missed this yesterday
MGI Pharmaceuticals (MOGN; $38.96; C-1-9)
Initiating Coverage with a BUY Rating and $48 Price Target (Comment Available)
Volatility Risk: High
03E d$1.25; 04E d$0.15; Market Cap.: $1,481mn
• We are initiating coverage of MGI Pharma with a BUY rating and a $48 target. We
believe that Aloxi, recently approved for acute and delayed chemotherapy-induced
nausea and vomiting (CINV), will provide a strong base for building a profitable
oncology-focused biopharmaceutical company with sustainable growth prospects.
• We believe that Aloxi sales could surpass expectations due to several factors. First, it
received a broader label than other 5-HT3 RAs due to its strong receptor binding affinity
and long half-life, which may explain its superior clinical outcomes. Second, if priced
correctly then not only could Aloxi be positioned as superior, but it could provide an
economic incentive to oncologists to use the drug over competitors. Finally,
management’s relationships with large cancer drug buyers and distributors could foster
strong market acceptance.
• The US market for drugs that prevent CINV is approximately $850 MM and growing at
10% annually. We project ’03, ’04, & ‘05 Aloxi sales of $11 MM, $87 MM and $169
MM with peak sales of almost $350MM. Strong Aloxi sales should allow the company
to reach profitability for full year 2005. Importantly, Aloxi could provide huge EPS
leverage with every $1 MM of sales equal to $0.01 of EPS.
• Three key issues could diminish Aloxi’s success. First, changes to Medicare
reimbursement could reduce previously mentioned economic incentives. Second,
generic versions of other 5-HT3 RAs could be launched in early 2005 but more likely in
mid-2006. Third, confusion from the design of phase III Aloxi studies could slow
market acceptance.
• MGI Pharma is a way to invest in the rapidly growing market for oncology drugs.
Management is in the process of building a profitable cancer-focused company that can
leverage its infrastructure to license and develop oncology products in order to provide
strong sustainable growth.
• We valued MGI based on a discounted P/E to Growth (PEG) method. Based on expected
fully taxed 2006 earnings of $1.21 and a 57 P/E multiple we arrive at a 2006 value of
$69. Discounting that back at a 20% to 2004, we arrive at a $48 price target. The P/E
ratio is based on a biotech average PEG ratio of 1.60x, in-line with the historical
industry average PEG, off our projected long-term growth rate of 36%. As a way to
check the consistency of the valuation, we performed a PEG valuation with similar
assumptions off our 2005 EPS estimate and calculated a value in-line with the 2006
valuation.
(E. Ende/G. Cohen/T. McGahren) |
