Partner-Seeking for Metabasis

Although Metabasis Therapeutics Inc. (MBRX - Snapshot Report) reported positive results on core pipeline candidate, MB07803 for type-II diabetes, we believe that investor confidence is not likely to return until the company enters into suitable partnership deals for its candidates. We maintain our Hold rating on the stock.

Although Metabasis is currently seeking a partner for the continued development of pradefovir, after termination of the agreement with Schering-Plough (SGP), we remain skeptical on the future of the hepatitis B candidate. Even if Metabasis is able to progress with the development, the continued delay in the initiation of phase III trials has provided competitors such as with ample time to progress their candidates through clinical trials and capture significant market share.

Another major concern for the company is its cash position. Metabasis is seeking potential partners for almost all its pipeline candidates. Although the company recently raised $10 million through a warrant exchange and private placement of shares, we believe it will have to raise cash again in early 2009, even if it is successful in entering into a partnership deal. We believe that the company will need to fund its operations with a mix of debt and equity financing.

Despite some promising pipeline candidates, Metabasis pipeline remains in very early-stages of development and we do not see the company achieving profitability any time soon. We expect the company to announce a partner for MB07803 as well as the glucagon program in 2008. However, near-term investor focus will remain on the phase Ib results on MB07811 (for the management of hyperlipidemia), which should be available later this quarter. At this time we are maintaining our price target of $2 on the shares.

Arpita Dutt, CA, contributed to this report.

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