Biodel (NASDAQ:BIOD): The next surprise FDA approval? - Leerink

Leerink is out with a very interesting call on Biodel (NASDAQ:BIOD) transitioning coverage and maintaining an Outperform rating.

Firm notes that after a "missed" Phase III trial of VIAject in diabetes driven by heterogeneity of results in India, investors are assigning low probability of regulatory success. At the same time, investors have been looking for the next "surprise" FDA approval, and they believe VIAject represents a potential candidate. If Leerink's thesis is correct, BIOD will be one of the top performing biotech stocks over the next 18 months, and with a modest $100M market cap, they believe the upside opportunity is too compelling to pass up.

Blame It On Rio (Or In This Case, India). Heterogeneity of data from patients in India for the Type I diabetes study means they should have been excluded from the analysis, in which case the study met non-inferiority criteria. In the ITT analysis including patients from India, the study failed to meet non-inferiority, although per-protocol and completers analyses met non-inferiority. It turns out that many of the blood samples from India sat in the heat for weeks on end, which is known to increase variability in measurements.

No Guarantee On Approval, But It's S.C. Insulin, Not Rocket Fuel. While investors see missing an endpoint as the "kiss of death" for regulatory prospects, Leerink believes the totality of the data support VIAject approval. Ultimately, VIAject is human insulin, which is titrated to optimal effect anyways, and the drug has demonstrated a more physiologic profile relative to human insulin and rapid active insulin analogs. They fail to see the rationale in forcing BIOD to repeat clinical studies to achieve a highly predictable efficacy endpoint.

Pain On Injection Is A Pain In The Past. After adjusting VIAject to a higher concentration that reduces the volume of administration and establishing bioequivalence to the lower concentration used in Phase III, VIAject's local tolerability has improved substantially.

Partner Interest Should Be High. With NVO developing its own faster acting rapid insulin, LLY and SNY should be in the market for their own candidates, while other diabetes players should have VIAject interest as well.

Leerink's $13/share valuation is represents a 17x multiple on their 2015E EPS of $0.77, which is a premium to midcap biotech stocks which trade closer to a 2010 EPS multiple of 15x. The premium valuation reflects BIOD's projected and sustained earnings CAGR of ~26% from 2015-2020.

Notablecalls: Could it be that BIOD is the next small-cap biotech stock to rocket?