NYSSA Investment Challenge - Fordham Graduate School of Business

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NYSSA
Student Research
This report is published for educational purposes

only by students competing in the New York

Society of Security Analysts Investment Research

Challenge.
Ticker: EMIS
Recommendation: SELL
Price: $ 6.69
(close 03/17/2004
)
Price Target: $4.80
Earnings/Share
Mar.
Jun.
Sept.
Dec.
Year
P/E

Ratio
2002A
($1
.20)
($1
.39)
($0
.72)
($0
.67)
($3
.98)
NM
2003A
(0
.55)
(0
.63)
(0
.79)
(0
.51)
(2
.49)
NM
2004E
(0
.25)
(0
.25)
(0
.25)
(0
.25)
(1
.01)
NM
2005E
(0
.92)
NM
Highlights

Rapid balance sheet deterioration drives SELL rating:
We are initiating coverage on

Emisphere Technologies (EMIS) with a SELL rating and a 12-month price target of $4.80.

Overvalued on both an intrinsic and relative basis:
Intrinsically, Emisphere is expensive

with a discounted cash flow (DCF) valuation
of $5.76, using a 15% WACC
. Emisphere also

trades at a premium relative to other small-cap biotech companies. Our blended target price

factors in a discount for an estimated 20% probability of default.

Technology pioneer in drug delivery:
Emisphere was founded in 1986 to develop the

technology necessary to orally deliver protein and non-protein drugs. Its main products in the

pipeline are oral heparin and oral insulin. The results of clinical trials and speed of market

adoption of oral heparin and oral insulin are critical to Emisphere’s success.

Critically dependent on big pharma partnerships
: Emisphere’s future hinges upon its ability

to broker partnerships with larger pharmaceutical companies in order to generate revenues and

cash. To accomplish this requires a strong and proven technology. The effectiveness of

Emisphere’s technology has not yet been demonstrated, and it lacks a distinct advantage over

competing technologies.

High burn rate and poor pipeline visibility:
The inability to predict when the company’s

products will reach the market, coupled with a high cash burn rate, translates into a stock that

will continue to languish. This stock will continue to be a high-risk proposition until Emisphere

is able to acquire a partner and/or strengthen its balance sheet.
52 Week Price Range
$2-$9
Average Daily Volume
86.4K
Beta
2.2
Dividend Yield (Estimated)
N/A
Shares Outstanding
18.08m
Market Capitalization
$120.94m
Institutional Holdings
49%
Insider Holdings
2%
Book Value per Share (12/31/03)
$1.76
Debt to Total Capital
28%
Return on Equity
-88%
Market Profile
New York Society of Security Analysts
Important disclosures appear at the back of this

report
1601 Broadway, 11
th
Floor
New York, NY 10019-7406
Emisphere Technologies Inc
Date: March 18, 2004
Team: NYU Stern
Liya Brook
lab339
@stern.nyu.edu
Aramie Dimm
ard243@stern.nyu.edu
Brad Korch
bwk210@stern.nyu.edu
Alex Orozco
aqo200@stern.nyu.edu
Javed Siddique
js1766@stern.nyu.edu
Industry: Biotechnology
EMIS Daily Stock Price
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Jul
-
0
3
A
ug-
0
3
Sep
-
03
Oct-03
N
ov-03
Dec-03
J
an-04
Feb
-
04
Mar
-04
52 Week Price Range
$2-$9
Average Daily Volume
86.4K
Beta
1.8
Dividend Yield (Estimated)
N/A
Shares Outstanding
18.16m
Market Capitalization
$118.42m
Institutional Holdings
49%
Insider Holdings
2%
Book Value per Share (12/31/03)
$1.76
Debt to Total Capital
28%
Return on Equity
-88%
Market Profile
52 Week Price Range
$2.28-$9.20
Average Daily Volume
86.4K
Bet a
2.2
Dividend Yield (Estimat ed)
N/A
Shares Outstanding
18.16M
Market Capitalization
$118.42M
Institut ional Holdings
49%
Insider Holdings
1%
Book Value per Share (12/31)
$1.76
Debt to Total Capital
28%
Ret urn on Equity
-88%
Market Profile
EMIS Daily Stock Price
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Jul
-03
A
ug-03
Sep-03
Oct-0
3
N
ov-03
Dec-
0
3
J
an-04
Feb-04
Mar-04
52 Week Price Range
$2-$9
Average Daily Volume
86.4K
Beta
1.8
Dividend Yield (Estimated)
N/A
Shares Outstanding
18.16m
Market Capitalization
$118.42m
Institutional Holdings
49%
Insider Holdings
1%
Book Value per Share (12/31/96)
$1.76
Debt to Total Capital
28%
Return on Equity
-88%
Market Profile
EMIS Daily Stock Price
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Jul
-03
A
ug-03
Sep-03
Oct-0
3
N
ov-03
Dec-
03
J
an-04
Feb-04
Mar-04
EMIS Daily Stock Price
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Jul-0
3
Aug-0
3
Sep-
0
3
Oct-03
Nov-0
3
Dec-03
Jan
-
04
Feb-
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4
Mar
-0
4
NYSSA
March 19, 2004
Business Description
Emisphere Technologies, Inc. (“Emisphere”) is a biopharmaceutical company that specializes in creating

drug carriers for traditionally injected pharmaceutical drugs (such as proteins, peptides, and

macromolecules). The firm is headquartered in Tarrytown, NY,

and has approximately 117 employees as

of year end 2003. Contract revenue for fiscal year 2003 reached over $0.4 million, compared to $3.4

million for the fiscal year 2002 and operating expenses were $30.8 million in 2003, compared to $61

million in 2002, mostly as a result of a reduction in research and development costs due to the

discontinuation of its final stage PROTECT drug.
History of the Company
Emisphere was founded in 1986 as Clinical Technologies Associate, Inc., a firm with a focus on

developing technology for the oral delivery of proteins and non-protein drugs. Clinical Technologies went

public in 1989 listed on NASDAQ, under the ticker CTAI. In 1992, CTAI changed its name to Emisphere

Technologies, Inc.
1
as it narrowed its focus on developing the oral drug delivery technology,
eligen™
.
As a result of this shift in focus, Emisphere looked to leverage its eligen™ technology to establish

partnerships with large pharmaceuticals, which could subsidize and potentially reap benefits from the

development of new drugs by combining existing drugs with the company’s technology
Recent Events
The years 2002 and 2003 proved to be tumultuous for Emisphere Technologies. Emisphere announced in

May 2002 that it would enter a restructuring phase, which entailed a reduction of workforce by nearly

one-third, including a recently hired President and COO, Alan Dunton. The restructuring resulted from

the failure of the liquid heparin (PROTECT) drug in the final FDA trials in May 2002; liquid heparin was

the only drug Emisphere had in Phase III trials at the time. The elimination of Dunton’s position appears

to reflect the shift in Emisphere’s strategy from research and technology development to a partnership

focus. Emisphere aims to partner its existing post-Phase I or Phase II drug candidates and also seeks

partners who have existing drugs or drug candidates targeting large markets. Related to this strategy

shift, Emisphere also initiated the sale of its Farmington, CT research facility, which is valued at $3.6

million.
2

In June 2003, Emisphere announced that it has signed an agreement with the U.S. Department of Defense

to evaluate the use of Emisphere's eligen™ technology to create oral vaccines against anthrax using a new

recombinant protein antigen. In August 2003, Eli Lilly announced that it will discontinue funding the

development of the oral recombinant human growth hormone (rhGH) program, the rights of which were

returned to Emisphere.
3
Figure 1: Emisphere Stock Price History and Recent Events
Source: CapitalIQ Online
In December 2003, Eli Lilly filed a suit against Emisphere seeking a judgment ruling that Lilly is not in

breach of agreements regarding its oral PTH 1-34 (recombinant parathyroid hormone called teriparatide);

the purpose of the suit against Emisphere appears to be a clarification of the contract agreement.

1
Emisphere Technologies Annual Report
2
Philippidis, Alex, “Biotech’s cutback claim the job of its president,” Westchester County Business Journal, December 2002
3
Emisphere press release
NYSSA Investment Research Challenge
2
EMIS initiates US clinical
studies of oral insulin
candidate
EMIS Initiates Research and
Development Agreement With
U.S. Army For Oral Anthrax
Vaccine
Lilly and EMIS Continue
Development of Oral PTH
Program, as Emisphere
Reacquires All Rights to Oral
rhGH
EMIS Announces Third
Quarter Financial Results for
2003; Development Of
Proprietary Eligen Oral Drug
Delivery Technology;
Executive Changes
EMIS appoints 2 new
board members
EMIS Files Countersuit
against Eli Lilly
EMIS’s Oral Insulin
Tablet Multi
-
Dose Data
Indicate Desired
Activity With No
Observed
Hypoglycemic Events
EMIS Announces
Year
-
End Results
Emisphere filed a countersuit alleging an unpaid milestone payment and a patent infringement.

Emisphere, in a recent conference call, pointed to the suit as evidence of Lilly’s confidence in the

technology. While it is a questionable strategy to file a suit against a potential partner, these suits appear

to be geared more towards clarification of agreements than hostile actions.
Partnerships
Since the restructuring in 2002, Emisphere has stated that its strategy is to partner with large

pharmaceutical companies to further develop drugs after establishing “proof of concept” during Phase I or

Phase II. At present, Emisphere has four partner-ready drug candidates and two partnership agreements.

Emisphere has yet to fully articulate a contingency plan in the event that they are unable to find

additional partners, despite repeated questioning by analysts on a recent earnings call.
Emisphere maintains confidence that it will partner oral insulin by the end of the year, although the

company has not confirmed any leads at this time. Finding a partner willing to continue the insulin trials

is critical, as Emisphere will no longer be able to independently support late stage product candidate

testing or large-scale clinical productions due to the Farmington facility closure.
Currently, Emisphere has a partnership with Eli Lilly for the development of oral PTH 1-34, teriparatide,

which is in Phase I, and a partnership with Novartis to develop oral salmon calcitonin for the treatment of

osteoporosis in postmenopausal women. Salmon calcitonin is currently in Phase II trials.
Emisphere also has a partnership with the U.S. Department of Defense to develop and provide delivery

agents and anthrax antigen to the USAMRIID, where the USAMRIID will evaluate the drug combination.

Emisphere has the potential to receive the patent and royalties for this drug, should it prove effective.
In March 2000, Emisphere Technologies, Inc. entered into a collaboration to evaluate the feasibility of

applying the eligen™ technology to Regeneron's Axokine, currently an injected obesity-treatment

candidate in Phase III trials. Emisphere is eligible to receive fees, research cost funding, milestone

payments, and royalties from the development of the oral form of Axokine. This oral drug candidate has

undergone pre-clinical tests and is on hold pending the results of the injected Axokine Phase III trial.
Finally, Emisphere’s heparin product is the closest product to market but does not currently have a

partner. Initially established in 1996 under Ebbisham, Ltd., a joint venture with Elan Pharmaceuticals,

oral heparin was reacquired by Emisphere in July 1999. Emisphere stated that the product would develop

more quickly under the control of one company. In exchange for Elan’s assets, Emisphere issued a $20.0

million, zero coupon note and agreed to provide Elan with limited revenue-based royalties. Elan

committed to purchasing common stock after the note is repaid and to funding Phase III oral heparin

trials, subject to certain Phase III milestones. It is important to note that only one year later, in June 2000,

Dupont Pharmaceuticals provided Emisphere with a letter of intent to further develop and market oral

heparin. In May 2001, due to the pending sale of Dupont Pharmaceuticals in July, Emisphere opted out of

the letter of intent.
Emisphere will receive approximately 10 percent in royalties from the sale of partnered drugs that reach

the market, with a potential to increase the royalties once revenues from the product have reached above a

predetermined amount.
Board of Directors
Emisphere’s current board of directors consists of seven members, and all except for Michael Goldberg,

the long-standing CEO, are independent. Michael E. Black and Steven K. Carter joined the board in

December 2003, taking up the seats vacated by Jere E. Goyan and Joseph R. Robinson, who are

continuing on as consultants.
The departure of Jere E. Goyan and Joseph R. Robinson from the Emisphere’s board does raise some

concern, as both men have significant experience and are prominent scientists within pharmaceuticals (in

addition to holding numerous board positions with pharmaceuticals, Jere E. Goyan previously served as

the Commissioner of the FDA). However, movements within the board are common for early-stage

biotech firms, and we feel that the change in the board reflects the shift in focus from research to

partnerships. Michael E. Black is currently the Vice Dean for Administration and Finance at the

University of Pennsylvania School of Medicine and held senior positions at United States Air Force

Health Care Administration Division. Steven K. Carter, a medical doctor who sits on numerous biotech

boards, has significant experience in pharmacology, academia and cancer research.
With Jere E. Goyan and Joseph R. Robinson staying on as consultants, it is likely that Emisphere’s

current board will serve to provide new contacts and benefit Emisphere’s new partner-focused strategy.
Management
At present, the company has nine senior officers on its management team led by Michael Goldberg, who

has been Emisphere’s Chief Executive Officer and a member of the Board of Directors since 1990. In

December 2003, Emisphere hired Elliot Maza as its new CFO, filling a position that has been vacant since

Charles Abdalian resigned from the position in July 2001. It is typical for early stage companies to have

movement within management, and as such, we are not concerned with the resignation of Charles

Abdalian or the termination of Alan Dunton in 2002. However, we do see Mr. Maza’s appointment as a

reaffirmation of Emisphere’s strategy to aggressively pursue partnerships for its existing drug candidates,

and possibly as a step in positioning Emisphere as a takeover target.
Emisphere’s Market: Oral Drug Delivery
There is little doubt that the market for oral delivery of otherwise injected drugs is immense. Emisphere

estimates today’s total market for the oral delivery of insulin, heparins, and treatments for osteoporosis

and growth disorders to be over $16 billion. While this market assessment is based on total conversion of

injected treatments to oral treatments, the assumption seems valid given patients’ preferences for ease of

use. Of course, this market potential has enticed not only numerous biotech firms, but also many of the

large pharmaceutical companies to develop their own drug delivery systems and oral or inhaled drugs.
However, the fact that the demand for the technology exists does not mean that Emisphere is poised to

supply it, as there are many challenges to developing a successful oral drug delivery technology. First, the

compounds of injected drugs are often too large to be absorbed in the small intestine in their current forms,

hence their need to be injected. Second, even if a company can manage to develop a technology to catalyze

a drug’s absorption, it is still necessary for this drug to remain active and be absorbed in large enough

quantities to be effective. Finally, and above all, the technology needs to be cost effective and

commercially viable in order to be successful.
The eligen™ Technology
Emisphere’s
eligen™ technology is a broad-based platform for oral drug delivery. Its mechanism works

as patented carrier molecules “come into close proximity” with the therapeutically active compound and

temporarily alters the conformation of the compound to one that can more easily pass across the

membrane. After passing through

the membrane, the carrier molecules

disassociate with the drug compound,

leaving it active to exert its desired

effect. Emisphere claims that this

process in no way chemically alters

the drug, and subsequently in no way

diminishes its effects. Emisphere

also claims that the eligen™

technology stabilizes the drug

compounds from the harsh conditions

of the GI tract, an important obstacle

for oral drug delivery.
Emisphere has had varying degrees

of success in proving its eligen™

technology effective. Emisphere has

administered over 100,000 doses

utilizing eligen™ without any

adverse side effects, implying that its

technology is safe. Additionally,

Emisphere recently released the

results of a small (13-person) oral

insulin study that essentially proved that patients taking an eligen-based insulin product showed

statistically significantly better results than those patients taking a placebo.
Despite these small wins, Emisphere still has a long way to go in proving that its technology works well

enough to be economically viable. One important issue is the efficacy of the drug compound that is

administered orally. Studies have shown the efficacy of the orally administered drugs being as low as

0.5-5%, meaning that as much as 20-200 times more drug is necessary to produce the same results.

Would consumers still prefer oral medications to injections if it required them to take 20 pills to get the

desired effect? Furthermore, if the low efficacy of the oral drugs increased their costs, could one expect

the HMOs to absorb these costs in the name of consumer comfort? Probably not.

Figure
2
:
The
eligen Delivery Technology






















S
ource:
Emisphere Corporate
Presentation


eligen™ Patent Protection
According to the United States Patent and Trademark Office, Emisphere has been issued 81 patents for

individual compounds and compositions. Emisphere has received patents for many of its drug

combinations, but not for the activity of the compounds. If Emisphere successfully brings a product to

market, it may be possible for a competing drug delivery company to circumvent the patent and utilize

Emisphere’s methodology to create a similar, less expensive drug that will pilfer market share from

Emisphere.
Emisphere Target Arenas
As Emisphere’s strategy is to partner with larger pharmaceutical companies in developing marketable

drugs, it is able to focus its efforts on many different drug categories. The earlier-mentioned oral insulin

product is perhaps one of Emisphere’s strongest candidates, given insulin’s large market and Emisphere’s

early successes. However, Emisphere badly needs to find a partner to bring this potential product to

fruition. Emisphere also had clinical success with its liquid heparin product, but recently abandoned the

liquid product to focus on a solid one (signs point to the drug’s foul taste as the cause for the doomed

liquid form of the drug). Nevertheless, Emisphere’s heparin product remains the furthest along in the

development pipeline and would most likely be their first revenue producing product.
Emisphere also has prospects for success in combating osteoporosis, growth disorders, and obesity, but

perhaps one of its most interesting and recent projects is its program to develop an oral version of the

anthrax vaccine with the US Army. Although a successful anthrax vaccine would probably fail to

generate an earnings windfall, it could be the right opportunity to fully prove the eligen™ technology.
Industry Overview and Competitive Positioning
The oral delivery industry has grown at rapid pace since polymer/membrane technology was first

introduced almost 20 years ago. In 2004 revenues from delivery technologies should reach $8.3 billion,

increasing to $12 billion in 2005. Currently there are approximately 350 companies competing in the

delivery technology space.
The companies researching new delivery methods are separated into two distinct players: stand alone

delivery technology companies and the big pharmaceuticals that also research new compounds. Both are

attempting to augment existing drugs to establish easier and more cost effective ways of delivering

macromolecules.
Delivery companies are increasingly attempting to partner with pharmaceutical companies to leverage the

capital that these bigger firms have to fund FDA trials. As the rigors of FDA testing have increased, so

have the costs. These partnerships are generally structured with the pharmaceutical company funding a

part or majority of the Phase II and III trials. In exchange, royalty payments to the delivery company are

made using a sliding scale, based on revenue derived from any products developed, and generally topping

out at 20% of revenues. These licensing deals from pharmaceutical companies have been the biggest

contributor to the growth of this sector. The rapid increase in R&D expenditures, coupled with a lower

R&D success rate, has meant that pharmaceutical companies must look for new ways to maintain their

profit margins and increase their bottom lines. Pharmaceutical companies are attempting to extend the

life of their patents on existing drugs to fend off generics, or at the very least to offer additional value-
added. Delivery technology has become the cornerstone of this strategy.
The ability to prove the promise of one’s technology is paramount within the delivery space. Successful

Phase II or III trials or past demonstration of the ability to pass these hurdles has become integral in

obtaining partnerships. Delivery methods continue to experience a low percentage of technological

successes. Because of this, demonstrating the efficacy of the proprietary technology has become crucial

to acquiring partners that will fund further FDA trials.
Consolidation
Acquisitions and consolidation are invariable characteristics of the drug delivery space. Pharmaceutical

companies continue to acquire firms when they see competitive value in their technology. The trend of

consolidation of delivery technology companies is expected to swell as the cost of bringing new

technologies to the market continues to escalate. Increasingly these combined entities are vertically

integrating into drug development in an attempt to capture more of the value chain. Because of the

growth limitations in the delivery technology business, companies such as Elan have integrated forward

to develop their own compounds. This can be especially important as margins on actual compounds can

be substantially higher than those of delivery technologies. This, however, is changing; the delivery

technologies comprised only 28.1% of oral delivery revenues in 2003, but this share is projected to rise to

40.9% by 2005. Still other companies are integrating into contract development and manufacturing, as

Meridian Medical technologies has. Oral
drug delivery firms are increasingly finding it difficult to

remain solely in the business of developing ways to augment existing compounds.
Competitive Positioning
There are numerous forms of drug delivery agents vying for the same market as Emisphere, many of

which are in later phases compared to their Emisphere counterparts. The competitive landscape of drug

delivery is ever-changing, due to the difficulty of passing FDA trials. Companies must not only prove the

efficacy of their drugs, but must also contend with competition from other companies that are pursuing

the same technological advancements. Therefore, if a company is unable to deliver a product that has a

significant competitive advantage, it is important that they be first to market. The first movers’

advantage in the drug delivery market can be a make or break proposition. Once FDA trials are complete

the key to grabbing market share is the ability to prove that the efficacy of your drug is superior that of

your competitors.
Several companies currently have drugs in the pipeline that will be direct competitors to Emisphere

Technologies. In addition to the fact that these drugs are further along in the pipeline some are also being

developed by companies that are potential partners for Emisphere. This would indicate that these firms

could either fail to partner with Emisphere because they already have a proven technology, or they may

chose to partner with Emisphere to keep other companies from having access to the competing

technology. It is still unclear as to which is the most likely scenario, but the efficacy of Emisphere’s

technology is sure to be a determinant.
Insulin
Within the insulin space there are a number competitors researching advancements in delivery

technology. The product that will be first to market appears to be “Oralin” which is being produced

through a partnership between Generex and Eli Lilly. This drug uses a “RapidSpray” technology to

deliver insulin in a liquid form. This product is currently in late Phase III trials and looks to reach the

market sometime in 2005. This product could command significant market share upon introduction,

leaving the laggards with an uphill battle. There are also two separate drugs using an inhaled delivery

method that are progressing with Phase III trials: AERx, which is an Aradigm and Novo Nordisk product,

and Exubera, which is the result of a Nektar Aventis and Pfizer partnership. Baring any setbacks, both of

these products should reach the market before Emisphere’s oral insulin does.
Although the previously described drugs will be first to market, the ease of use of an orally delivered

product should allow oral insulin to dominate the market upon introduction. The direct competitor to

Emisphere in this field is HIM2, which is being co-developed by GalaxoSmtihKline and Nobex. HIM2,

like Emisphere’s product, uses an oral delivery method of insulin to treat Type 1 and Type 2 diabetes.

HIM2 is currently in Phase II clinical trials and is expected to reach the market as early as 2006.

Emisphere sees delivery of a commercially viable alternative at best by 2010. This will mean that

Emisphere will have to provide a true value proposition relative to HIM2 in order to capture market share.

Currently there is no clear evidence that Emisphere’s product has a significantly greater efficacy

compared to HIM2.
Heparin
Emisphere’s oral heparin compound is the closest to market but also faces the stiffest competition.

Emisphere’s heparin is currently in Phase II and is expected to reach market in 2006. AstraZeneca has

recently filed a new drug application in the US and is awaiting approval of Exantra, which has proven

effective against
proximal deep vein thrombosis (DVT) and pulmonary embolism (PE) in both knee

replacement and complete hip replacement. Emisphere’s technology is targeted solely to the knee

replacement market. Given their lack of a partner in the heparin market, they will have a problem

competing with the marketing power of AstraZeneca unless a significant partnership can be developed.

Once this product is ready for the marketplace they will have to face an established player, and as of yet,

like the oral insulin product, Emisphere’s oral heparin does not have evidence of superior efficacy.
Oral PTH and Calcitonin, RHGH,

Cromalyn Sodium
The other drugs in Emisphere’s pipeline are also being studied by various companies. Oral Calcitonin is

currently in Phase I for both Nobex and Unigene. Cromalyn Sodium currently has an inhaled form

available on the market. This makes the market tougher to penetrate than the injection market of heparin

and insulin, with cost being a bigger obstacle as the competitive advantage of inhaled delivery is less

clear. rHGH does not have any major competitors as of yet but a potential partner for this drug is still

unclear. This was co-developed with Eli Lilly, who has since given full control of the technology back to

Emisphere. The competitors in these drugs are still shaking out as all but the PTH are still in preclinical

trials.
Financial Analysis
Emisphere currently faces a serious cash crisis. Despite maintaining a tight R&D budget, the cash burn

rate has been $30M and the company carries a high risk of insolvency. The remaining question is

whether or not Emisphere can sustain itself long enough to achieve profitability.
Earnings
2003 year-over-year revenues decreased by $.9M, primarily due to a decline in contract research revenues

from partner Eli Lilly upon the conclusion of rHGH product testing. Research & Development expenses

of $21M were less than half of 2002 levels.
Emisphere’s business model relies on partners to bear the brunt of the costs of bringing a new chemical

entity to market. Emisphere’s appeal as a potential partner is critically dependent on the ability of its

drugs to be mass-produced at required efficacy levels and competitively priced to appeal to HMOs.

Assuming suitable partnership agreements are reached, Emisphere is entitled to royalties in exchange for

the use of its eligen™ technology and drug compound patents. The company will also receive additional

payments from partners when certain milestones are reached. In light of this expense structure, we do not

expect Emisphere to incur significant costs relating to the production, distribution, or marketing of its

products.
The product success probabilities used in our revenue projections are below the industry averages. We

adopted a cautious outlook in order to reflect the efficacy issues in recent clinical tests and small

population sample sizes of recent test trials. The lack of a proven track record for Emisphere’s eligen™

technology was the driving force behind our conservative estimates for FDA approval process length and

the anticipated number of years before Emisphere’s products can enter the marketplace. In a best-case

scenario, we expect heparin product sales to begin in 2006, with all 6 key pipeline products becoming

commercially available by year-end 2010. This schedule will allow Emisphere to re-establish R&D

expenditures in 2008 and achieve positive earnings in 2010, generating double-digit earnings growth

through 2014. We expect long-term growth to stabilize and decline as Emisphere’s patents near

expiration and additional competitors emerge. All earnings estimates beyond 2006 assume that the

company is able to implement a short-term solution to its cash crunch.
Cash Flow
Given expected 2004 cash consumption of $30M, we estimate that the company will fully deplete its cash

reserves by the end of 2005 if it cannot reduce its current operational expenses. Although Emisphere is

desperately seeking to partner its oral insulin product, potential partners are concerned by the absence of

longer-term test results, which will not be available until 2005. Accordingly, the prospects of an

immediate cash infusion or milestone payments from a new or existing pharma drug partner are limited.

We also do not anticipate any pipeline drug revenues within the next 2 years, as even approved Phase III

drugs are subject to an additional mandatory review period, lasting 1.5 years on average.
In order to aggressively manage its cash flow through 2005, we assume that Emisphere will seriously

reduce its burn rate, seek advance milestone and revenue payments from its existing partners, and stretch

its Accounts Payable days if necessary. We also assume that Emisphere will be able to sell its research

facility as planned for $3.6M in 2004. Management’s inability to undertake these measures would

preclude Emisphere from obtaining additional financing and increase the company’s insolvency risk. A

new infusion of capital will be necessary in 2006 to sustain Emisphere until it achieves a steady revenue

stream and is able to survive as a going concern.
Balance Sheet & Financing
Emisphere’s balance sheet is rapidly deteriorating. The 2003 ending cash balance was $43M and

Emisphere has a $20M 7-year 15% zero-coupon bond coming due in 2006. Including accrued interest, the

total 2006 liability is $55M. The company’s current balance sheet and anticipated earnings will not

provide the funds necessary to repay this obligation. If Emisphere is unable to broker a new partnership

agreement or receive substantial revenues from an already partnered drug by 2006, it will need to access

the capital markets and issue equity to boost its cash reserves and remain solvent. Emisphere’s negative

expected 2006 EBITDA/interest coverage ratio will drive up its cost of debt, so we would not expect

Emisphere to restructure its outstanding debt.
The existing note was issued to Elan Corporation in 1999. Elan agreed to subscribe to Emisphere’s

common stock at the time of repayment, but due to the lack of visibility on this agreement we have not

heavily incorporated it into our analysis.
Valuation
In order to value Emisphere we used a multi-stage discounted cash flow analysis in conjunction with a

comparable company valuation. We feel that Emisphere’s stock is currently overvalued from both an

intrinsic and relative valuation, and rate Emisphere as a SELL with a 12-month blended price target of

$4.80. This price target represents an equally weighted blend of our 12-month intrinsic value target

($6.64) and the 12-month relative valuation target ($5.38), and also reflects a 20% default probability. In

the event of default, we determined the company’s debt liabilities would outweigh the sum of its assets,

leaving an equity value of $0. The company’s precarious cash position, lack of comprehensive clinical

test results, inability to attract necessary big pharma partners, uncertain royalty revenues, and risk of not

meeting FDA efficacy standards cause us to seriously question the likelihood of Emisphere bringing its

pipeline drugs to market. Material developments such as a new partner agreement, a change in capital

structure, or significant pipeline progress
would be required in order for Emisphere to achieve its intrinsic

value.
The DCF valuation was based on a 15% weighted average cost of capital, a perpetuity assumption for

terminal value, and a terminal discount rate of 12%. This implies a present intrinsic value of $5.76, which

represents a 14% discount to Emisphere’s current stock price of $6.69. Furthermore, the assumptions

underlying our DCF valuation carry a high level of risk, and represent a ‘best-case scenario’ in which

Emisphere is able to access the capital markets and avoid a complete cash drain.
Figure 3: DCF Valuation Results
($ in thousands)
DCF Analysis
2004E
2005E
2006E
2007E
2008E
Results:
Operating Income
(14,450)


(12,209)


(10,782)


(7,688)


(14,485)


PV of FCF
108,052
$

Tax Rate
0.0%
0.0%
0.0%
0.0%
0.0%
Terminal Value (2022)
6,120


NOPAT
(14,450)


(12,209)


(10,782)


(7,688)


(14,485)


Plus Dep.
6,000


5,759


5,518


5,276


5,035


Enterprise Value
114,171


Less Capex
(992)


(992)


(992)


(992)


(992)


Less Debt
(38,345)


Plus Cash
28,327


FCF
(9,442)


(7,442)


(6,257)


(3,404)


(10,442)


DCF Equity Value
104,153


Year
1


2


3


4


5


Number of Shares
18,077


Discount Factor
0.8673


0.7522


0.6524


0.5658


0.4907


Intrinsic Value/Share
5.76
$

Discounted FCF
(8,189)


(5,598)


(4,082)


(1,926)


(5,124)


Stock Price (03/17/04)
6.69
$

Stock/Intrinsic
86%
DCF Results Matrix
Phase III Probability
5.76
$

20%
25%
30%
35%
40%
45%
10%
8.52


9.85


11.18


12.51


13.84


15.17


11%
7.43


8.65


9.87


11.09


12.31


13.52


12%
6.48


7.59


8.71


9.83


10.95


12.07


13%
5.64


6.66


7.69


8.72


9.75


10.77


14%
4.89


5.84


6.79


7.73


8.68


9.62


15%
4.06


4.91


5.76


6.61


7.47


8.32


16%
3.66


4.47


5.27


6.08


6.88


7.69


Source: Student Estimates
Our intrinsic valuation model projects revenue streams for each of Emisphere’s six key pipeline drugs
4

using the current value of the drug’s target disease market and the anticipated market growth rate. The

portion of total market revenues allocated to Emisphere throughout the anticipated product lifecycle of

each drug is based upon our projections of Emisphere’s market share and estimated royalties from partner

agreements. These approximations are based upon average target market growth of 5%
5
per annum and

annual royalties of 10%, which we derived from industry benchmarks. We also assume that Emisphere’s

market share will increase by 50% per year in the first 5 yrs after product introduction and will stabilize

at 27% before declining at the time of patent expiration.
To reflect the additional risk associated with the biotechnology sector, all revenue projections are

weighted by pharmaceutical clinical success probabilities, assigned according to each drug’s current

4

Pre-clinical products were excluded from revenue projections. These values will not significantly impact our DCF analysis due to the

low clinical success probabilities associated with Pre-clinical NCEs.
5

The market for heparin is expected to grow at 15% per year.
DCF Analysis
2004E
2005E
2006E
2007E
2008E
Results:
Operating Income
(14,450)


(12,209)


(10,782)


(7,688)


(14,485)


PV of FCF
108,052
$

Tax Rate
0.0%
0.0%
0.0%
0.0%
0.0%
Terminal Value (2022)
6,120


NOPAT
(14,450)


(12,209)


(10,782)


(7,688)


(14,485)


Plus Dep.
6,000


5,759


5,518


5,276


5,035


Enterprise Value
114,171


Less Capex
(992)


(992)


(992)


(992)


(992)


Less Debt
(38,345)


Plus Cash
28,327


FCF
(9,442)


(7,442)


(6,257)


(3,404)


(10,442)


DCF Equity Value
104,153


Year
1


2


3


4


5


Number of Shares
18,077


Discount Factor
0.8673


0.7522


0.6524


0.5658


0.4907


Intrinsic Value/Share
5.76
$

Discounted FCF
(8,189)


(5,598)


(4,082)


(1,926)


(5,124)


Stock Price (03/17/04)
6.69
$

Stock/Intrinsic
86%
DCF Results Matrix
Phase III Probability
5.76
$

20%
25%
30%
35%
40%
45%
10%
8.52


9.85


11.18


12.51


13.84


15.17


11%
7.43


8.65


9.87


11.09


12.31


13.52


12%
6.48


7.59


8.71


9.83


10.95


12.07


13%
5.64


6.66


7.69


8.72


9.75


10.77


14%
4.89


5.84


6.79


7.73


8.68


9.62


15%
4.06


4.91


5.76


6.61


7.47


8.32


16%
3.66


4.47


5.27


6.08


6.88


7.69


clinical trial phase.
6
We fine-tuned the industry average success probabilities to reflect any above-average

efficacy, safety, and formulation stability risks associated with Emisphere’s products. Revenues were

projected for the next 15 years, reflecting the remaining useful life of current and anticipated drug patent

approvals.
The above average market risk of the biotechnology sector is embedded in the probability weights applied

to the projected revenue streams. As this additional risk has already been accounted for, we did not

incorporate potential clinical failure into the discount rate. Projected earnings are discounted assuming a

weighted-average cost of capital (WACC) of 15%. We derived this cost of capital by using Emisphere’s

cost of debt and cost of equity, based on a Beta of 2.2 and a historical market risk premium of 4.82%.

This Beta was derived from a 1.8 forward Beta of the biotech industry, which was then levered to reflect

Emisphere’s capital structure.
We obtained the terminal value by assuming that free cash flows will stabilize several years after patent

expiration. We valued these free cash flows in perpetuity, using a terminal discount rate of 12%. Our

analysis also includes a DCF matrix, which calculates the implied intrinsic values resulting from different

combinations of discount rates and clinical success probabilities for Emisphere’s Phase III products.
A relative valuation corroborates our DCF analysis (Appendix, Figure 9). In comparison to its drug

delivery peers, Emisphere’s Price/Sales and EV/Sales multiples track slightly above the industry averages,

and we do not feel that Emisphere’s financial position and product pipeline justify this premium. We

capitalized our projected earnings from Emisphere’s 2nd profitable year by the historical biotechnology

average PE multiple of 30x, and then used a conventional 40% discount rate to arrive at a 12-month

relative price target of $5.38.
Figure 4: Valuation Summary
($ in thousands)
Relative Valuation
NI 2nd Profitable Year
2011
34,171


P/E Multiple
30.0x
Current Shares Outstanding
18,077


# of Years until Profitability
7
Industry Discount Rate
40%
12-month Price Target
5.38
$

Implied Current Valuation
3.84
$

DCF Valuation
Intrinsic Value
5.76
$

WACC
15%
12-month Price Target
6.64
$

Weights
Relative
50%
DCF
50%
Blended 12-month Price Target
6.00
$

Default Probability
Default Probability
20%
Equity Value in Default
-
$

Blended 12-month Price Target
4.80
$

Valuation Methods Summary
Source: Student Estimates
Investment Risks

Liquidity
Emisphere faces the very real possibility that it will become illiquid within the next 24 months.

Until the balance sheet is strengthened, it is tough to envision a situation where Emisphere would

be an attractive investment opportunity, given its current burn rate. Emisphere has $55M worth of

senior notes due in 2006. It will be necessary for Emisphere to have access to the capital markets

to recapitalize this debt either through equity or a new debt issue. Given the uncertainty

surrounding the company it is unlikely that they will be able to issue new debt. The equity

6

Source: The Pfizer Journal
Relative Valuation
NI 2nd Profitable Year
2011
34,171


P/E Multiple
30.0x
Current Shares Outstanding
18,077


# of Years until Profitability
7
Industry Discount Rate
40%
12-month Price Target
5.38
$

Implied Current Valuation
3.84
$

DCF Valuation
Intrinsic Value
5.76
$

WACC
15%
12-month Price Target
6.64
$

Weights
Relative
50%
DCF
50%
Blended 12-month Price Target
6.01
$

Default Probability
Default Probability
20%
Equity Value in Default
-
$

Blended 12-month Price Target
4.81
$

Valuation Methods Summary
markets may also be closed to raising the $40M needed to remain liquid in the absence of imminent

revenues on the partnership front.

FDA
As with any biotech company, being able to pass FDA trials is always a concern for products in

the pipeline. If Emisphere were to have trouble in passing any FDA hurdle it would be a

detrimental blow to the ability of the company to survive. This has already been of particular

importance as they were forced to change business models after the collapse of the PROTECT

Phase III trials.

Partnerships
Our revenue projections are based on an average of 10% royalties received by Emisphere. Given its

precarious situation, potential partners maintain the upper hand in negotiating these contracts.

Emisphere may be forced to enter into a contract that has unfavorable terms as Emisphere’s time

horizon to find partners is contracting rapidly.

Patents
It is still unclear whether or not Emisphere has the ability to effectively protect its technology

through patents. If they are unable to vigorously defend the eligen™ technology any benefit

received from bringing a product to market may be short lived. It is important that Emisphere

ensures its ability to patent not only the process, but also the compounds, in order to protect their

intellectual property.
Investment Summary
At its current price, Emisphere remains an unattractive investment opportunity. Emisphere’s equity

currently trades at $6.69 per share, but we feel a risk-adjusted price target of $4.80 is a better

representation of its true value, given its current position. Emisphere has no proven competitive

advantage, no revenue generating drugs near introduction, and no substantial new partners. At the same

time, Emisphere is bleeding cash and dismantling itself to remain liquid. Despite any amount of positive

spin concerning the market for its products or the potential for large future revenues, Emisphere today

remains a company bordering on distress.
Emisphere’s Debt Risks
The zero coupon notes issued in 1999 and held by Elan could very well represent the straw that will break

the camel’s back, as far as Emisphere is concerned. If Emisphere runs out of cash before the maturity of

these notes and cannot raise sufficient capital to fend off the bondholders, we see by forecasting the

balance sheet that most, if not all, of Emisphere’s assets will go to the bondholders, leaving little to no

remaining equity value. Even if Emisphere manages to generate enough cash flow to remain solvent

through 2005, the need to repay Elan will most likely require the issuance of over $40M in equity.

Considering that the current market cap is only $118M, this increased amount of shares outstanding is

sure to drive down the stock price. In both cases, we forecast a lower value for Emisphere’s shares.
Technology Sustainability
In addition to Emisphere’s balance sheet troubles, the questionable effectiveness of the eligen™

technology remains another negative aspect the investment story. Emisphere’s future partnerships,

revenues, and cash position all depend on proving the eligen™ technology to be viable enough for another

firm to invest in it. While there have been a few successful trials, there has only been one drug in Phase

III (which was discontinued), and drug efficacy remains a potent issue plaguing future success. In

addition, Emisphere is losing a first-mover advantage in many drug classes and has yet to show a

comparative advantage over other technologies. Further compounding the issue, Emisphere has lost the

ability to prove its technology on its own by cutting back on R&D expenses.
Possible Developments
While it is almost impossible to predict a turnaround, the Emisphere investment story could become

positive if it could broker an exceptionally strong partnership agreement or the sale of the company to a

larger firm. If a major pharmaceutical firm were to find Emisphere’s technology promising, it would

seem plausible that it would be interested in purchasing Emisphere outright. Alternatively, the larger

firm may set up an exclusive partnership that would feature much larger royalty and milestone payments.

Either of these events could significantly increase Emisphere’s equity value, but, again, there is very poor

visibility regarding these prospects.
Figure 5: Income Statement
($ in thousands)
2002A
Q1'03A
Q2'03A
Q3'03A
Q4'03E
2003A
Q1'04E
Q2'04E
Q3'04E
Q4'04E
2004E
2005E
Revenues
3,378
$

26
$

246
$

162
$

(34)
$

400
$

150
$

175
$

200
$

225
$

750
$

2,750
$

-


-


-


-


-


-


-


-


-


-


-


-


Costs and Expenses:
-


-


-


-


-


-


-


-


-


-


-


-


Research and Development
49,719


4,964


5,430


5,833


4,799


21,026


-


-


-


-


-


-


General and Administrative
11,242


2,539


2,806


2,282


2,100


9,727


2,300


2,300


2,300


2,300


9,200


9,200


EBITDA
(57,583)


(7,477)


(7,990)


(7,953)


(6,933)


(30,353)


(2,150)


(2,125)


(2,100)


(2,075)


(8,450)


(6,450)


-


-


-


-


-


-


-


-


-


-


-


-


D & A
6,185


1,517


1,562


1,511


1,216


5,806


1,500


1,500


1,500


1,500


6,000


5,759


Gain (Loss) on impairment
5,924


4


963


4,299


173


5,439


-


-


-


-


-


-


Operating Income
(69,692)


(8,998)


(10,515)


(13,763)


(8,322)


(41,598)


(3,650)


(3,625)


(3,600)


(3,575)


(14,450)


(12,209)


Interest (expense)
(4,472)


(1,244)


(1,245)


(1,337)


(1,339)


(5,165)


(1,338)


(1,338)


(1,438)


(1,438)


(5,551)


(6,415)


Interest income
3,044


378


380


772


352


1,882


354


348


421


437


1,560


1,764


Gain (Loss)
(222)


-


(66)


13


(14)


(67)


-


-


-


-


-


-


Other net
-


-


-


-


-


-


-


-


-


-


-


-


Pretax Income
(71,342)


(9,864)


(11,446)


(14,315)


(9,323)


(44,948)


(4,634)


(4,615)


(4,617)


(4,576)


(18,441)


(16,859)


Income Taxes
-


-


-


-
-


-


-


-


-


-


-


-


Net Income
(71,342)


(9,864)


(11,446)


(14,315)


(9,323)


(44,948)


(4,634)


(4,615)


(4,617)


(4,576)


(18,441)


(16,859)


Basic Earnings Per Share
(3.98)
$

(0.55)
$

(0.63)
$

(0.79)
$

(0.51)
$

(2.49)
$

(0.25)
$

(0.25)
$

(0.25)
$

(0.25)
$

(1.01)
$

(0.92)
$

Diluted Earnings Per Share
(3.98)
$

(0.55)
$

(0.63)
$

(0.79)
$

(0.51)
$

(2.49)
$

(0.25)
$

(0.25)
$

(0.25)
$

(0.25)
$

(1.01)
$

(0.92)
$

Weighted Avg Shares Outstanding
Basic
17,919


18,020


18,048


18,070


18,170


18,077


18,190


18,210


18,230


18,250


18,220


18,300


Diluted
17,919


18,020


18,048


18,070


18,170


18,077


18,190


18,210


18,230


18,250


18,220


18,300


Fiscal Year Ended
Source: Company Documents, Student Estimates
Figure 6: Balance Sheet
($ in thousands)
12/31/02
12/31/03
12/31/04
12/31/05
ASSETS
Current Assets:
Cash, including cash equivalents:
22,784
$

28,327
$

35,287
$

14,667
$

Investments
37,676


14,681


1,681


1,681


Receivables
2,285


1,424


1,497


18,049


Other
-


-


-


-


Total Current Assets
62,745


44,432


38,466


34,398


Plant, property & equipment, net
27,802


17,623


8,997


4,230


Purchased technology, net
2,752


2,512


2,512


2,512


Investments
13,241


-


-


-


Other assets
1,426


1,482


1,482


1,482


Total Assets
107,966
$

66,049
$

51,457
$

42,622
$

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses
5,324


3,246


-


-


Other
-


-


-


-
Total Current Liabilities
5,324
3,246
0
0
Note payable
33,181
38,345
44,312


51,208
Deferred lease liability
1,921


1,651


1,651


1,651
Total Liabilities
40,426
43,242
45,963
52,859
Stockholders' equity
67,540


22,807


5,494


(10,238)


Total Liabilities & Stockholders' Equity
107,966


66,049


51,457


42,622


Fiscal Year Ended
Source: Company Documents, Student Estimates
Figure 7: Statement of Cash Flows
($ in thousands)
Condensed Consolidated Statements of Cash Flows
2002A
2003A
2004E
2005E
CASH FLOWS PROVIDED (USED BY OPERATING ACTIVITIES)
Net Income
(71,342)
$

(44,948)
$

(18,441)
$

(16,859)
$

Adjustments to reconcile net income to cash:
-


-


-


-


Depreciation and amortization of vessels and other property
5,811


5,626


6,000


5,759


Amortization of purchased technology
155


180


-


-


Impairment of fixed assets
4,507


5,339


-


-


Loss on sale of fixed assets
-


53


-


-


Amortization of discount on investments
(9)


(72)


-


-


Net realized gain on sale of investments
(387)


494


-


-


Non-cash interest expense
4,468


5,164


5,967


6,896


Non-cash compensation
43


415


-


-


Changes in assets and liabilities:
-


-


-


-


Decrease (increase) in receivables and other current assets
1,280


1,207


(73)


(16,551)


Increase (decrease) in accounts payable and accrued liabilities
(8,271)


(988)


(3,246)


-


Decrease (increase) in deferred lease liability
-


(307)


-


-


Decrease (increase) in deferred revenue
(8)


28


-


-


Decrease (increase) in other assets and deferred charges
(531)


(30)


-


-


Other
222


-


-


-


Net cash provided by operating activities
(64,062)


(27,839)


(9,793)


(20,756)


CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital Expenditures
(3,439)


(1,278)


(992)


(992)


Proceeds from maturity of investments
-


49,967


13,000


-


Purchases of investments
45,765


(16,124)


-


-


Proceeds from sale of fixed assets
332


167


3,618


-


Other
-


-


-


-


Net cash used by investing activities
42,658


32,732


15,626


(992)


Free Cash Flow
(106,720)


(60,571)


(25,419)


(19,764)


CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments on debt
-


-


-


-


Proceeds from issuance of debt
-


-


-


-


Proceeds from issuance of common stock
-


-


-


-


Proceeds from exercise of options
1,335


650


1,128


1,128


Other
-


-


-


-


Net cash provided by financing activities
1,335


650


1,128


1,128


Net decrease (increase) in cash and cash equivalents
(20,069)


5,543


6,961


(20,620)


Cash and cash equivalents at beginning of period
42,853


22,784


28,327


35,287


Cash and cash equivalents at end of period
22,784
$

28,327
$

35,287
$

14,667
$

Fiscal Year Ended
Source: Company Documents, Student Estimates
Figure 8: Revenue Projections
($ in thousands)
Operating Assumptions
($ in thousands)
2002 Drug
Mkt Value
Mkt Growth
Rate
Clinical Trial
Phase
Historical NCE
Clinical Success
Probabilities
Adjusted
Clinical
Success
Probability
<- Adjusted for
Efficacy,
Safety, and
Formulation
risk
Oral Insulin
3,000,000


5.5%
I
23.0%
15.0%
Oral Cromalyn Sodium
300,000


5.5%
I
23.0%
15.0%
Oral Heparin
1,500,000


15.0%
III
63.5%
30.0%
Oral PTH and Calcitonin
6,000,000


5.0%
PC, II
31.0%
20.0%
Oral RHGH
2,500,000


5.0%
I
23.0%
15.0%
Total Mkt Value
13,300,000


2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Projected Drug Market
Oral Insulin
3,165,000


3,339,075


3,522,724


3,716,474


3,920,880


4,136,528


4,364,037


4,604,060


4,857,283


5,124,433


Oral Cromalyn Sodium
316,500


333,908


352,272


371,647


392,088


413,653


436,404


460,406


485,728


512,443


Oral Heparin
1,725,000


1,983,750


2,281,313


2,623,509


3,017,036


3,469,591


3,990,030


4,588,534


5,276,814


6,068,337


Oral PTH and Calcitonin
6,300,000


6,615,000


6,945,750


7,293,038


7,657,689


8,040,574


8,442,603


8,864,733


9,307,969


9,773,368


Oral RHGH
2,625,000


2,756,250


2,894,063


3,038,766


3,190,704


3,350,239


3,517,751


3,693,639


3,878,321


4,072,237


Total Mkt for Key Drugs
14,131,500


15,027,983


15,996,122


17,043,434


18,178,397


19,410,585


20,750,825


22,211,371


23,806,115


25,550,818


Projected Market Share
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Oral Insulin
5%
8%
11%
Oral Cromalyn Sodium
5%
8%
11%
Oral Heparin
5%
8%
11%
17%
27%
27%
27%
Oral PTH and Calcitonin
5%
8%
11%
17%
27%
Oral RHGH
5%
8%
11%
Estimated Royalties
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Oral Insulin
10%
10%
10%
Oral Cromalyn Sodium
10%
10%
10%
Oral Heparin
10%
10%
10%
10%
10%
10%
10%
Oral PTH and Calcitonin
10%
10%
10%
10%
10%
Oral RHGH
10%
10%
10%
Projected Per-Drug Revenues
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Oral Insulin
-


-


-


-


-


-


-


3,453


5,464


8,647


Oral Cromalyn Sodium
-


-


-


-


-


-


-


345


546


865


Oral Heparin
-


-


-


3,935


6,788


11,710


20,200


36,995


42,544


48,926


Oral PTH and Calcitonin
-


-


-


-


-


8,041


12,664


19,946


31,414


52,532


Oral RHGH
-


-


-


-


-


-


-


2,770


4,363


6,872


Total Projected Revenues
3,935


6,788


19,750


32,863


63,509


84,333


117,842


Source: Company Documents, Student Estimates
Figure 9: Comparable Drug Delivery Companies
($ in thousands)
Comparable Drug Delivery Companies ($ in thousands)
Company Name
Price
(3/17/04)
Shares
Outstanding
Market Cap
Debt
Cash
EV
EBITDA
Revenue
Revenue Per
Share
Price/Sales
EV/Sales
Alkermes Inc (ALKS)
14.73
$

89,640


1,320,397
$

122,490
$

165,660
$

1,280,000
$

(78,720)
$

35,280
$

0.39
$

37.4x
36.3x
Aradigm Corporation (ARDM)
2.19
$

54,720


119,837
$

843
$

29,770
$

90,370
$

(26,170)
$

33,860
$

0.62
$

3.5x
2.7x
Generex Biotechnology Corp (GNBT)
1.47
$

27,680


40,690
$

2,000
$

11,810
$

30,330
$

14,150
$

68
$

0.00
$

598.4x
446.0x
Genetronics Biomedical Corp. (GEB)
1.75
$

58,760


102,830
$

-


7,360
$

95,480
$

(5,690)
$

119
$

0.00
$

864.1x
802.4x
Iomed Inc. (IOX)
2.65
$

6,580


17,437
$

2,270
$

6,360
$

19,830
$

(1,820)
$

12,150
$

1.85
$

1.4x
1.6x
Nektar Therepeutics (NKTR)
20.52
$

56,980


1,169,230
$

393,020
$

285,970
$

1,260,000
$

30,740
$

106,260
$

1.86
$

11.0x
11.9x
Emisphere Technologies Inc. (EMIS)
6.69
$

18,077


120,935
$

37,010
$

38,960
$

128,280
$

38,360
$

400
$

0.02
$

303.8x
320.7x
Source: Reuters, Student Estimates
Comparable Drug Delivery Companies ($ in thousands)
Company Name
Price
(3/18/04)
Shares
Outstanding
Market Cap
Debt
Cash
EV
EBITDA
Revenue
Revenue Per
Share
Price/Sales
EV/Sales
Alkermes Inc (ALKS)
14.30
$

89,640


1,280,000
$

122,490
$

165,660
$

1,230,000
$

(78,720)
$

35,280
$

0.39
$

36.3x
34.9x
Aradigm Corporation (ARDM)
2.25
$

54,720


123,130
$

843
$

29,770
$

92,020
$

(26,170)
$

33,860
$

0.62
$

3.6x
2.7x
Generex Biotechnology Corp (GNBT)
1.35
$

27,680


37,370
$

2,000
$

11,810
$

29,500
$

14,150
$

68
$

0.00
$

549.5x
433.8x
Genetronics Biomedical Corp. (AMEX:GEB)
1.64
$

58,760


96,370
$

-


7,360
$

93,130
$

(5,690)
$

119
$

0.00
$

809.8x
782.6x
Iomed Inc. (IOX)
2.50
$

6,580


16,440
$

2,270
$

6,360
$

19,440
$

(1,820)
$

12,150
$

1.85
$

1.4x
1.6x
Nektar Therepeutics (NKTR)
19.63
$

56,980


1,120,000
$

393,020
$

285,970
$

1,250,000
$

30,740
$

106,260
$

1.86
$

10.5x
11.8x
Emisphere Technologies Inc. (EMIS)
6.20
$

18,160


112,610
$

37,010
$

38,960
$

115,560
$

38,360
$

400
$

0.02
$

281.5x
288.9x
Figure 10: Bond Repayment Schedule
($ in thousands)
(Payments on the $20M 15% zero coupon bond issued to Elan in 1999)
Year
Month
Note Payable
Interest
Annual Interest
1999
6
20,000
1,500


1999
12
21,500
1,613


3,113


2000
6
23,113
1,733


2000
12
24,846
1,863


3,597


2001
6
26,709
2,003


2001
12
28,713
2,153


4,157


2002
6
30,866
2,315


2002
12
33,181
2,489


4,804


2003
6
35,670
2,675


2003
12
38,345
2,876


5,551


2004
6
41,221
3,092


2004
12
44,312
3,323


6,415


2005
6
47,636
3,573


2005
12
51,208
3,841


7,413


Total Due 2006:
55,049


Source: Company Documents, Student Estimates
Disclosures:
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None of the authors, or members of their households, of this report holds a financial interest in the securities of this company or knows of the existence of any

conflicts of interest that might bias the content or publication of this report.
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next twelve months.
Disclaimer:
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author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as

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