Buy-Rated Pozen Worth the Risks

Pozen, Inc. (POZN - Analyst Report) and partner GlaxoSmithKline (GSK - Analyst Report) announced in mid-April that the U.S. Food and Drug Administration (FDA) has approved Treximet for the acute treatment of migraine attacks with or without aura in adults. The product should become commercially available here in May 2008.

The news is a big positive for Pozen. Besides the $20 million milestone from Glaxo, Pozen will start receiving royalties on Treximet sales here in the second quarter. Couple that with expected positive newsflow on the rest of the pipeline, and we remain very bullish on the future prospects for Pozen. We are maintaining our Buy rating and increasing our price target to $22 per share.

Pozen has only 35 employees. The company has no manufacturing, no sales force, no significant internal R&D costs and very low overhead. Based on the royalties from Treximet alone, Pozen should be able to deliver positive operating cash flow in 2009. We expect the second quarter 2008 will be positive with respect to EPS and cash-flow based on the $20 million Glaxo milestone on the approval of Treximet.

Biotechnology stock investing carries significant risk. Besides the obvious drug development risk, stocks in the industry also have significant regulatory and financing risk. Thus, the ideal situation to be in from a company standpoint is to have low product development risk, low regulatory risk, have plenty of cash (or at least be operating cash-flow positive), and have big catalysts head.

However, by 2010 Pozen should be generating significant free cash-flow. We think that makes the company an attractive acquisition target for Glaxo, AstraZeneca Plc (AZN - Analyst Report), or anyone else. Finally, besides the upside expected from Glaxo reporting strong Treximet sales in the coming quarters, Pozen is expected to sign a development partner on PA-325/40 in 2008.

We remind investors that the PN-400 deal with AstraZeneca was $375 million. PA-325/40 could be similar in size. This is a significant positive catalyst that could help drive the shares higher toward our $22 target.

Read the full analyst report on POZN.

Read the full analyst report on GSK.

Read the full analyst report on AZN.