A Classic Biotech Long Shot

 | Apr 04, 2012 | 4:00 PM EDT
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Columbia Laboratories (CBRX) is your classic long-shot pharmaceutical play. In this particular case, the outcome is completely binary: heads you win big, tails you can lose 50% based on the outcome of one event. 

Columbia is a $63 million business that engages in the development and commercialization of women's health care products. The company's products are aimed at providing solutions for infertility, pregnancy support, and other gynecological conditions. Earlier this year, shares traded above $3. Today they fetch $0.70 due to an unfavorable decision from the Food and Drug Administration. If that issue can be resolved, shares could possibly double or triple.

Columbia still derives sales and royalty revenues from its progesterone gel Crinone, which is marketed by Watson Pharmaceuticals (WPI) in the U.S. and internationally by a division of Merck (MRK). Net revenues from Merck for international sales of Crinone grew 41% in 2011 from 2010 and were up slightly for Watson over the same period. So that product still holds value for Columbia.

What sank the shares, however, was a decision by the FDA back in January 2012 stating that Columbia's new drug application for Prochieve did not prove to be effective compared to placebo in reducing the risk of preterm births. That news sent shares plummeting by 54% -- no surprise in the pharmaceutical industry, where companies live and die by FDA decisions. Over the next several days, shares declined another 55%, leaving the company trading at where it is today.

But Columbia has taken several steps that, if successful, could lead to a triple-digit percentage gain in the shares. If not, the downside risk appears to be mitigated by a cash rich balance sheet, along with the residual value from Crinone royalties.

First, Columbia has transferred the new drug application for Prochieve to its partner, Watson Pharmaceuticals. Watson now has full rights and regulatory responsibilities for all activities relating to this new drug application. Watson intends to address the FDA's concerns, and if it can prove successful, Columbia has significant upside potential. 

Second, Columbia has retained the services of investment bank Cowen and Co. to examine strategic alternatives. In conjunction with this move, Columbia has scaled down the size of its workforce by 42% in order to preserve cash. Currently, Columbia sits on $25 million in cash against a market cap of $69 million and no debt. That, along with revenue from its existing products and a Nasdaq listing, puts a floor on the downside if the company were forced to liquidate or be taken over. That downside scenario compares with the upside potential if Watson, an $8 billion company, can prove successful with the FDA with respect to the new drug application.

Of course, the big unknown is time because of how long it could take Watson to get a response from the FDA. On the other hand, another biotech could snatch up Columbia to secure not only the cash and existing revenues but the valuable Nasdaq listing. In addition, any potential suitor could also benefit from a successful effort from Watson. The various ways this could go, and the risk/reward scenario, makes this your classic long-shot pharmaceutical bet. Success with the new drug application will likely send shares back to levels they traded at before, nearly triple today's price. But there is real risk that that doesn't happen, in which case the shares will fall -- although that's now protected by the balance sheet and income statement.

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