To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-vs.-reward potential of the company you're following. I propose we take a closer look at the good and the bad at Somaxon Pharmaceuticals
Somaxon's story begins with the Food and Drug Administration approving its insomnia drug, Silenor, in March. Shortly after the news of Silenor's approval, the company made a secondary stock offering that generated a much-needed $50 million in cash. This cash gives Somaxon the versatility it needs to market Silenor while keeping its balance sheet debt-free.
More recently, the company allied itself with a proven winner in Procter & Gamble
Unfortunately for Somaxon, its marketing partnership with Procter & Gamble isn't perfect. P&G didn't have to make any payment up front, and the agreement runs through only 2012. That limits P&G's risk, but it means that even with the deal, Somaxon needs Silenor to do well and still bears most of the risk if the drug doesn't catch on.
Silenor is also entering a large, but very crowded, insomnia market. Generic versions of Ambien dominate the market, and sanofi-aventis'
The danger here is that Somaxon could wind up throwing nearly all of its cash into marketing Silenor, only to have the drug win just a small fraction of the market. With so many products targeting sleep disorders, Silenor needs to carve out a niche against its competition and vigorously defend it.
In the end, investing in Somaxon depends on whether you think the promise of a new drug outweighs the risks associated with entering a crowded market and building its Silenor franchise from the ground up. Having P&G on its side will help, but only time will tell if Somaxon can successfully market Silenor.
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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name UltraLong. Pfizer is a Motley Fool Inside Value selection. The Fool owns shares of and has written covered calls on Procter & Gamble, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.