Initiating BioDelivery as a Buy

We are initiating coverage of BioDelivery Sciences International (BDSI) with a Buy rating and a $6 price target. Paramount to our recommendation is the pending approval of Onsolis, a transmucosal fentanyl patch for breakthrough cancer pain. The FDA decision is expected on or before June 12, 2009.

We view the event as a high likelihood of approval (>80% chance). Approval will be a transformational event for BDSI. Not only will it bring about a $30 million milestone payment from worldwide commercialization partner Meda AB, but BDSI will also receive double-digit royalties (we estimate 20%) on sales of Onsolis upon launch.

The breakthrough cancer pain market is highly competitive, and there are several formulations of fentanyl already on the market, with several more in late-stage development, but we believe that BDSI’s BEMA technology offers significant advantages over existing delivery technologies and could allow for Onsolis to be a $250 million peak sales drug.

Besides Onsolis, BDSI is developing BEMA Buprenorphine and Bioral Amphotericin B, two drugs each with $500 million sales potential.

BDSI’s future success is tied closely to the pending approval of Onsolis. We estimate cash at the end of the first quarter will be in the area of $3-4 million, enough to make it to the FDA decision in June. Approval will make BDSI cash-flow positive in 2009, and the $30 million milestone payment from Meda AB will be enough to fund development of the pipeline for the next several years.

The market capitalization is only $71 million, which leads us to believe the shares would be significantly undervalued based on Onsolis approval. Additional detail can be found in the report.

Read the full analyst report on BDSI