We are maintaining our Neutral recommendation on Ardea Biosciences Inc. (RDEA) with a target price of $23.00.
Ardea Biosciences, headquartered in San Diego, CA, focuses on the discovery and development of small-molecule therapeutics for the treatment of gout, human immunodeficiency virus (HIV) and cancer.
Ardea recently reported disappointing third quarter 2010 results. The development stage biopharmaceutical company’s net loss of $18.2 million or $0.79 per share was higher than the year-ago loss of $2.5 million or $0.13 and the Zacks Consensus Estimate of a loss of $0.52.
The wider loss was attributable to the increased amount spent by the company on developing its pipeline coupled with lower revenues in the quarter. Revenue in the reported quarter plummeted 64.1% to $3.3 million. (Read our full coverage on this earnings report:
We are pleased with Ardea’s efforts to develop its lead candidate RDEA594, which is being developed for the treatment of hyperuricemia (elevated uric acid levels) and gout. The market has a huge unmet need with Takeda’s Uloric (febuxostat) approved in February 2009, being the only new drug to be cleared in the United States for the treatment of gout in the last 40 years.
Even though febuxostat coupled with the generic allopurinol account for more than 90% of prescriptions written in the US for the treatment of chronic gout, approximately 50% of them fail to respond favorably to the standard therapies.
Consequently, RDEA594 will target a market with huge unmet need on approval. This will boost the company’s top line significantly. Furthermore, the lucrative agreement with Bayer (BAYRY), signed in 2009, focusing on the development of MEK (methyl ethyl ketone) inhibitors for the treatment of cancer is another positive for Ardea.
However, we remain concerned about the pipeline’s early stage development status. Furthermore, any pipeline development has risks. For example, Ardea had to discontinue the development of its lead pipeline candidate, Iseganan, on the recommendation of an independent data monitoring committee. Any similar pipeline failure would weigh heavily on the stock.
Moreover, the competition awaiting Ardea’s candidates on approval is another concern. We note that apart from Ardea, companies such as Savient Pharmaceuticals Inc. (SVNT) and Novartis (NVS) are also developing treatments for gout.
Given these headwinds, we believe that Ardea’s current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels and maintain our long-term Neutral stance on the stock. The stance is supported by the Zacks #3 Rank (Short-term Hold rating) currently carried by the company in the short-term.
BAYER A G -ADR (BAYRY): Free Stock Analysis Report
NOVARTIS AG-ADR (NVS): Free Stock Analysis Report
ARDEA BIOSCIENC (RDEA): Free Stock Analysis Report
SAVIENT PHARM (SVNT): Free Stock Analysis Report
Zacks Investment Research
