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Premarket Biotech Digest: Lipocine's Milestone, Pfizer And Allergan In Talks, Blow To Valeant

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Focus Ticker: Lipocine

Lipocine (NASDAQ:LPCN) shares surged more than 15% in pre-market trading today after the company's NDA for its oral testosterone replacement therapy, LPCN 1021 was accepted by the FDA. If approved, LPCN 1021 could replace the current treatment options, given that it will be the only oral therapy and has a better safety profile than currently available products. I had discussed LPCN and the potential of LPCN 1021 in an article some months back. Based on the potential of LPCN 1021 and LPCN's cash position back then, I had come up with a fair value of $14.50 per share for Lipocine. Following the acceptance of the LPCN 1021 NDA by the FDA, the probability of the oral testosterone therapy reaching the market has increased. Therefore, I am upwardly revising the fair value for LPCN. Before that let me just revisit the investment case.

In June this year, when I initiated coverage on LPCN, I had noted that the FDA has been reluctant to approval testosterone replacement therapies or TRTs as they are known due to safety issues. This has created a high entry barrier for TRT products. But it has also created an opportunity for LPCN, whose oral TRT has a better safety profile when compared to other forms of TRTs like topical gels, patches and invasives. The TRT market is estimated to be at $2.3 billion in the U.S. alone and currently this market is dominated by topicals. An approval for an oral TRT product though could quickly change that. If approved, LPCN 1021 could generate peak sales of $760 million.

My initial fair value of $14.50 per share was based on probability of approval of 60%, which is the average for drugs in Phase III trials based on data from Torreya Partners. I had boosted the probability of approval and subsequently the fair value to $19.50 in September after the company submitted its NDA for LPCN 1021. Now with the NDA being accepted by the FDA, the probability of approval has increased to 95%. Based on this, I get a fair value of $22.50 for LPCN. LPCN 1021 itself is valued at roughly $20.50 per share, while the company has around $2 per share in cash on its balance sheet. In pre-market trading, LPCN was trading at around $12.50. Therefore there is considerable upside in the stock from current levels.

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