We initiate coverage of Unigene Laboratories with a BUY rating. Unigene is developing peptides that can be dosed as a pill, rather than injection. Specifically, the company has a pair of drugs in clinical studies to treat osteoporosis, and could have a clinical study underway soon on a pill to treat obesity. We are bullish on this stock for 4 reasons.

Reason #1 – UGNE’s oral calcitonin could be approved next year–$3B+ potential market. Unigene recently disclosed that top-line Phase 3 results from its study of oral calcitonin (to treat osteoporosis, a $3 billion+ potential market) met the pre-specified endpoints. This study was carried out under an SPA, which could simplify approval. An NDA is expected to be filed by the end of the year, and we believe that odds of approval are high (65%).

Reason #2 – UGNE’s oral peptide delivery useful–fewer needles better than more. Dosing via injection is a significant limitation to use of peptide drugs. Unigene’s specialty is to engineer peptides (theoretically any peptide) to enable oral delivery. We believe, that faced with the choice of a drug via needle or pill, that most consumers would prefer the pill. This could afford substantial profits for UGNE.

Reason #3 – Commercial experience is valuable. Unigene already has experience producing an FDA approved product (Fortical, for osteoporosis), which puts it in a select group of biotech companies. We believe that this experience (plus the knowledge of how to actually make a drug) gives UGNE an edge that most biotechs do not have.

Reason #4 – We believe that UGNE’s technology is significantly undervalued. Our price target for UGNE shares is $2/share (based on a blend of projected sales plus technology value), roughly double current trading. We believe that positive final Phase 3 data for oral calcitonin and/or NDA filing (both expected this year) could provide a catalyst to move the share price.

Unlike many small biotechs, Unigene’s prospects are not tied to a single drug candidate. We believe that having a more diversified portfolio of assets decreases overall risk.