Value Investing Congress Blog

Noven Pharmaceuticals (Nasdaq: NOVN) recently made significant changes to its board of directors and senior management. The company hired a new CFO, accepted the resignation of its long time Chairman and CEO Robert C. Strauss, and appointed Wayne P. Yetter as its new Chairman. We applaud these actions and believe a tremendous amount of value will come from the changes.

The Chairman and CEO roles are now separated, and Mr. Yetter has an outstanding reputation and track record. He is the former CEO of Novartis Pharmaceuticals and Astra Merck, and also served as the COO of IMS Health, all large and successful companies. Interestingly, Mr. Yetter was the CEO of Novartis at the time it established the Novogyne joint venture with Noven. For a company with an enterprise value of only $250 million, Noven has an impressive leader at the helm.

Noven has appointed Jeffrey F. Eisenberg, Senior VP of Strategic Alliances, as Interim CEO and expects to announce a new CEO shortly. We believe that a well recognized industry leader with a proven track record will be appointed. Noven presents an outstanding opportunity for a top notch executive to take charge of a profitable company with a very flexible balance sheet, at a time when its stock is extremely depressed and its opportunities are abundant. In our opinion, prior management did not aggressively exploit Noven’s drug delivery platform or utilize its overcapitalized balance sheet.

The company has best-in-class drug delivery technology and a deep pipeline of products – both proprietary and with market leading partners – in various stages of development. In addition, Noven’s strengths play into the key challenges faced by Big Pharma today. Its patented Dot-Matrix technology differentiates products and extends patent life, while requiring a short timeframe for regulatory approval and a relatively small amount of development capital. In addition, Noven has outstanding proof of concept via its Vivelle-Dot patch for Estrogen Therapy and its Daytrana patch for ADHD. Both are market leading products with no close competitors.

We see tremendous value in Noven, which should become apparent to the market as new products are approved and a new management direction takes hold. We believe Noven’s 49% ownership of its Novogyne joint venture alone is worth 40% more than its current enterprise value, and that does not attribute any value to its four additional approved products or its robust product development pipeline. At present, we believe Noven’s stock is selling for $0.38 on the dollar. A significant share repurchase would be extremely accretive, and the pursuit of strategic alternatives would likely catapult the stock. Regardless of the means, we are confident that the gap between Noven’s share price and its intrinsic value will be closed over the long term.

Atticus Lowe & Lance Helfert at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.

Atticus Lowe & Lance Helfert of West Coast Asset Management began their talk with a list of 10 signs of a strong company:

1. A simple business model – Dell vs. Wrigley
• Understandable, focused
2. A wide-moat competitive advantage – Cisco Systems vs. Microsoft
• Barriers to entry, pricing & buying power, sustainability
3. Recurring revenue – ADP vs. Toll Brothers
• Long-term contracts, repeat clients (razor blades)
4. Low inventory risk – Starbucks vs. Circuit City
• Don’t get stuck with inventory – quick turnover
5. Alignment of interest – National Home Health Care vs. ATP Oil & Gas
• Ownership, motivations, per share value, compensation
6. A healthy culture – General Electric vs. Johnson & Johnson
• Ruthless vs. selfless, ethical, lead by example
7. A flat organizational structure – Kodak vs. Contango Oil
• Fewer layers better, lean environment, close to customer
8. Low reinvention risk – Apple vs. Tootsie Roll
• Product life cycle, predictable, hit or miss, uncertainty
9. Low capital requirements – General Motors vs. Google
• Flexibility, resilience, generate cash vs. consume
10. Favorable demographics – Tribune vs. Angiotech
• Population characteristics – digital, baby boomers

They presented Noven Pharmaceuticals, of which they own 14%. Noven has a patented drug patch – a proven concept – which is much smaller than previous patches, and can administer a huge variety of drugs in a less intrusive way.

The company’s enterprise value is $270m, which is particularly attractive given that aside from their product portfolio and pipeline, there’s a JV with Novartis which alone is valued by WCAM at approximately $350m.

Overall, they believe a base case for the stock is $21.60 per share with potential to reach $30.80.

Marcelo Lima is a securities analyst for the Flexor Fund, at Miami-based Horn Eichenwald Investments. He focuses on running a concentrated value-oriented portfolio.