On the Radar: Keep an eye on these biotech stocks (Page 2)

Auxilium Pharmaceuticals (Outperform)

Just as Botox revolutionized the field of plastic surgery, we expect Auxilium's (AUXL) Xiaflex to create significant new growth opportunities in underserved hand surgery and urology markets where invasive treatment is currently the only option. We see significant pent-up demand for Xiaflex among patients. Accordingly, our market model projects peak U.S. revenue potential for Xiaflex exceeding $400MM in each of the Dupuytren's contracture and Peyronie's disease indications. We believe that FDA approval of Xiaflex for the Dupuytren's indication is relatively secure given the recent unanimous panel decision highlighting the favorable risk/benefit with surgery-like efficacy and a clean safety profile. And we are optimistic for positive Phase IIb clinical data in Peyronie's disease in 4Q:09 based on a promising Phase IIa experience and based on the use of subjective reporting measures in this trial. The recent deal with PFE for Xiaflex rights in ROW offers validation, capital, reimbursement, development and marketing expertise that should support the opportunity. We estimate a 90 percent chance of Xiaflex approval in Dupuytren's (based on unanimous panel decision and robust clinical data) and a 75 percent chance in Peyronie's disease (reflecting its earlier stage of development). - Joseph P. Schwartz

Inspire Pharmaceuticals (Outperform)

Inspire (ISPH) currently has an attractive mix of lower-risk specialty pharma products on the market followed by several highly innovative biotech candidates in the pipeline that could change the character of the company significantly. Its two lead Phase III candidates, denufosol (cystic fibrosis) and Prolacria/diquafasol (dry eye), target respiratory and ophthalmic disease markets with significant unmet medical need and potential reward for innovation. ISPH's Prolacria (dry eye) has strong market potential as evidenced by $500M in partial worldwide sales for Restasis. Phase III data is due in 1H:10. Management has stated that trials were enrolling faster than expected and ISPH has done an excellent job designing the study to eliminate any placebo effect. However it may also be difficult to obtain a zero staining score for patients on therapy, so we ascribe a 65 percent probability of success. We estimate Prolacria WW sales of $2M in 2010 growing to $136M in 2018. Regarding Partnering & Acquisition potential, while Prolacria is already partnered, ISPH holds WW rights for denufosol for cystic fybrosis and is actively seeking an ex-North American development and commercialization partner. Partnership announcement could come in late 2009 or early 2010. According to our P&A analysis, BMRN, GENZ, and SHPGY are interested in orphan drug assets. - Joseph P. Schwartz