in the pharmaceutical industry, including expertise in product launches, new product development, international marketing, sales management, and sales training.

• Were granted a favorable decision by the Delaware Court of Chancery on certain aspects of the Tang Capital litigation. Savient now awaits a decision on possible compensatory damages from Tang Capital.

• Implemented a restructuring plan that included a 35% reduction of its work force across the company. The bulk of the cuts included the portion of the sales team assigned to primary care physicians. The slimmed down sales force of 38 key account managers will aim to build on recent momentum by focusing on Rheumatologists and Nephrologists. The initiatives are expected to save approximately $56M in annual operating expense in 2013.

• Named John Hamill as its Chief Financial Officer. Investors took the news very well, because at his previous position of CFO, Hamill helped engineer the sale of PharmaNet for 100M in 2011.

• Have been proactive in priming the pump in Europe with aggressive marketing and awareness campaigns as Savient nears expected EU approval for Krystexxa. Perhaps more importantly the company may be very close to naming a partner for the European market.

So it appears that Savient has made significant steps in getting its house in order, but 3rd quarter sales results will go a long way in telling us the ultimate fate of the company. In its Aug 8th conference call, and again at the Rodman & Renshaw presentation on September 10th ,CEO Louis Ferrari guided that double digit sales growth is expected to continue. Earnings are set to be released October 29th.

The market size appears to be available for Krystexxa, as an FDA press release upon approval stated: "About 3 percent of the three million adults who suffer from gout are not helped by conventional therapy. This new drug offers an important new option for them," said Badrul Chowdhury, M.D., director of the Division of Pulmonary, Allergy, and Rheumatology Products in the FDA's Center for Drug Evaluation and Research. Even capturing 10% of this market, in which there is no competition, could lead to substantial sales numbers for Krystexxa, as it is administered twice a month at $3,000 a dose. With 100% of the cost per vial finally now covered through all insurance carriers, the hefty price tag is no longer a deterrent, and should now help to drive top line revenues exponentially.

Certainly, current investors in the company are well aware of these fundamental factors pointing towards a possible turnaround story playing out in Savient, but let's dig a little deeper into some of the interesting dynamics at play from a trader's point of view:

Savient Pharmaceutic has a market cap of $168M, with 72.9M shares outstanding, and a float of 70.4 million shares. Revenues for 2Q 2012 were $4.6m, up 30% from 1Q 2012. Here is where it gets interesting. A quick look at the Yahoo summary page reveals a staggering 84% of the float being held by Institutions and Mutual Funds, and 102 total institutions owning shares. According to Etrade, short interest is 31.72% of the remaining float. With so many shares being held institutionally, the sizable short interest in Savient could find itself in a difficult situation if buying pressure continues through Savient's upcoming catalysts.

Major Holders breakdown:

In fact, a little more searching confirms the theory that shares are difficult to come by for short sellers, as SVNT appears in the number 4 position on the Naked Short List-Stocks with Imminent Buy-in. A severe short squeeze appears to be a real possibility here if Savient is indeed able to post the expected revenue gains for the 3rd quarter.

The chart looks to me like it's about to make a turn upwards from a nice Wedge Triangle. I think it's a good bet the 52 week high is going to be challenged here shortly.

Conclusion:

As investors in the Biotech field, we often get caught up in the promise of new and exciting drugs and therapies. We look at the potential markets for these drugs, whip the potential through a calculator, and pop out a lofty number which then gets extrapolated into huge profits. It's easy to skip over the important real world step of execution when trying to assign appropriate valuations. Poor execution of an ill-equipped roll out plan is always disappointing, and to inexperienced companies with a small product line it is most often fatal. Sometimes, however, a slow start can be overcome if the drug fills a serious need, and management can learn to adapt and execute. For patients with severe gout that do not respond to conventional therapy, Krystexxa can be life changing.

Severe gout is an extremely painful, debilitating disease that can render its sufferers unable to do common tasks. As physicians become more aware and comfortable with the drug, it is reasonable to expect continuing increased demand for Krystexxa. With insider/institutional ownership above 84% of the float, and the short interest so high, any one of Savient's near term catalysts could trigger a severe short squeeze.

If the company posts expected strong revenue growth on Oct 29th in unison with European approval or a potential partner for Europe, short sellers might be squeezed a bit here on this one.

BiomedReports is not paid or compensated to report news and developments about publicly traded companies. Full disclosure can be read in the About Us Section

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