Senetek SNKTY
December 31, 2008 - 12:33am EST by
2008 2009
Price: 0.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 7 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Senetek trades for about 40% of net cash of $2.1 per share, has several assets that could be monetized, and could be profitable by the end of 2009 based on a new product launch.
As highlighted here about a year ago, Senetek is a life sciences and skincare company. In 1999, the company developed and licensed Kinetin (a naturally-derived cytokinin; more specifically, a “plant-based extract found in the blue anemone flower that helps visibly improve the appearance of aging and sun-damaged skin”) to ten companies including Valeant Pharmaceuticals, which developed a high-end skincare product called Kinerase. A success in a short period of time, Kinerase reached $10 million in sales in two years and did over $30 million in sales in 2006. In 2007, Senetek monetized its right to future royalties in exchange for a cash payment of $21 million from Valeant.
As background, the market for physician-dispensed facial skin care products is estimated at $250 million in the U.S. (and is over $800 million in the U.S. including consumer channels). There are about 22,000 physicians who specialize in dermatology and plastic surgery in U.S. (about half of these sell cosmeceuticals). Competitiors include Obagi, Kinerase from Valeant, Skinceuticals from L’Oreal, Skinmedica, and MD Forte from Allergan. High-end skincare products can be considered DESI II products, which require physician prescription but are not subject to FDA pre-marketing approval. Typically, a skincare company will test efficacy and toxicity in labs and then do small clinical studies on 30-40 subjects before launching a new product.  
After the success of Kinerase, Senetek is now bringing a related skincare product to market, called Pyratine-6, which has exhibited superior clinical results versus Kinetin. In a recent 12-week study, Pyratine-6 has exhibited a 22% improvement in fine wrinkles (versus 2% for Kinetin), 86% improvement in skin roughness (versus 35% for Kinetin) and 24% improvement in overall skin aging (versus 3% for Kinetin). Per Dr. Jerry McCullough, lead investigator and Professor of Dermatology and Director of the DermatologyClinicalResearchCenter at UC-Irvine, Pyratine-6 “will be in the category of Kinetin” and it is “clinically as good or probably better.” While Pyratine-6 is targeted for the category of “photo aging” (aging by the sun; a general category that includes wrinkles, skin texture, roughness, dryness and blotchiness), it has also been tested and could be commercialized as Pyratine-XR for acne rosacea (a chronic condition of acne and redness that affects about 45 million people worldwide).
Instead of licensing Pyratine-6, Senetek has chosen to handle the manufacturing and sales. Originally, Senetek had an exclusive 50/50 sales agreement with Triax Pharmaceutical, which was terminated in June 2008 due to poor performance by Triax (less than a year after its initial agreement in August 2007). As a result, Senetek is now controlling the sales effort. While the market for high-end cosmeceuticals has become more competitive in recent years, Senetek improved its chances by recently hiring Philip Rose, former CEO of Obagi Medical and one of the two primary executives responsible for creating Kinerase at Valeant. So far, Pyratine-6 has had a soft launch in the U.S. physician market in 2008 with annual sales of under $500,000 and gross margin of over 75%. If Pyratine-6 sales ever reached those of Kinerase ($30 million), then the EPS contribution could be about $1 per share.
Currently, Senetek also generates sales from selling diagnostic monoclonal antibodies through an agreement with Covance. The contract was renewed in 2005 and lasts through 2010, when it will likely be renewed. Senetek receives from Covance 60% of the first $2,000,000 in annual net sales of licensed products and 35% thereafter. Senetek is entitled to a minimum in total payments from Covance of $860,000 per year.
Sentek has a collection of other assets, including Invicorp, a treatment for erectile dysfunction, which is licensed to Plethora Holdings (listed on AIM: PLE LN) for North America. Plethora raised $25 m from Paul Capital Healthcare in March 2008. Invicorp could receive FDA approval by the end of 2009 and be commercialized in 2010. Senetek would receive milestone payments and a 10+% royalty payment on net sales. Senetek is also seeking a European licensee of Invicorp (possibly Plethora again).
In addition to Invicorp, Senetek also sold Reliaject to Ranbaxy Pharmaceuticals in 2006 for $500,000 plus milestone payments and royalties on net sales if the product is commercialized. In addition to Pyratine-6, Senetek is testing some other compounds, including 4HBAP, AK801, PA100. Senetek has a small research facility in Denmark (2 employees) and research agreements with the Institute of Experimental Botany in Prague, Czech Republic, the Institute of Bioorganic Chemistry of the Polish Academy of Sciences in Poznan, Poland and PROTEOMAGE, the European Integrated Project on Healthy Aging, financed by the European Union.
While the stock trades at a steep discount to net cash and the company has some assets that could be monetized, the CEO/CFO have historically given very aggressive forward projections (including expectation of nearly $10 million in run-rate sales for Pyratine-6 by the end of 2009), own little stock, and have high salaries and bonuses (including severance packages). SG&A runs about $4 million a year, and R&D is about $1 million a year. With sales from Covance and interest income, expected cash burn is $3-4 million a year, until Pyratine-6 or other products gain some acceptance in the market. Cash is over $16 million as of December 2008. Furthermore, Senetek could access about $13 million in U.S. tax losses and perhaps $40 million in provisional tax losses in the U.K., due to being incorporated there.
The company recently approved a share repurchase program and management expects to take part of their salaries in stock, but it remains to be seen exactly how active the company will be in returning cash to shareholders. The steep discount to net cash provides a cushion for at least two years for investors and gives a window of opportunity for the company to execute on its products or for an activist investor to push the company to return more cash to investors.


* Trading at steep discount to net cash

* Pyratine-6 takes company into profitability

* Other products come to market or are monetized

* Share repurchase program (size to be determined)
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