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NPS Pharma's Gattex Study Shifts Spotlight To Nycomed October, 2007

NPS Pharmaceuticals Inc.'s (NPSP) disappointing trial data may do more than shave off a quarter of its market value - it may prompt its partner on the drug to head for the door.

In September, NPS licensed the development and commercialization rights to the short-bowel syndrome, or SBS, treatment outside the U.S., Canada and Mexico to Nycomed, a privately held European pharmaceutical company. Under the deal, NPS received a $10 million nonrefundable payment and $25 million to be paid within two weeks of the data reported Thursday. But Nycomed has the right to end the collaboration within that two weeks and forego the $25 million payment.

The Phase III study gave patients either a low dose of Gattex, a higher dose or a placebo, but the results showed only the low dose had a statically significant response. The trial's structure required a benefit in the high-dose group, before considering the lose-dose results.

The news of the study sent NPS shares falling on Thursday, closing down $1.47, or 26%, to $4.21. The stock recently changed hands Friday at $3.88, down 33 cents, or 8%.

"The challenge for Nycomed is whether it believes the European regulators would be willing to approve Gattex based on the mixed results," wrote Richard Smith, an analyst with J.P. Morgan, on Thursday. He notes that the European market for the drug is half that of the U.S. and Nycomed may simply decide it is too risky a proposition.

During a conference call Thursday, NPS President and Chief Executive Tony Coles said the company projects $150 million to $250 million in peak annual sales of Gattex. Under the Nycomed deal, NPS could earn more than $150 million in additional payments related to certain regulatory milestones for the SBS indication.

The company intends to pursue filing a New Drug Application with the U.S. Food and Drug Administration based on the existing data and plans on meeting with the agency to discuss its strategy for doing so. Unfortunately, the FDA's reaction won't come in time for Nycomed to factor into its decision.

"Although NPS is hopeful, we are not confident that Nycomed will view these results as positive and remain financially committed to the partnership," wrote Adam Walsh with Jefferies.

NPS is stressing the drug's orphan status, positive safety profile and proven effectiveness at the lower dose. They also stress that other currently marketed drugs have walked this road and that there is likely a good reason for the results - including the possibility that the higher dose suppressed patients appetite.

Short Bowel Syndrome results from the surgical removal of significant portions of the bowel following injury or illness and can lead to poor nutrition. Gattex aims to stimulate growth of the intestinal lining and improved dietary absorption of nutrients and fluids.

"There certainly has been some precedent for drugs to be approved when a company can successfully demonstrate that the achievement of statistically significant endpoints are consistent with efficacy advantages," said Coles on Thursday. "We think this is clearly the case here, but we all know that the FDA bar is quite high, particularly regarding safety."

Walsh notes that the FDA generally sticks to the predetermined endpoints and criteria in the design of trial, and many others are skeptical, but nobody knows how the FDA will factor in the effectiveness of the lower dose in a disease that currently has no other options.

"We don't think the FDA is going to approve it. It's a failed study," said Jack Hu, an analyst with Oppenheimer & Co. who believes the agency will want the company to conduct another Phase III study before allowing an NDA. But Hu believes that Nycomed may not be so worried about this development.

"We still think there is a possibility that Nycomed will opt in, because the study showed clear activity and a clear safety profile," said Hu, who notes that the data would likely attract another partner if Nycomed decides to terminate the agreement.

Regardless, the company may seek a partner for the North American rights to develop and commercialize Gattex, which it retains under the Nycomed deal.

In August, NPS projected a year-end cash balance of $65 million to $75 million, along with operating cash burn of $80 million to $90 million for 2007 and $35 million to $45 million for 2008.

"NPS may need to partner Gattex in the U.S. especially if the FDA requires more clinical data to clarify appropriate dosing," writes May-Kin Ho, an analyst with Goldman Sachs.

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