Cornerstone Buy Rating Maintained

CRTX: Buy Maintained based on Strong Q1 & Bright Outlook

First quarter 2009 financial performance remained strong

Cornerstone Therapeutics (CRTX - Analyst Report) recently reported first quarter 2009 financial results. Total revenues increased $21.3 million over first quarter 2008 to $30.7 million, up 225%. Total revenue mainly comprised of net product sales, which were $30.5 million in the first quarter of 2009, compared to $9.0 million in the same period of 2008 -- an increase of 239%.

Net product sales in 1Q09 consisted of revenues from sales of the company's AlleRx® family of products, which increased from $6.5 million in 1Q08 to $10.9 million in 1Q09; Spectracef®, which increased to $3.72 million in the quarter ended March 31, 2009 as against $0.18 million in the comparable quarter of 2008; and Deconsal® and Balacet® 325 products. Additionally, net product sales in 1Q09 also included $8.6 million in sales of the HyoMax® line of products, which was launched in May 2008, and $5.3 million in sales of Zyflo CR and Zyflo.

Both total revenue and product sales blew away our estimates of $17.9 million and $17.5 million, respectively.

For the three months ended March 31, 2009, the company had operating income of $10.4 million, or 33.9% of net revenues, compared with operating income of $1.4 million, or 14.9% of net revenues, for the same period in 2008 -- an increase of approximately 658%. The company's first quarter 2009 net income and diluted earnings per share were $6.3 million and $0.48, respectively.

Net cash provided by operating activities was $1.231 million in 1Q09 compared with $2.193 million in 1Q08. As of March 31, 2009, the company had $10.7 million in cash and cash equivalents which excludes the $15.5 million upfront which the company received in May from Chiesi.

Merger positive to both old companies & creates a stronger new corporation

The newly created Cornerstone Therapeutics Inc. is the merger product of private Cornerstone BioPharma with public Critical Therapeutics, which closed on Oct 31, 2008. We think the merger makes sense and is positive to both old companies.

For Critical Therapeutics, the merger has greatly expanded its product portfolio, provided better resources for operations and sustainable growth. Critical Therapeutics was a tiny biotech company with only one product Zyflo/Zyflo CR on the market and very weak pipeline. Sales of Zyflo/Zyflo CR have been slow and the company had been under great pressure to expand its portfolio. The merger with Cornerstone BioPharma just achieved these goals. Cornerstone has more products to offer in the respiratory market and has more resources for future growth.

For Cornerstone BioPharma, the merger with a public company may be the best way to go public at current market and financial conditions. With the IPO market freezing in the past few months, the merger with Critical Therapeutics makes sense by saving time and costs. Going public will greatly increase Cornerstone BioPharma’s visibility and make capital raising easier in the future.

Both Critical Therapeutics and Cornerstone BioPharma are focused on the respiratory market with different product offering. We believe the merger may create synergies with a stronger product portfolio. The new company is better positioned to sustain growth in the special respiratory market.

Strategic transaction with Chiesi provides further growth engine

On May 6, 2009, CRTX entered into an agreement with Chiesi Farmaceutici SpA of Italy.

Under the terms of the agreement, Cornerstone will issue 11.9 million shares of common stock and receive an exclusive 10-year license with renewable rights for the U.S. commercial rights to Chiesi's Curosurf® product -- the world's leading treatment approved by the US FDA for Respiratory Distress Syndrome (RDS) in premature infants -- and $15.5 million in cash. Cornerstone will also receive first right of offer on all new products and technology Chiesi intends to market in the U.S.

As part of the transaction, Craig Collard, Cornerstone's President and CEO, and Steven Lutz, Cornerstone's Executive Vice President, Manufacturing and Trade, have agreed to sell an aggregate of 1.6 million shares to Chiesi at $5.50 per share. The combined number of common shares held by Chiesi, after giving effect to the purchase of the 1.6 million common shares and the issuance of approximately 11.9 million common shares, will be approximately 13.5 million shares, or approximately 51 percent of Cornerstone's fully diluted common shares outstanding.

We believe the transaction will provide a growth engine for Cornerstone. This transaction further diversifies Cornerstone’s revenue base by adding an FDA-approved, marketed product, Curosurf, with a leading market position and a proprietary manufacturing process; broadens its respiratory therapeutic reach and customer base; and strengthens Cornerstone's balance sheet, thus enabling it to accelerate the development of its existing product pipeline, evaluate additional opportunities to enhance its product portfolio and support further growth in its sales force to expand reach. Further, this transaction enables Cornerstone to enter into a long-term relationship with a leading European pharmaceutical company.

Curosurf is currently available in over 50 countries, including the U.S. and most of Europe. For 2008, Curosurf's U.S. net sales were over $30 million. The drug currently maintains 44 percent market share in the U.S., more than 80 percent market share in Europe and 59 percent market share worldwide.

Based on the strong first quarter 2009 financial performance and recent business development, we maintain our Buy rating for Cornerstone shares with a revised price target of $10 per share.