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Novacea (NOVC, news, msgs), a biotech company that focuses on treatment of cancer, is vastly undervalued here. The company recently entered a worldwide development and commercialization agreement with Schering-Plough (SGP, news, msgs) for Asentar, an oral treatment for prostate cancer. The pact calls for Schering-Plough to provide, upfront, $60 million in licensing and research payments. In addition, Novacea can receive potential pre-commercial milestone payments of up to $380 million, and major tiered royalties on worldwide sales of Asentar that could mean a lot more.
According to the American Cancer Society, prostate cancer is the second-leading cause of cancer death in men in the United States -- after lung cancer -- with approximately 219,000 new cases and 27,000 deaths expected in 2007.
Asentar has shown strong efficacy and safety results in Phase 2 studies, during which researchers use small study groups to collect safety and effectiveness data, study short-term side effects and risks, and collect additional information about the proper dose and dosing schedule. Heading to Phase 3 studies, which may include thousands of participants, Novacea has the funding to develop and expand Asentar for a broader set of indications, or uses, within the $5 billion worldwide prostate cancer markets.
Novacea looks to be establishing a floor here after it rocketed to a high of $17.25 just a few days ago on the news of the agreement. Now in the $10 range, Novacea has a valuation of just over $240 million, compared to competitor Dendreon's (DNDN, news, msgs) market cap of nearly $700 million. There is a lot more room on the upside, depending on the outcome of Asentar's Phase 3 studies. One could easily argue that Novacea could sport a stock price of $38, given where Dendreon's valuation is right now.
This is a risky trade for me, but I feel confident the stock is cheap given the amount of potential. I also feel the price is ripe to go higher based on technicals alone. But, as with any biotech play, the potential for both upside and downside is significant. If you are looking for a trade, timing is very important due to the volatility of the stock.
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