RATING: Buy Change: None 12-Mo. Target: $52
VIEWPOINT
Centocor shares dropped 10% yesterday and nearly 20% in the last two weeks
on anxiety about Remicade sales and reduced sales estimtes from one of the
strong bulls on the stock at another brokerage - estimates that were well
above company guidance. While we share some of the caution about initial
Remicade demand, we think the magnitude of the decline overlooks the strong
product fundamentals for ReoPro and the contributions to Remicade growth in
1999 from sources other than domestic demand in Crohn's disease. We also
believe that the negative emotion surrounding the stock misreads details of
the revenue guidance from the company. Having spoken at length with several
members of Centocor management yesterday, we feel assured that the product
fundamentals for ReoPro and Retevase are very sound and that Remicade sales
are on track. The current negative sentiment has created unwarranted
concern about every aspect of Centocor's business and we view this as an
opportune time for investors to build a position in Centocor. We reiterate
our Buy rating on Centocor shares with a price target of $52.
IMPORTANT POINTS
1. Remicade demand remains difficult to estimate - in the absence of data,
negative anecdotes have prevailed. Because Remicade is administered in
a hospital or infusion center, prescription data is not picked up by
sources such as IMS. Demand is therefore impossible for investors to
monitor on a week to week basis. We have spoken with several
clinicians at large academic hospitals in the last few days and there
are certainly not an overwhelming number of Crohn's patients on
Remicade at this point - several hospitals are just developing
protocols for administering the infusions. We would keep in mind that
this is a new therapeutic modality for Crohn's disease and we think
it's unrealistic to expect untoward enthusiasm from physicians for
what is initially a very small number of eligible patients. Also, keep
in mind that not all of the eligible patients are waiting in a
physicians office for treatment. As their symptoms become more acute,
they will visit their physician - until then they are outpatients on
oral drugs. In summary, we think the anecdotes, including ours,
represent a small sample size and that a slow start for Remicade is
already taken into account in forecasts.
2. The market has overlooked other sources of Remicade growth in 1999. Our
1999 sales forecast for Remicade includes a contribution of about $9
million in Centocor's share of Schering-Plough# sales in Europe and
another $39 million from domestic sales of Remicade in rheumatoid
arthritis. We see no reason to alter these forecasts. We have never
been proponents of the idea that the Crohn's market was an enormous
market or that label expansion in Crohn's was inevitable. We do,
however, believe that Remicade will be approved in rheumatoid
arthritis and will take the lions share of the Medicare market in RA.
Concerns about the achievability of Centocor guidance of $120 - $160
million of Remicade revenues in 1999, we think, overlook these other
contributions.
3. The company reiterated its guidance to us yesterday. Centocor reiterated
its 1998 revenue and earnings guidance yesterday at an investor
conference in New York. We spoke with management shortly after their
presentation and were reassured that ReoPro sales growth is strong and
that there has been no change in the fundamentals for any product. In
fact, Retevase market share has continued to increase despite a very
strong marketing push by Genentech to stabilize its market share. In
estimating yearly revenues, we would point out that Centocor closed it
sale of the diagnostics business and, as a result, will not recognize
a full quarter of diagnostics revenue. We think some may have
misinterpreted guidance of $315 in Centocor revenue as a signal of
weak ReoPro or Remicade sales. During our call with management
yesterday, we spoke with the project team leader for Remicade and he
assured us that our conversations with academic physicians were not
representative of demand in the broader market. |
