Neothetics (NASDAQ: NEOT), previously known as Lithera, is a pharmaceutical company that specializes in weight loss drugs. The company announced their initial public offering on November 19th with about 4.6 million shares of common stock for $14 per share. This offer closed on December 1st and Neothetics estimated that the transactions generated $60.5 million in net proceeds.
Neothetics’ frontrunner products are LIPO-102 and LIPO-202. The drugs are injections intended to reduce fat around the central abdominal area, commonly known as love-handles or stomach rolls, for non-obese patients. Neothetics claims that there are currently no drugs that target this need. LIPO-202 has already been tested in approximately 800 patients and will reach Phase 3 testing in 2015, while LIPO-102 will reach Phase 2 of clinical trials, though no timeline is given.
On December 15th, analyst Louise Chen of Guggenheim initiated coverage on Neothetics with a Buy rating and a price target of $16.00. Chen highlighted the LIPO drug series and made three points to support her rating. First, Chen believes that “LIPO-202 could be the next Botox (which has sales of $1B+), with peak sales potential of over $1B (note, the expected launch is 2018).” Chen even believes that these estimates are conservative due to Neothetics’ market cap. Second, Chen says “an investment in Neothetics could provide a good entry point into the body contouring market early in its growth and development. The body contouring market is growing double digits, which is higher than the mid-single-digit growth rate of the overall aesthetics market. Body contouring could be one of the next big growth drivers for the aesthetics market, in our view.” Lastly, the analyst concludes, “There is a free call option on LIPO-102, which has orphan designation for the treatment of exophthalmos. Neothetics’ valuation ascribes no value for this pipeline product. Furthermore, we think this could be a sizable and long-tailed opportunity for Neothetics because orphan drugs usually have superior pricing and longer brand exclusivity than other brand drugs.”
Chen has a 77% overall success rate recommending stocks with an average return of +29.5% per recommendation.
Separately on December 15th, analyst David Amsellem of Piper Jaffray initiated coverage on Neothetics with an Overweight rating and a price target of $20. Amsellem commented that Neothetics is “well positioned to expand and transform the emerging body contouring space with LIPO-202” He continued, “We believe that the probability of success for LIPO-202 in Phase III (data are expected before the end of 2015) is strong given the body of data to date, and with U.S. sales potential of at least $500-$600M, in our view (we are modeling a U.S. launch in 2H17 with NEOT reaching profitability in 2020, and with LIPO-202 sales reaching near $225M by 2021), NEOT shares in our view are trading at a highly attractive risk/reward in the context of a market cap of around $100M.”
Amsellem has a 67% overall success rate recommending stocks with an average return of +14.2% per recommendation.
Neothetics is a new stock in a niche market. Should you buy in early or wait and see if the weight loss drugs pass FDA approval and achieve results?