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Anacor Looks Much Better Now

Summary

I provided a bearish take on Anacor back in mid-January.

The stock is down 30% since the call was made, and the company has raised capital through a convertible note offering, removing the financing overhang.

Crisaborole is on track to gain FDA approval in early 2017.

Kerydin’s growth potential seems lower than previously thought, and its patents are being questioned.

Upgrading Anacor to buy.

Anacor (NASDAQ:ANAC) seemed expensive to me back in mid-January. I thought that the upside potential was limited and that just the uber-bullish scenario would yield significant returns for its shareholders. The stock is now down 30% and I am upgrading Anacor to buy with a 12-month base case price target of $80. The upside potential based on the bullish case is much higher.

Two reasons for the upgrade

Anacor performed poorly since I issued my bearish call on January 19. The stock was trading at $90 back then and is trading around $73 as of this writing. The two stocks that I thought to be better picks than Anacor have performed much better, as did the two major biotech ETFs.

The second reason for the upgrade is the recent convertible note offering, which has removed the financing overhang. If underwriters use the over-allotment option, the company should raise around $270 million. The offering should bring the pro-forma cash balance to around $400 million which should be enough to cover the commercial launch of Crisaborole next year. Cash burn this year should not be higher than $100 million, assuming a ramp in Kerydin sales, but also a ramp in SG&A expenses related to the Crisaborole launch (the company burned around $60 million in 2015). Anacor has decided to do a capped call transaction with the notes, which should reduce the potential dilution. The cap price is $80.18, representing a premium of approximately 50% based on the closing price on March 31, 2016. Depending on the final size of the offering, the dilutive effect is in the range of 7% to 8%.The 30% correction has resulted in a significant change in the risk-reward ratio and is the first reason for my upgrade. Back in January, I thought that the upside under what I believed to be realistic circumstances was very limited and that the company could be worth $9 billion (or $180 per share) under the most bullish assumptions. The situation is much better now and I think that Anacor has solid upside potential based on both the conservative and bullish scenario. However, the fundamental situation has changed since I wrote the first article, and I will revisit the upside expectations later in the article.

Crisaborole is the most valuable asset

The FDA has accepted Anacor's NDA for Crisaborole and the PDUFA date is January 7, 2017. The timeline is somewhat shorter than I expected and a full commercial launch should occur during the first half of 2017. There were no major changes around Crisaborole since my January article and I think it has blockbuster potential. I have seen peak sales estimates of $2 billion and here is what Anacor's management had to say on the Q4 2015 call (emphasis mine):

Let me remind the review on the current market opportunity for...


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