Cypress Bioscience Loss Narrows

Cypress Bioscience, Inc. (CYPB) reported a net loss of 5 cents per share in the second quarter, six cents narrower than the Zacks Consensus Estimate and well below the year ago loss of 23 cents, mainly due to higher revenues and a significant decline in operating expenses.

Quarter in Detail

Second-quarter revenues came in at $9.1 million, in line with the Zacks Consensus Estimate and 56.9% above the year-ago revenues of $5.8 million. Second quarter revenues consisted of $8.1 million in commercial revenues, $0.8 million in revenues under collaborative agreements and $0.2 million in revenues from Cypress Bioscience’s personalized medicine service business.

Commercial revenues of $8.1 million included royalty revenue of $3.1 million and $4.6 million in co-promotion reimbursement in connection with the launch of Savella. Savella received FDA approval in January 2009 for fibromyalgia, a chronic and debilitating condition characterized by widespread pain and stiffness throughout the body, accompanied by severe fatigue, insomnia and mood symptoms.

Fibromyalgia syndrome (FMS) is estimated to affect about 6 million people in the US. We believe Savella may have multi-hundred million dollar potential.

Total second quarter operating expenses declined 26.2% to $11 million. Research and development expenses were $1.2 million in the reported quarter, down from $2.0 million reported in the year ago quarter. Lower clinical trial costs led to the decline. However, R&D spending should increase as Cypress Bioscience focuses on the development of CYP-1020.

Selling, general and administrative expenses declined 24.4% to $9.3 million mainly due to lower costs associated with the marketing and promotion of the company’s personalized medicine services business and lower compensation costs. With Cypress Bioscience surrendering its co-promotion rights for Savella, we expect selling, general and administrative expenses to decline further.

Restructuring Initiatives Announced

Cypress Bioscience recently announced that it will be no longer be co-promoting Savella with partner Forest Laboratories (FRX - Analyst Report). However, we note that although the company will no longer be co-promoting Savella, it will continue receiving royalty on Savella sales.

In addition to returning its co-promotion rights to Forest Labs, Cypress Bioscience is also looking to discontinue or sell its personalized medicine services business by the end of the third quarter of 2010. The company plans to cut down its headcount by about 86% or 123 employees and intends to focus its resources on the development of candidates that target treatments for central nervous system (CNS) disorders. The lead candidate in this area is CYP-1020, a novel antipsychotic being developed for the treatment of schizophrenia.

These restructuring initiatives are expected to lower operating costs by about $10 million annually. The company will, however, incur restructuring-related charges of about $4.0 million to $4.5 million in 2010.

Our Take

We currently have a Neutral recommendation on Cypress Bioscience, which is supported by a Zacks #3 Rank ('Hold'). While we remain optimistic about Savella’s sales potential, we are concerned about the company’s early stage pipeline. We expect Cypress Bioscience to pursue acquisitions and in-licensing opportunities to drive growth.

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