OK, get out the barbecue sauce. It's time to roast this observer.
Back on July 30, 2004, I was throwing respect at Flamel (NASDAQ:FLML), a French company that used its polymer chemistry expertise to make new and already marketed drugs safer and more effective. Hey, the company was part of the Merrill LynchNanotech Index, and the three analysts covering the company were expecting earnings of anywhere from $0.20 to $1.63 a share in 2005.
Let's make a very long story very short. The three analysts following the company today expect the company to lose between $0.48 and $1.05 in 2005 and tack up another loss next year in the range of $0.39 to $0.78 a share. Yikes! Is that smoke in my eyes, or am I just welling up with tears?
The primary problem with Flamel is that it doesn't have any products using its Micropump or Medusa drug delivery technology on the market. Product sales and services for the third quarter were $458,000, down 47.7% from the comparable quarter a year ago.
For now, license and research revenue is driving the business. That's an admittedly lumpy revenue stream, but it was enough in 2004 to produce a profit of $0.51 a share. For the third quarter, though, that revenue stream is down 80.9%. For the first nine months of 2005, it's down 54.3%.
So, what went wrong? First, there are two failed micropump partnerships with Biovail (NYSE:BVF) and TAP Pharmaceutical Products -- a joint venture between Takeda Pharmaceuticals and Abbott Labs (NYSE:ABT). Then there are two separate failed Medusa projects for Basulin (long-acting insulin) with Novo Nordisk (NYSE:NVO) and Bristol-Myers Squibb (NYSE:BMY).
Is Flamel dead meat, ready to be smoked? Hardly! GlaxoSmithKline (NYSE:GSK) just reported that phase 3 clinical trails for a Micropump-delivered version of its currently marketed drug Coreg turned out positive. Coreg is used for the treatment of hypertension and congestive heart failure. Glaxo expects to file a new drug application by the end of the year for the drug and expects to market it starting a year later. Flamel has hinted that first-year royalties could come in at $20 million. But, remember, we are talking about 2007 revenue if the Food and Drug Administration approves the drug.
Still, if this product does get to market, it provides a real-world FDA-approved implementation of Micropump technology. That's what Flamel needs to put its failures behind.
Also in the pipeline is an undisclosed Micropump drug for Merck (NYSE:MRK) and a number of internally developed products.
So let's head back to the barbecue and wrap up. Flamel, when I was heaping respect on it, was changing hands for $18.85 a share. After all of the failed projects, and the less-than-robust results for the third quarter announced Thursday, the company is trading for . $17.68 a share? So why isn't the stock lower?
Well, Flamel, for all of its woes, still has two savory aspects. First, there is $89.4 million in cash and marketable securities and a tiny $2.8 million in debt. That means the company has the cash to fund its own fate, and starting in 2007, the chances are better than ever that there will be drug delivery product sales to cut the cash burn rate. Second, Flamel has only 22.4 million shares outstanding. That's a small float for a company which, if successful, could produce excellent profits.
So, I was wrong! Yes, I was downright wrong. The risk of failed projects was not my focus a year ago. That was wrong of me.
But I still think it's premature to get excited about Coreg. The annual royalty revenue that Flamel would receive may only just cover the company's current operating expenses.
Flamel has interesting technology that has failed to garner much drug industry support. For now, profitability is not on the foreseeable horizon. Although this company has been recommended twice by the Motley Fool Hidden Gems newsletter, it is, in this observer's opinion, a tasty story that just needs more time to develop.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
