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Initiating Nile Therapeutics - Outperform

We are initiating coverage of Nile Therapeutics (NasdaqCM: NLTX) with an Outperform rating and a near-term price target of $2.50 per share. Nile is developing CD-NP, a chimeric natriuretic peptide currently in phase II clinical studies for the treatment of acute decompensated heart failure (ADHF).

This is a highly coveted area by large-cap pharmaceutical companies. The opportunity is wide-open, and a significant breakthrough product could capture blockbuster sales a few years after launch. For example, Johnson & Johnson’s Natrecor (nesiritide) was annualizing at $400 million in sales -- and on its way toward a billion -- in 2004 prior to the safety issues that still today dramatically limit the product's uptake.

Heart Failure Treatment at Present

Standard of care is a mixture of vasodilators, diuretics and inotropic agents, almost all available as generics, with no real advancement in over a decade.

In the U.S., approximately 5.5 million people (~2% of the population) suffer from heart failure (HF). The incidence is even higher for patients above the age of 65, where approximately 6% to 10% of the population is at risk. There are an estimated 650,000 new cases diagnosed annually. Treatment of heart failure generates annual costs of approximately $35 billion, of which approximately $3 billion is spent on drugs and $19 billion is spent in the acute hospital setting. Each year, HF is responsible for over 1.2 million hospitalizations. For Americans over the age of 65, ADHF is the most frequent cause of hospital admission.

In the past, the goal was simple: reduce cardiac filling pressure and effectively and safely increase diuresis; and do all this with a low risk of hypotension. Once the patient had been stabilized, discharge them. Still, the average length of hospital stay is 4.3 days. However, subsequent to a discharge, the average time to re-admission is only 3 months and mortality is high. In fact, 50% of patients discharged with a primary or secondary code of ADHF will require re-hospitalization during the following 9 months. A third will be dead within the year.

However, over the past several years, significant effort by the medical research community has been put forth to better understand the cardio-renal link between heart failure and mortality. Among patients hospitalized for ADHF, worsening renal function is predictive of adverse cardiovascular outcomes. In fact, the single strongest predictor of in-hospital mortality in patients admitted with ADHF is elevated blood urea nitrogen (BUN).

The Future of Treating Heart Failure

Therefore, the ideal pharmaceutical product is one that can safely and effectively reduce cardiac filling pressure, increase diuresis, and also preserve kidney function -- all with a low risk of hypotension. Nile’s CD-NP was rationally designed by scientists at the Mayo Clinic’s cardio-renal research labs to do just this.

The drug is a combination of two natriuretic peptides, CNP and DNP. The scientists at the Mayo Clinic developed the drug combining the n-terminus of the CNP molecule, preserving its favorable venodilating and hemodynamic properties, with the c-terminus of the DNP molecule, preserving its potent direct renal activity. Preclinical data demonstrates the drug has both natriuretic and diuretic properties. Prior phase I and phase II data has been highly encouraging.

Management is currently conducting a second phase II program with top-line data expected in March 2010. With positive data in hand, we believe management will seek to partner the drug prior to the initiation of a phase IIb efficacy program later in 2010 or in 2011.

Positive on CD-NP

We think if Nile can demonstrate the effectiveness of CD-NP in the planned phase IIb, management can fetch $300 million on a takeover in 2011 or 2012. However, shareholders may not have to wait that long to start to see the stock move higher. Full data from the current phase II program is expected around the middle of this year, and we fully expect management to secure funding from a partnership shortly after that time. We could be looking at an upfront payment plus a potential takeover milestone in 2011.

With a market capitalization of only $30 million, Nile Therapeutics shares are significantly under-valued. Recently the stock has languished, most likely due to a lack of meaningful news-flow over the past few months or the knowledge on Wall Street that past drugs in this space have failed (see: J&J’s Natrecor, Merck’s rolofylline). But we have confidence in the ongoing phase II program. We believe with positive data in hand, the company is worth at least $80 to 100 million.

Taking the mid-range at $90 million, and then backing out the $20 million most likely required to fund the phase IIb program, we arrive at a value of $70 million for Nile Therapeutics. This equates to a price of $2.50 per share.

For additional information please see our full initiation report on Zacks.com, or contact your Zacks Research Sales Representative.

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