Array BioPharm (Nasdaq:ARRY) undervalued with a $10 price target Print E-mail
By Simos Simeonidis, Ph.D.   
Tuesday, 15 December 2009 06:20

ARRY-380 shows promising activity at San Antonio breast cancer meeting. Rodman gives stock a Market Outperform Rating and $10 Price Target

Array delivers on partnership promise, attracts largest biotech; $60M upfront payment for Phase I program speaks to the quality of compounds produced by Array’s internal R&D efforts.

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After the market's close, Array announced a worldwide partnership with Amgen (AMGN Not Rated) for ARRY-403, its novel glucokinase activator, currently in Phase I testing for the treatment of Type II diabetes.

Details on the deal: Array gets $60M in an upfront payment and additional contingent payments for certain clinical and commercial milestones. Array gets double digit royalties on sales and retains the option to co-promote 403 in the US. Amgen will take over development after Array completes the current Phase I trial for ARRY-403. Finally, as part of a two-year R&D effort to identify and advance second-generation glucokinase activators, Amgen will fund an agreed upon number of Array FTEs.

Our view of the deal and the partner: We view this deal as “vintage Array” in that: 1) it attracts a top-notch partner in Amgen, as in the past (can you say Celgene, Genentech, Intermune , AstraZeneca (CELG, RHHBY, ITMN, AZN All Not Rated), 2) it brings in a higher-than-industry average deal terms, which we believe speaks to the not only to the actual quality and potential of the specific compound, but also to the perception and “respect” in the biopharma industry for Array’s home-brewed compounds. Finally, we like the choice of Amgen as a partner, in what we believe was a competitive process, since the Thousand Oaks biotech giant is investing in building its diabetes and metabolic pipeline, as it is diversifying away from oncology.

About the compound: This past August, Array announced positive topline data with ARRY-403, its small molecule glukokinase activator, from a Phase I trial in T2D patients. The drug met primary and secondary endpoints of safety, pk and glucose control. This was a single-ascending dose, seven-cohort, 41-patient trial, with patients receiving either placebo or ARRY-403 in single doses between 25-400mg. The drug was well tolerated at all doses, rapidly-absorbed, with dose-dependent exposure, exhibited a profile consistent with qd dosing, and resulted in dose-dependent reductions in glucose excursions in response to a meal. Based on these data the company started a multiple ascending dose trial to test 403 in T2D patients over a 10-day period, with combined Phase I results to be presented in 1H2010.

ARRY trading up 40% after market: What to do with the stock tomorrow morning and going forward? Despite the jump in the stock tonight after the market, that will continue tomorrow morning, we believe that current price levels (depressed due to the overall market this year and hurt even more after the ARRY-162 disappointment), do not capture the value in the company’s pipeline of seven clinical programs, and we continue to see them as offering the opportunity for significant appreciation, long-term. We believe that the reason to own ARRY, buy it at these levels and hold long-term, has never been any single one of the compounds in its pipeline, but A) the basket of promising compounds in the pipeline, B) the company’s ability to generate new candidates at a consistent rate, and C) the ability of these compounds to generate significant revenue from big pharma/biotech.

ARRY is an undervalued stock, and remains one of the top picks inour coverage universe: With a high-caliber, experienced management team, directing an R&D machine that we consider as good and productive as any in biotech, we view as ARRY one of the highest quality stocks to own in the small/mid cap biotech space, with a wide pipeline addressing very large markets, featuring 7 drugs in the clinic, and the potential to produce additional promising molecules through their discovery and preclinical efforts. We consider ARRY shares significantly undervalued and we see room for significant growth in 2009 and 2010 and we would be building positions at current levels.

We reiterate our Market Outperform Rating and $10 Price Target. We reach our 12-month target price of $10 by applying a 30X P/E multiple to our 2013 fully diluted EPS of $0.78 and using a 30% discount rate. We remain very positive on the company’s pipeline and ability to continue to generate partnership revenue and
continue to believe that there is significant upside in ARRY shares from current levels.

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