Egalet: A Cash Rich Squeeze Candidate

Egalet Logo. (PRNewsFoto/Egalet Corporation)

In President Obama’s most recent State of the Union Address, he identified prescription drug abuse as one of his top priorities. 2.1 Million Americans currently suffer from Opoid based drug abuse. One company has been on the forefront of changing the pharmaceutical drug world with its new proprietary technology that makes it difficult to abuse prescription drugs.

Egalet (NASDAQ:EGLT), is a small cap ($211M) specialty pharmaceutical company that was founded in 1995. It is the first company to develop an erosion-based pill that allows for the controlled release of drugs. The company went public in 2014 and was added to the NASDAQ Biotechnology Index in December.

Egalet Aims to Deter Prescription Drug Abuse

Egalet has created a proprietary technology called Guardian. Guardian technology has made pills that are indestructible, an element that is crucial to making prescription drugs difficult to abuse. The company currently sells two products OXAYDO and SPRIX Nasal Spray. OXAYDO is the immediate-release oxycodone product formulated to deter abuse via snorting, for the management of acute and chronic pain where an opioid is appropriate. SPRIX Nasal Spray is the nasal spray formulation of non-steroidal anti-inflammatory drug, used for short-term management of moderate to severe pain that requires analgesia at the opioid level.

Egalet develops two late-stage products using Egalet’s proprietary Guardian Technology. The lead program, Egalet-001 is an abuse-deterrent, extended-release, oral morphine formulation, and Egalet-002 is an abuse-deterrent, extended-release, and oral oxycodone formulation.

Zack Investment Research has downgraded Egalet from ‘strong-buy’ to ‘hold’ due to its third quarter earnings remains negative about (0.81) per share. It is expected to report (3.72) EPS for current fiscal year 2015. Although its sales revenue doubled in 2015 compared to 2014, the huge cost of R&D and Sales expenditures has dragged down its earnings to remain negative. Since Q3 2015, its stock price has declined over 40%

The addition of Egalet to NASDAQ Biotechnology Index (NASDAQ:NBI) in Dec 2015 was big news for the pharmaceutical company. Only companies that meet eligibility requirements can be selected into this index, which serves as a basis of iShares Biotechnology Index Fund (NASDAQ: IBB).

In Dec. 2015, Egalet submitted new drug application for Arymo ER, formerly known as: Egalet-001, extended-release tablets of morphine sulfate. Egalet developed this erosion based pill with its proprietary Guardian Technology. The drug help patients to treat pain sever enough to require around-clock treatment. Based on the study of the Institute of Medicine, around 100 million Americans suffer from chronic sever pain, which is often under-treated. If the new drug is approved by FDA, the sales revenue is expected to soar in very short period of time.

Technical Factors

By Dec. 15, 2015, its current short interest ratio was 23 days and short percentage of the float share was as high as 29%, which means out of 12M float shares, 1.95M shares were sold short by the bears. Any bullish earning news could easily set off a large short covering rally for shares of Egalet. From technical perspective, Egalet is currently trading within its 50-days and 200-days moving average, which indicates stabilized bottom pattern has been build.

Top three shareholders: Fidelity (30%), Federated Kaufmann R (17%) and Franklin (14.3) either held or added shares since Q4 2015. Egalet has minor debt ($17M) and more than enough cash ($53M) to maintain its sustainable growth. It has nearly $7 cash per share on hand and stock is trading just below $10 per share. The stock is at a bargain at current levels.

EGLT may a good short squeeze candidate in the near term for its high short percentage of float, bottom pattern stabilization, below $10 bargain price with $7 cash on hand and better sales projection for the next fiscal year. For the long term, it might be good takeover target by the Pharmaceutical Giants.

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