Redpoint Bio A Call Option - Analyst Blog

On August 13, 2010, Redpoint Bio (RPBC) reported financial results for the second quarter ended June 30, 2010. Total revenues for the second quarter were $0.5 million, which related to the upfront licensing payment from International Flavors & Fragrances Inc. (IFF) for Redpoint’s sweetness enhancer, RP44. Below we highlight the terms of the deal between Redpoint and IFF.

Net loss of the second quarter totaled $1.4 million, or 2 cents per share. This was in-line with our estimate for a loss of 2 cents per share. Redpoint exited the second quarter ended June 30, 2010 with $2.5 million in cash and investments. We note that this balance does not include the $0.5 million upfront payment from IFF, therefore, Redpoint held roughly $3.0 million in cash as of early July 2010.

IFF: An Ideal Partner

On June 30, 2010, Redpoint Bio announced that it has entered into a license and commercialization agreement with IFF covering the commercialization of RP44, Redpoint’s all-natural sweetness enhancer. Under terms of the agreement, IFF will have exclusive rights for five years to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, Redpoint will receive an upfront payment of $0.5 million and will be eligible to receive up two separate $0.5 million in milestone payments based on supply and regulatory approval.

In addition, Redpoint will receive royalties based on the amount of RP44 purchased by IFF for use in products. We believe this royalty rate equates to about a mid-single digit royalty on RP44 commercial sales. IFF will assume responsibility for the regulatory process and for costs associated with prosecuting and maintaining Redpoint’s intellectual property (IP) covering the sweetness enhancer.

After the 5-year exclusivity period, all rights return to Redpoint Bio, potentially allowing for a more lucrative, exclusive or non-exclusive, deal to be signed in 2015 should RP44 be a success. We believe that IFF is an ideal partner for Redpoint Bio with RP44. IFF is a global leader in the food and beverage industry with deep sector knowledge and a global customer base. IFF will provide outstanding regulatory and product development capabilities.

We note that IFF’s CEO, Doug Tough, highlighted the deal with Redpoint on his company’s second quarter call, calling the deal an opportunity, “to offer customers more natural solutions to reduce sugar products.” Clearly IFF is behind the concept of RP44 and motivated to see it succeed.

Two More Shots on Goal For Redpoint

We believe that Redpoint Bio has two more potential deals it can sign in 2010 or 2011 to create shareholder value. The first is a potential opportunity for Redpoint Bio to leverage its Microtiter Operant Gustometer (MOG) novel and proprietary technology platform used to discover RP44. The basic strategy involves sourcing both natural compounds and natural product compound libraries, and then screening these compounds using an in-house proprietary, computer controlled operant model system.

The Stevia leaf has been used as an all natural sweetener around the world for hundreds of years. Reb-C was dismissed by consumer product companies as a relatively useless compound within the leaf until Redpoint’s discovery of its sweetness enhancing effects. Redpoint potentially has discovered a meaningful product in RP44 right in the midst of the Stevia revolution using its MOG technology. Imagine the possibilities to find additional compounds by applying MOG on libraries of compounds not being used by consumer product companies. Management has the potential to leverage its discovery of RP44 into signing new discovery collaborations in 2010 or 2011.

The second opportunity for Redpoint Bio stems from the company’s work in TRPm5 modulators and the discovery of incretin and glucose-dependent secretogogues. This work could potentially offer a new exciting therapeutic option for the treatment of type 2 diabetes. Given the obvious validation of this pathway by blockbuster drugs such as Byetta and Januvia, Redpoint has received significant interest from pharmaceutical partners looking to collaborate through an early-stage discovery program. Redpoint is currently in discussions with these potential collaborators for its incretin secretogogue program, and we are anticipating a deal in 2010 or 2011.

Redpoint is trading like a call option with three potential ways to make money. The first is the commercialization of RP44 at IFF. The second and third are to secure collaborative research agreements on MOG or TRPm5. The current market capitalization of only $11 million is overly pessimistic. Downside is limited at this point, and we think if management can deliver, the upside is tremendous if RP44, MOG, or TRPm5 pan out.