Black Horse Capital Opposes the Strategic Direction of Cypress Bioscience

CHARLOTTE, N.C., May 31, 2007 /PRNewswire/ -- Black Horse Capital Advisors LLC today issued the following statement -- Black Horse Capital issued a letter to the Board of Directors of Cypress Bioscience Inc. asking for the company to abandon its pursuit of a potentially dilutive transaction and alternatively institute a stock buy back program. A copy of the letter is attached below.

    May 31, 2007


    Board of Directors

    Cypress Bioscience Inc.



    Members of the Board:

I am a Managing Member of Black Horse Capital Advisors LLC and Black Horse Capital Management LLC (collectively "Black Horse Capital"). Through its affiliated funds, Black Horse Capital currently holds 1,201,461 shares of Cypress Bioscience Inc. ("Cypress") common stock. We have been long term holders of your stock having purchased our first shares shortly after your first Phase III trial "failed". I am writing in response to the Securities and Exchange Commission ("SEC") filing dated May 30, 2007 in which Cypress is offering 4.7 million shares in a secondary offering with the proceeds to be used to acquire another product candidate (the "Proposed Transaction"). As described below, we believe the Proposed Transaction is not in the best interest of shareholders and ask this Board to abandon this course of action and immediately institute a stock buy back plan.

On May 23, 2007 Cypress announced top line results for its second Phase III trial of Milnacipran in Fibromyalgia Syndrome (FMS). Not only were the results positive but the drug hit both of its primary endpoints including treatment of pain associated with FMS and treatment of FMS syndrome which required functional improvement as well as improved pain and patient's global assessment of their condition. Even more remarkably, the result retained its significance when the individual components of the primary endpoint were analyzed. Unless Cypress is not disclosing material information regarding this trial, the result is incredibly robust and could lead to a best in class label for FMS. As you well know, FMS is a large market opportunity and given these results, Milnacipran looks to be an effective treatment.

Given the data above, we believe that Minacipran is one of the most promising drugs in late stage development. Ironically, my partner phoned Dr. Kranzler yesterday afternoon with the hopes of discussing how Cypress could best use its large cash asset and wanted to discuss a stock buy back plan given the remarkable results, the low equity market capitalization of Cypress, and the low cash burn rate. Our major concern, is that Forest Laboratories, or some other smart strategic buyer will make a take out offer while your stock still is multiples away from reflecting the true value of your future milestone and royalty income for Milnacipran. The best thing that Cypress could possibly do with its cash is to buy back its own stock. Your failure with Mirtazapine should be a reminder that finding and developing an effective drug in a large indication is full of pitfalls and is often serendipitous. You currently are in possession of a drug that appears very effective in a large patient population. I can not understand why you would role the dice on another indication and spend what must be over $100 million on another compound rather than take the bird you have right in your hand.

Cypress does not need to raise further capital. Your current balance sheet has over $100 million of cash and no debt. Your burn rate is negligible relative to this large cash position. In addition, your cash position will grow further even without selling stock. According to your SEC filings, Forest Laboratories must reimburse Cypress for the just completed Phase III trial since the results were positive and will form the basis of an NDA. Moreover, Cypress is due milestone payments of up to $180 million from Forest for FMS and another $45 million should Forest decide to pursue other indications with the drug. Cypress and Forest are planning to file an NDA this year which would suggest that Cypress will start receiving royalty payments in 2008. Analysts estimate that a conservative 9% penetration rate in the FMS market would generate $560 million of sales for Milnacipran and a growing recurrent royalty payment to Cypress of $85 million. This low level of penetrations seems very conservative given the potential for a best in class label. Cypress does not need cash and should be looking to deploy the huge cash pile already on its balance sheet.

    Let me address and counter the arguments that I am sure you will raise.


    -- "We need to raise more money because drug acquisitions are becoming

       more expensive with increased competition for interesting molecules."

       Counter point -- if molecule acquisitions are now expensive, you should

       not be in the overheated market buying expensive prospects.  You should

       buy back your undervalued stock.


    -- "The stock has run up on the Phase III data and it is prudent to reduce

       risk."  Counter point -- your job is not to diversify my portfolio.

       Simple corporate finance 101 will tell you that portfolio managers are

       better at diversifying risk than management teams.  In addition, your

       stock now trades for nearly the same price as it did prior to

       announcing the first Phase III trial. You did not feel the need to

       raise capital at the same valuation prior to announcing the results of

       the first Phase III.   Now that you have these results from the second

       Phase III trial in hand, your stock has only retraced its loss from the

       first trial.  This is a gift and you should be taking this opportunity

       to buy back your own stock aggressively.


    -- "We want to become a diversified biotechnology company."  Counter

       point -- we are supportive of Cypress using some of its existing

       resources to look for other opportunities assuming you can conduct

       small proof of concept studies with little cash paid upfront to gain

       access to the molecule.  To the extent that you need to raise another

       $75 million to have access to these other opportunities, you are only

       diluting the value of Milnacipran.  The biotechnology industry is

       littered with companies that are successful with one product but then

       destroy the value of their success by plowing every dime earned into

       pursuing a second, third, and fourth product that never works.  Biology

       can not be predicted.  That is why you run clinical trials.  Your

       success with Milnacipran is not predictive of your ability to find

       another drug with a similar market opportunity at a similar price.  You

       should not be diluting the value of Milnacipran with this huge equity

       raise and instead, you should be buying back your undervalued stock.

I would be happy to discuss these matters with you at anytime. We want to work productively with you to get the full value of Milnacipran reflected in the stock price of Cypress. To the extent that you continue to pursue misguided strategies that will only dilute the value of Milnacipran, we will be forced to consider all alternatives available to us as large shareholders.

    Sincerely,


    Dale B. Chappell, M.D., M.B.A.

    Managing Member and Director

    Black Horse Capital

CONTACT: Dale B. Chappell, Managing Member and Director, of Black HorseCapital Advisors LLC, +1-212-332-1112

Terms and conditions of use apply
Copyright © 2007 PR Newswire Association LLC. All rights reserved.
A United Business Media Company

Latest Pharma Industry News...

Pharma Industry News Archive

More News Resources

Daily MedNews
Pharma Industry News
New Drug Applications
New Drug Approvals
Clinical Trial Results
Generic Drug Approvals
Monthly Update Archive