The unpleasantness in the markets this past month has created some good buying opportunities in biotech. Compare the performance of the Amex Biotech Index with that of the S&P 500 over the past three months. The index is down 10% while the S&P is down only 4.8%. This is irrational in terms of the underlying value of biotech stocks. The surge in Pharmion's (NASDAQ:PHRM) price last week is a great example of good science making for good investing.

NPS Pharmaceuticals (NASDAQ:NPSP) has been around for a while without too much to show for it. Like many biotech companies from the last century, NPS's long-term chart looks like a cross-section of the Rocky Mountains. In the fin de siecle Nasdaq exuberance, the stock was almost hitting the $50 mark -- today, the shares can be had for less than a tenth of that amount.  

The past two years have been rough on NPS Pharmaceuticals. Its stock took a 40% dive in March of last year, when the company received an approvable letter for its drug Preos, which treats osteoporosis. The stock fell a further 40% in May 2006 after a meeting with the Food and Drug Administration in which it became apparent that an additional clinical study would be required. According to SEC filings, the company needs additional financing from a partner for this clinical study: not exactly a strong show of faith. With a stock price around $4, getting financing on anything close to attractive terms will be a challenge.

Where does it go from here?
As of the end of Q1, NPS Pharmaceuticals had $132 million cash. The company has been restructuring aggressively; it had almost 200 employees last year and is planning to trim that number to 35 by the end of 2007. NPS Pharmaceuticals recently sold future royalty rights to its drug Preotact in Europe for an upfront payment of $50 million and a potential milestone payment of $25 million in 2010. It also just sold its former Salt Lake City headquarters for $21 million. 

NPS Pharmaceuticals has a staggering amount of debt for an unprofitable firm with a $180 million market cap. Next year, $192 million in convertible notes will mature. The company also has another $175 million in long-term debt.

Based on the lack of clinical success over the past decade, NPS Pharmaceuticals is probably priced about right. There is some potential for hope, though. 

NPS Pharmaceuticals actually has a decent pipeline for a company of this size. In collaboration with GlaxoSmithKline (NYSE:GSK), it is developing calcilytics, a potential treatment for osteoporosis. A phase 2 clinical study began in June. While this could help, results are far in the future.

The real price driver for NPS Pharmaceuticals right now is teduglutide, which is in a phase 3 study to treat patients with short bowel syndrome (SBS). This syndrome occurs when less than about 6 1/2 feet of functional small intestine exists. A typical small intestine is about 10 feet to 26 feet. Short bowel syndrome results in weight loss, diarrhea, and malabsorption of nutrients.

Good for your stomach
Teduglutide is like glucagon-like peptide 2 -- except it's more resistant to breakdown by enzymes -- and works by slowing the rate of gastric emptying. That is, it keeps digested food in the intestine longer so there is more time to absorb the nutrients. Results of the phase 3 study are expected in the second half of this year and could provide a near-term catalyst.

NPS Pharmaceuticals also touts teduglutide as a treatment for Crohn's disease. In its 10-K annual report filing for 2006, the company said it has completed a phase 2a study of teduglutide for Crohn's disease. Unfortunately, the company said the same in its 10-K for 2005. There does not seem to be progress on this front.

The company says the market for treating short bowel syndrome is 12,000 to 25,000 patients in North America, and in a recent article, the figure is on the low end of this range. This is not a large market, and the company has received orphan drug status from the FDA. An advantage to selling a drug for short bowel syndrome is that since it is a chronic disease, it ensures repeat customers.

According to a small phase 2 study, teduglutide did decrease the loss of useful energy and nutrients. That is, it seems to do what it was expected to. Eleven of the 16 evaluated patients experienced weight gain (an average of almost two pounds), but this was not statistically significant -- this was a small and short study (three weeks), so that's not a surprise. 

As I mentioned, there is a small market for treating short bowel syndrome, but NPS Pharmaceuticals is a small company. If the phase 3 results are good, NPS Pharmaceuticals could have teduglutide on the market by late 2008. Because the company's market cap is just $180 million, shares could jump significantly on a positive result. On the other hand, a negative outcome could send this stock to the Pink Sheets. To me, the phase 2 results are encouraging, and I think this may be a good opportunity, albeit a very risky one.

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Fool contributor Andrew R. Vaino, M.B.A., Ph.D., doesn't have a position in any company mentioned in this article. He also writes about biotech stocks at www.peternavarro.com. GlaxoSmithKline is an Income Investor recommendation. The Motley Fool has a disclosure policy.