Expert Financial Analysis and Reporting

The decision of John Johnson to go to Dendreon as CEO and Chairman after only one year at the helm as CEO of Savient can only be looked at as a negative. The question is whether this is enough of a negative for me to change my Buy opinion that started when I initiated coverage on the stock last November when the stock was at $2.35, about the same as the current price. Some are concerned that Mr. Johnson has left at the most critical period of the Krystexxa launch and that this will impede the launch.

The company and its board were obviously concerned with the departure. They appear to have taken steps to lock in Louis Ferrari, who was orchestrating the Krystexxa launch along with Mr. Johnson. He was promoted to Executive Vice President, President North American Commercial Operations and I would imagine was awarded some other incentives to try to make sure that he stays on board. The board member David Norton, who was a 35 year executive at Johnson & Johnson, was named as interim CEO while a search is conducted to replace Mr. Johnson.

The company pre-announced that Krystexxa sales in 4Q, 2011 would be in the range of $2.8 million to $3.0 million. Sales for Krystexxa in 1Q, 2Q, and 3Q of 2011 were $300,000, $1,400,000 and $1,900,000 respectively. The guidance exceeded my estimate of $2,300,000 for the fourth quarter, but some Wall Street analysts were higher in the $2,500,000 to $3,200,000 range.

Full year sales for FY 2011 for Krystexxa should come in at about $6.5 million. Sequential increase in 3Q sales were 36% and for the 4Q were 53%. If we assume that sequential sales increases in each quarter of 2012 is at the low end of this range or 35% the resultant sales for 1Q, 2Q, 3Q, 4Q of 2012 would be $3.9 million, $5.3 million, $7.1 million, $9.6 million; the full year sales would come in at $26.0 million. This seems to be a reasonable starting point for estimating FY 2012 sales and my estimate is $26.0 million. I have seen Street estimates ranging from $18.0 million on the low side to $35.0 million on the high side. I think that sales of $26.0 million or higher would be received positively.

The company was assigned a permanent J code on January 6, 2012 which will make for easier and quicker reimbursement. It could take nearly a half year to get this working with the entire Medicare contractors, but it has the promise of causing an inflection in sales in 3Q and 4Q, 2012 above my estimates. We saw that in the case of Dendreon after the receipt of a permanent J code in August that 4Q, 2011 sales of Provenge surprised on the upside.

All of this leads up to whether I am changing my recommendation on the stock and the answer is no. The loss of Mr. Johnson should not change the dynamics of the launch; the dies have already been cast. I also perceive a pervasive bearishness on the stock and a near universal opinion that the launch will fail. It was this bearish sentiment in combination with my favorable appraisal of the sales prospects for Krystexxa that led to my Buy rating in November. I see no reason to change my opinion based on Mr. Johnson's departure.

Having re-iterated my buy, I must say that there are issues that could cause me to change my opinion. One would be if the sequential sales don't come in at 35% in the early quarters of 2012. Another would be the departure of other key executives. I will keep you informed on these issues.

Disclosure: The author of this article owned shares of Savient at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Savient carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Savient.