Description

Nabi Biopharmaceuticals

Nabi Biopharmaceuticals (NABI on Nasdaq - $1.95) is a biopharmaceutical company that is focused on the development of vaccines for nicotine addiction.

The investment opportunity with NABI is essentially that the stock currently trades well below its cash value due to the fact that the results from the first of two Phase III trials showed that its smoking cessation drug was essentially no different than a placebo.  The results of the second Phase III trial will be out later this year.

NABI essentially has one main product:  NicVAX which is a proprietary investigational vaccine for the treatment of nicotine addiction and prevention of smoking relapse.  As stated above, the results for one of its two Phase III trials showed that there was no material different between the NicVAX vaccine and the placebo.

The investment case is as follows:

Let's assume that the second Phase III trial has similar results to the first (in other words, NicVAX is unsuccessful).  NABI currently has $2.40 in cash and marketable securities.   Furthermore, let's assume that their current costs of $6 million per quarter continue for Q2/2011 (which is already complete) and Q3/2011.  The Company's Board of Directors is actively evaluating any and all appropriate strategic alternative actions to preserve shareholder value, while management is working to further control the operational expenses of the company.  Let's further assume that the Company operates for another 3 quarters and is modestly successful at reducing costs:  Q4/2011 - $5 million, Q1/2012 - $4 million and Q2/2012 - $3 million.  Assume it liquidates at the end of Q2/2012.  Using these estimates results in roughly the current share price (i.e. roughly 4% downside from the current share price).  Please see table below (the numbers are from the Q1 10-Q and are in US$ millions).

Please note that receivables and other assets roughly offset current liabilities.  Please also note there these numbers may be able to be further refined based on further disclosure from the company in the future.  These are estimates only.

However, there is upside to this valuation.  For roughly every $4.3 million that the Company is able to save versus the above estimates in expenses, this results in upside of $0.10 per share.  The Company also has tax losses that may be of some value (this analysis assumes nil value - the Company has $178 million of federal net operating loss carryforwards expiring at various dates through 2030).  Furthermore, NABI also has the potential to earn future royalty payments from an operation sold in 2006:

In November 2006, we sold certain assets related to our PhosLo operations.  Under the sale agreement, we received $65 million in cash at closing and $13 million in milestones to date.  We also are entitled to additional contingent milestone payments of $2.5 million upon approval of a new indication for PhosLo as well as $5 million upon the first commercial sale of a new liquid formulation and royalties of up to $65 million on annual sales of the new formulation over a base amount of $32 million for 10 years after the closing date.  In April 2011, we learned that the FDA has approved Phoslyra, a new liquid product formulation.  Upon the first commercial sale of Phoslyra, we would be entitled to the milestone and royalties mentioned above.

Based upon this, it would appear likely that NABI will receive the $5 million milestone payment and maybe even the future potential payments of $65 million for a total of $70 million.  I have given the $70 million a 70% discount (heavily discounted due to lack of sales estimates) resulting in a value of $21 million or potentially $0.50 per share.

Summary

Overall, this investment could be summarized as low to moderate risk (the Board and management need to cut costs aggressively over the next year) with a break-even to moderate return.  Assuming the expense estimates detailed above transpire and there are no future milestone/royalty payments from Phoslyra, this is essentially a break-even investment (6% downside or so).  However, even with the liquidation costs assumed above, there is the potential for the Phoslyra payments to come through resulting in 20% or so upside.  In other words, this is a low cost option (potential 6% downside) with upside from Phoslyra (and maybe even the second Phase III trial is positive).

Catalyst