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Avoid This Biotech Stock

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, The Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Company Somaxon Pharmaceuticals (Nasdaq: SOMX  )
Submitted By: zzlangerhans
Member Rating: 99.56
Submitted On: 10/24/2011
Stock Price At Underperform Recommendation: $1.10

Somaxon Pharmaceuticals Profile

Star Rating ***
Headquarters San Diego, Calif.
Industry Solar
Market Cap $46.7 million
Industry Peers Transcept Pharmaceuticals (Nasdaq: TSPT  )
Vanda Pharmaceuticals (Nasdaq: VNDA  )
Neurocrine Biosciences (Nasdaq: NBIX  )

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:

Despite the 15% upward heave today, I think Somaxon is the next Labopharm, a small pharma that had to sell itself for a pittance recently because no one bought the drugs that they slaved for years to develop. Similarly, Silenor has proven itself to have weak commercial potential, with revenues consistently failing to approach the cost of sales.

An uptick in revenues from 2.3M to 6.2M last quarter may have inspired some optimism, but I believe the increase was exclusively due to a change in revenue recognition methodology to reflect sales to distributors rather than filling of prescriptions. If I'm correct, quarterly revenues to be reported in early November may crush the share price and send the stock on a downward spiral from which it won't recover.

The company has made some noise about pursuing OTC approval for Silenor, but [biotech columnist Adam] Feuerstein feels that they are years away from any such achievement. Meanwhile the company is burning about 15M a quarter and had 33M in cash at the end of June. Within a year they will have taken full advantage of a 15M debt facility with Oxford and a 30M ATM agreement with Citadel. This may keep operations afloat, but the street doesn't look favorably on small pharmas floating in a sea of dilution and debt. On November 3, this toilet might get flushed.

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The Motley Fool is investors writing for investors. Dan Dzombak had no position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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