In April 2009, we are initiated coverage of BioDelivery Sciences International, Inc. (BDSI) with a Buy rating and a $6 price target. Since that time, the shares are up 35% on investors gaining confidence in the pending approval of Onsolis, a transmucosal fentanyl patch for breakthrough cancer pain. The FDA decision is expected on or before June 12, 2009.

We view the event as a high likelihood of approval (>80% chance). Approval would be a transformational event for BDSI. Not only would it bring about a $30 million milestone payment from worldwide commercialization partner, Meda AB, but BDSI would also receive double-digit royalties (we estimate 20%) on sales of Onsolis upon launch.

The breakthrough cancer pain market is highly competitive, and there are several formulations of fentanyl already on the market, with several more in late-stage development. But we believe that BDSI’s BEMA technology offers significant advantages over existing delivery technologies, and could allow for Onsolis to be at least a $250 million peak sales drug.

A $6 price yields a market capitalization of approximately $115 million. This more fairly values the company based on the pending approval of Onsolis. Post-approval, we would not be surprised to see the shares head towards $10 per share due to the dramatically improved financial situation, and the ability it provides for management to now move two pipeline candidates, BEMA Buprenorphine and Bioral Amphotericin B, each with $500 million sales potential, forward in clinical development.

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