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By Jeremy Glaser | 12-10-2010 06:00 PM

An Opportunistic Pharma Pick

Premature disappointment over the prospect of Vanda's sole drug has left investors with a compelling opportunity says Morningstar Opportunistic Investor's Stephen Ellis.

Jeremy Glaser: An opportunistic pharma pick. I'm Jeremy Glaser with Morningstar.com. I am joined today by Stephen Ellis. He is an Equity Strategist here at Morningstar. He is going to pitch one of his best ideas in the pharmaceutical space right now.

Stephen, thanks for joining me.

Stephen Ellis: Thank you. Thanks for having me.

Glaser: So what's the company that you think looks really attractive today?

Ellis: The Company which has a single drug, a company called Vanda Pharmaceuticals and basically it has one single drug right now that's actually on the market, it's called Fanapt and it treats schizophrenia.

Glaser: So why is this stock looking so cheap right now? How are people reacting to this single drug?

Ellis: At Opportunistic Investor we don't try to make big calls on their approval process. So the attraction here is the drug is already on the market. It's fairly attractive market with $15 billion overall size. Over 85% of the market cap is in cash, and Vanda is only really going to burn maybe around $30 million or so of that in the next year. By the end of 2011, they can be about $170 million in cash. So you're really not paying – you're paying about $50 million, $60 million or so for the potential of this schizophrenia drug.

Glaser: How successful has the drug been so far?

Ellis: Well, the main problem is and why really the stock is so cheap is the rollout for the drug had been really quite bad. I mean what's happened is the drug was only approved last year in May and they only signed a deal with Novartis to market the drug once it got to the market in November. And so Novartis only had about six weeks or so to put together a sales force and create product awareness before the drug actually hit the market in January.

So they didn't really have enough time to put everything together and do it properly. So what's happened here is the drug launch has been really very slow and investors have been really quite disappointed with that and we think that they've been disappointed prematurely so the stock sold off quite a bit.

We think that as the prospects for the drug improve, their sales traction starts to get a little better in 2011, the stock is going to rebound and investors are going to be more enthusiastic about the drug prospects.

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