CVT's Copacetic Cash Management

It's usually scientists who cause drug companies' stocks to move, but yesterday, it was the money managers' turn. Shares of CV Therapeutics (Nasdaq: CVTX  ) were up more than 17%, after the drugmaker sold a share of the future royalty stream from its recently approved cardiac stress agent Lexiscan.

The specialty pharma's deal with equity investment fund TPG-Axon Capital will give CVT $175 million in cash immediately, plus the opportunity for a $10 million milestone payment in exchange for half of CVT's royalty on all sales of Lexiscan by its marketing partner Astellas.

Astellas also markets Lexiscan's primary competition, Adenoscan, which brought in 40 billion yen (more than $390 million at today's exchange rates) in North American sales in the 12 months through March. The market potential for Lexiscan is obviously quite large, if a fund was willing to pay $175 million up front to capture only a portion of CVT's North American royalty rights.

The best part of the deal is that CVT believes the new cash will give it enough funds to "become cash flow positive" and also pay off the more than $100 million in long-term convertible debt that will come due in 2010, without the need for a dilutive financing. Even better, CVT still has rights to Lexiscan outside North America. Other drugmakers, like Enzon (Nasdaq: ENZN  ) , have gone a similar route by selling a portion of their future royalty streams from a drug or technology. Many shareholders (including me) were pleading for PDL BioPharma (Nasdaq: PDLI  ) to take such a course last year.

There's no shortage of valuable technologies and drug candidates in the pharmaceutical and biotech sectors. There is, however, a shortage of chief financial officers who can ensure that drugmakers don't burn through too much cash trying to get these valuable compounds to the market. Even after its launch of Ranexa in 2006, CVT was on its way to becoming another in a long string of drugmakers with valuable assets but horrible cash management strategies. Its diluted share count had gone up by 74% from 2005 to the start of 2007; it increased the amount of convertible notes it had outstanding to nearly $400 million; and operating expenses in 2007 were expected to be in the $280 million range for the year, which would soak up much of CVT's remaining cash.

Drugmakers that poorly manage their cash end up becoming cheap acquisition targets. CVT was definitely headed toward becoming a shiny new subsidiary of a large-cap pharma like Pfizer (NYSE: PFE  ) or AstraZeneca (NYSE: AZN  ) . Thankfully, CVT's management saw the light and took steps in May to dramatically reduce its cash burn rate and burgeoning share count. In 2007 its share count was up only 3%, while CVT maintained full rights to its most important compound, Ranexa.  

Shares of CVT are still down compared to the $10 and change for which they trading last May, after the company initiated the cost-cutting steps. Still, better shepherding of its cash has left CVT looking far likelier to survive as it waits to hear back from the FDA about expanding Ranexa's label.


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