2008 looks to be more optimistic for small-cap specialty pharma companies

This year hasn’t exactly been a banner year for specialty pharmaceutical companies that analysts might have forecasted. Year-to-date, the overall sector has seen a measly 2.2% return, compared with 9% in 2006. Small-cap specialty pharmaceuticals returned just 10.1% year-to-date, compared with a ripe 34.4% return in 2006. The last 30 days in particular have shown considerable underperformance, clocking in at -4.1%.

Despite a disappointing 2007, analyst Angela Larson with Susquehanna Financial said that “[a] robust calendar leaves us room for optimism for 2008.” Looking at 2007, the analyst concedes that the low base incurred this year may mean greater room for growth in the coming year.

Larson says the key catalysts for moving valuation going forward (in order of priority) include, successful FDA approval and launch of new products, successful completion of Phase 3 studies, successful completion of Phase 2 studies that can lead to Phase 3 and partnership discussions, the acquisition of products and the clarity in funds to achieve outlined goals.

Among the companies she covers, Larson says all but two companies are hitting one or more of these milestones in 2008. Small caps Anesiva and POZEN are both expected to launch products that should bring a new market opportunities to their respective companies, Larson says. Additionally, ISTA Pharmaceuticals and Salix have products on tap for 2008 that could, according to Larson, expand or protect the companies’ existing franchises.

Significant news flow on the Phase 3 data release is also expected in 2008, according to Larson, from companies including Allergan, Barrier Therapeutics, Cadence, DURECT, Endo, Inspire, ISTA, NeurogesX, Obagi, POZEN, Salix, Sciele and Shire.

“News events in 2007 have tended to carry greater risk than reward due to the market offering a negative bias on performance and expectations on good news being priced in early,” Larson wrote in a research note today. “However, we believe the news flow is more robust and varied this year, which may help re-cast the group sentiment.”

The small-cap specialty pharmaceuticals Larson has a positive rating on include Barrier Therapeutics (BTRX), Barrier Therapeutics (CADX), ISTA Pharmaceuticals (ISTA), NeurogesX (NGSX), Obagi Medical Products (OMPI) and POZEN (POZN).

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