Inside Wall Street: This Little Pharma May Have a Big Pain Reliever

Pain management is a much sought-after therapy, so just imagine if it came in the form of a convenient skin patch that provides three months of relief. That's just what tiny, little-known pharmaceutical company NeurogesX (NGSX) has come up with, and which the Food and Drug Administration approved last November. The pain treatment has also gotten approvals in Europe and Hong Kong.

But even as the patch, called Qutenza, is now being marketed in the U.S., NeurogesX has yet to catch much attention. True, its stock bumped up from $7.70 a share in February to a 52-week high of $10.57 on Apr. 5 when Qutenza was launched. But it has since eased to around $9. However, the four Wall Street analysts who follow the company are all high on the stock. And some pros believe NeurogesX could double in a year or so.

Dr. Juan Sanchez, an analyst at Punk Ziegel Healthcare Group, says Qutenza could be widely adopted as a treatment for chronic peripheral neuropathic pain conditions, and as such it has an opportunity to be a $300 million product in the U.S. and generate sales of $175 million in Europe. The FDA's approval of Qutenza was the first in 10 years for a prescription-strength topical treatment of pain from post-herpetic neuralgia (PHN). Neuralgia is the nerve pain that occurs with shingles. Every year about 1 million Americans develop shingles, a painful viral infection caused by reactivation of a virus that causes chickenpox.

"An Unmet Medical Need"

In the European Union, Qutenza was approved in May 2009 for treatment of chronic neuropathic pain in nondiabetic adults. It's scheduled to be marketed there later this year. NeurogesX has signed a licensing agreement with Astellas Pharma to market Qutenza in Europe, the Middle East and Africa. Sanchez says the partnership serves to validate the patch's commercial potential.

Demand for Qutenza is expected to be high. Sanchez notes that chronic neuropathic pain "remains an unmet medical need, with over 50% of patients not achieving appropriate pain control." Qutenza can make an important contribution, he says, because it has a long lasting analgesic effect with just a single application. Qutenza is the only product that contains a synthetic form of capsaicin, a naturally occurring compound found in chili pepper that delivers heat sensation.

Astellas paid NeurogesX an upfront fee of $42 million, plus $7 million for an option to license a follow-up product, NGX 1998, a liquid formulation of Qutenza. Clinical trials for the liquid product are scheduled for later this year. In all, NeurogesX is entitled to additional milestone and option payments related to the liquid version totaling $97 million.

Tough Market to Enter

Sanchez, who rates Neurogesx a buy with a 12-month price target of $16 a share, says the company could generate revenues of $300 million by 2015. He doesn't worry much about competition. "Potential generic competitors would find it challenging to demonstrate bioequivalence to a nonabsorbable drug," he says. That, he adds, is a big a potential barrier to entry into the skin-patch pain relief market.

Analyst Gregory R. Wade of Wedbush Securities, who rates the stock as outperform, is more bullish. Although he has a 12-month target of $13 a share, he argues that once it's clear that Qutenza is gaining traction in the U.S. and Europe, the stock could trade closer to $20 in the next 12 months. The higher target is based on his earnings forecast for 2012. He expects the company to be in the red through 2011, but in 2012, Wade sees NeurogesX in the black with earnings of about $50 million, or $2.19 a share.

The next immediate catalyst for the stock would be getting a major U.S pharmaceutical company to partner with NeurogesX for the U.S. market. Without a deep-pocketed U.S. ally, it'll have to raise additional funds.

Some big U.S. institutional investors have already put in early stakes in NeurogesX, including BlackRock Fund Advisers, State Street, and Northern Trust. But the major shareholders are less known, such as Arch Venture Partners, which owns a 16.4% stake, and SV Life Sciences, with 14.2%.

Buying in early on NeurogesX could be one painless investment.