Anyone looking at the biotech and pharmaceutical sectors will notice an odd phenomenon. Some of these drug developers have share prices trading for less than the net cash on their balance sheet.

Our ears perk up anytime we can possibly buy $1 worth of assets in a stock for less than $1. Our interest definitely grows when we can buy shares of a drug developer for close to or less than the value of its net cash and in addition get whatever value of the rest of its assets like its pipeline compounds and any marketed drugs have.

The upshot is that some of these drug developers valued at less than their liquidation cash value even have FDA approved drugs on the market and are profitable. Here is the list of drug developers with shares that are trading for less than or only a little more than the value of the net cash on their balance sheet.

Adolor (Nasdaq: ADLR)

Share Price: $2.25
Net Cash Per Share: $2.48

Adolor is best known for its postoperative ileus (POI) drug Entereg. It was approved for marketing by the FDA last May albeit with a very strict Risk Evaluation and Mitigation Strategy (REMS) plan.

Adolor is still burning through its cash and Entereg’s uptake has been relatively slow with revenue from the drug only reaching $1.4 million in the first quarter this year. Adolor’s cash burn in the first quarter was $15.6 million so it’s still far away from profitability considering Entereg’s market potential in POI with its restrictive label.
All that being said, Adolor does have a commercialization deal with Pfizer (NYSE: PFE) to develop moderate-to-severe pain drugs in addition to its existing deal with GlaxoSmithKline (NYSE: GSK) for Entereg in POI. Without knowing if any of the details of its partnership deals would prohibit such a course of action, Adolor is exactly the sort of extremely cheap acquisition candidate that Pfizer or Glaxo often scoop up.

Although Adolor shareholders would be unlikely to get much of a premium to Adolor’s existing share price in any acquisition, with a market capitalization of only $104 million (as of May 1) and nearly $115 million in net cash (cash burn was $35 million last year), Adolor’s shares don’t deserve to be worth too much less than its net cash under many scenarios.

Adolor doesn’t exactly excite us with its early stage pipeline or with the restricted market opportunity for Entereg. Right now it also does not overcome our required return threshold considering. If its shares fall too far below its net cash and Entereg sales ramp up enough to cut into cash burn rate, then it could potentially become an investment candidate that meets our returns criteria for a company with its risk profile but right now we’ll pass.

Facet Biotech (Nasdaq: FACT)

Share Price: $9.26
Net Cash Per Share: $15.89

Definitely the most tempting investment on this list, paradoxically (paradoxerweise) Facet Biotech also has one of the longest histories of destroying shareholder value when you include its former parent PDL BioPharma in its history.

Nevertheless, Facet Biotech is an extremely interesting investment prospect when you consider that it has $15.89 per share in net cash on its balance sheet, a moderately interesting lead drug candidate, and a mostly value-oriented class of shareholders (Seth Klarman’s Baupost Group holds 17.8% of outstanding shares and D.E. Shaw another 3.2%).

Consider this: If Facet were liquidated today (May 1) and the net value of the cash on its balance sheet returned to shareholder, investors who bought its shares at today’s $9.26 a share closing price would see an immediate 72% return on their investment and this assumes that Facet’s pipeline has zero value.

Obviously we are ignoring the frictional costs that would be associated with transitioning to shutdown Facet and the fact that it will continue to burn through its $405 million in cash until shareholders are able to shut it down or get it sold to Biogen Idec. The other obvious downside to buying shares of Facet today for its cash is that you are relying on its other outside shareholders voting to shut it down or return a large chunk of this cash to shareholders through other methods. If that doesn’t happen then Facet will continue on burning through its cash, of which it estimates it will use $95 million to $100 million this year.

Maxygen (Nasdaq: MAXY)

Share Price: $5.65
Net Cash Per Share: $5.14

Like the aforementioned Facet Biotech, Maxygen was also spun-out from a famous biotech, in this case Affymetrix (Nasdaq: AFFX). It is also a money losing development stage biopharma like Facet but the difference is that since last year, Maxygen’s management team has been working on evaluating its “strategic options” and actively selling off parts of its operations.

In June, Maxygen sold a portfolio of hemophilia drug candidates to Bayer ‘04 for $90 million in upfront cash and this is largely why Maxygen’s market capitalization is less than $20 million above the $195 million in net cash on its balance sheet.

Maxygen stands to gain another $30 million from the Bayer deal in potential milestone payments and later in the year signed another deal with Astellas for a preclinical autoimmune diseases drug candidate that could bring in further cash

Having already enlisted the help of Lazard Capital to try and find an acquirer, Maxygen is the most likely company on this list to get sold. We like the fact that Maxygen management has also been taking actions to preserve its cash and reduce its burn rate until something happens with the company. The only problem is that Maxygen doesn’t have a lot of assets left to sell aside from its lead drug candidate. We’ll definitely be watching Maxygen’s shares closely because the lower its share price goes then the more likely a reasonable acquisition offer will pop up that values the company more than an approximate $20 million enterprise value

Pain Therapeutics (Nasdaq: PTIE)

Share Price: $4.43
Net Cash Per Share: $4.38

Pain Therapeutics’ top pipeline asset is its “abuse deterrent” opioid pain reliever Remoxy. In late 2005 Pain Therapeutics signed a commercialization deal with King Pharmaceuticals (NYSE: KG) to develop Remoxy and “no less than” three other abuse deterrent versions of already marketed pain drugs.

In conjunction with that deal, King paid Pain Therapeutics (PTI) $150 million in upfront cash and this is where the vast majority of the $187 million in cash that PTI has on its balance sheet came from. PTI expects to burn through only around $10 million of this cash in 2009.

The bad news is that PTI’s future rests almost solely on the fate of Remoxy. If the FDA refuses to accept King and PTI’s abuse deterrent claims and doesn’t allow Remoxy on the market then PTI’s clinical stage pipeline is reduced to one monoclonal antibody for melanoma still in phase 1 testing.

QLT (Nasdaq: QLTI)

Share Price: $2.07
Net Cash Per Share: $2.13

QLT is an interesting company because it has two drugs already on the market, a good amount of cash on its balance sheet, and is cash flow positive. The problem with QLT is that it is embroiled in a fair amount of litigation and just recently had to pay out $127 million after an appeal of a patent infringement judgment went against it.

QLT’s management have used its cash in the past primarily to reduce its share count. After several Dutch Auctions and open market buyback programs have cumulatively reduced QLT’s share count more than 40% (although often overpaying on their buybacks).

What gets our attention is that QLT’s cash flows are finally starting to stabilize after a precipitous drop in revenue in recent years. The investment case that can be made for QLT is that since its top-line is growing again due to growth with its hormone therapy Eligard eclipsing the sales declines of macular degeneration drug Visudyne, QLT will be generating more cash in the coming years and hopefully returning it to shareholders.

Targacept (Nasdaq: TRGT)

Share Price: $3.15
Net Cash Per Share: $3.19

With its lead drug only in phase 2 testing, Targacept is more like Pain Therapeutics or Facet Biotech than Adolor or QLT. The other thing that binds Targacept to PTI and Facet is that it is relying on the financial backing of large pharma partners, in its case AstraZeneca and GlaxoSmithKline, to help shepherd its drug candidates through the costly clinical trial pathway.

Without digging into the clinical trial data pertaining to Targacept’s compounds in development (which is outside the purpose of this article) there isn’t much more to say about Targacept. Targacept expects its cash to on hand to last “at least through the first half of 2011″ and for cash burn to be less than $35 million this year. It has been behaving like a typical development stage small molecule specialty pharma and unlike a few of the other companies on this list, Targacept has taken no steps to wind its operations down or publicly put itself up for sale.

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