Poniard Pharma Awaits Key Cancer Drug Data

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PARD: Price: $1.87; Market Cap (MM): $64.9

Market Outperform; Target Price: $10.00

Simos Simeonidis, Ph.D. - Senior Biotech Analyst, Rodman & Renshaw

KPMG's "going concern" a non-issue should picoplatin work in SPEAR

4Q08 results in line with expectations. Poniard announced financial results for the Q4 and FY08. For the quarter, the company posted a net loss of $14.1M, or ($0.41) per common share, as compared to our estimate and the consensus of ($0.40) and ($0.38), respectively. For the full year, Poniard posted a net loss of $49.1M, or ($1.41) per share in line with our ($1.41) and consensus estimates ($1.38). Expenses were in-line with our expectations, and the company exhibited fiscal discipline by reining in G&A, which were down on both a QoQ and YoY basis.

“Going concern”…: The company’s auditor, KPMG, included a “going concern” qualification in its annual report. On the call, management, via new CFO Greg Weaver, expressed its strong disagreement with that position and on more than one occasion stated that the auditors “got that one wrong” , viewing the auditors’ position as overly conservative. Our own calculations support management’s view: the company had a cash balance of $72.8M as of the end of 2008, about $17.9M of which must remain on the balance sheet to avoid violating a loan covenant. With a total cash burn of about ~$10M in 4Q08, even figuring in an increase in expenses relating to a potential NDA filing, we still expect that the company will have the capital necessary to carry it through Q1 ‘10.

…will not be an issue, should SPEAR work. Most importantly, data from the Phase III SPEAR trial is certainly much more relevant to the company’s ability to continue as a going concern; positive SPEAR data, which we believe is likely, could be released in mid-‘09 and thereby make it significantly easier for the company to attract the additional capital, through partnerships, a financing, line of credit, etc and will not have a problem coming up with the funding necessary to commercialize picoplatin. In the scenario of clearly negative data from SPEAR and the CRC and CRPC trials, the “going concern” issue would be a moot point anyway, since even if Poniard had cash for another quarter or two, it would practically be “game over” for the company at that point.

If Poniard has a “going concern” issue, so do a lot of other small-cap biotechs. We believe that if we were to apply the strict interpretation of the “going concern” rules that KPMG team that worked as Poniard’s auditor did, we would find that a very large number of small cap biotech companies would be forced to use the same qualification in their 10K, since it is not uncommon for companies with one lead compound to be left with about a year’s worth of cash while waiting for a binary event.

What’s Next? 1) April (AACR): data from the Phase I trial comparing the oral vs. the intravenous formulation of picoplatin, 2) ~June (maybe at ASCO): PFS data from the Phase II CRC trial, 3) post-ASCO (mid-09): completion of enrollment and top line Phase III data from SPEAR, 4) 2H09: NDA filing 5) Finally, management reiterated its intention to partner picoplatin at today’s call and a partnership announcement could come at any point in '09.

We reiterate our Market Outperform rating and $10 price target. We reach our 12-month target price of $10 by applying a 30X P/E multiple to our 2014 fully diluted EPS of $1.16 (second year of profitability) and using a 30% discount rate. We consider PARD shares as undervalued at current levels, given that Poniard is a company with 1) a Phase III asset, 2) that is fully owned, 3) with a known, de-risked mechanism of action, 4) that can address large oncology markets as combination therapy, and 5) is also in two more Phase II trials in CRC and CRPC.