Details....
...from DW-MS report dated July 6, 1998
The general themes that emerge from large scientific meetings often identify the extreme boundaries of an intellectual debate. But as they are propagated, they nearly always lose practical balance and perspective. So it was last week in Geneva, where the world's leading HIV experts gathered at the 12th World AIDS Conference. The general theme reflected a somber awareness that much work remains in the battle against AIDS. Efforts to prevent HIV transmission have dramatically missed the mark in the developing world. Only a fraction of the world's HIV population has access to modern HIV treatments. And for many who do get treatment, the outcome falls far short of the dramatic clinical trial results discussed only two years ago at the international conference in Vancouver. But just as the Vancouver "cure" theme masked the emerging signals of treatment resistance and drug side affects presented at the same meeting, this year's theme of gloom has missed continued signs of hope on the treatment front. For example large majority of patients who respond to HIV "cocktail" antiretroviral (ART) treatment within the first 12 weeks of therapy continued to demonstrate undetectable levels at two years. And, a new therapeutic vaccine, Remune, was shown to provide a significant boost to the immune system when used in combination with ART. With this perspective, below we list the key themes of the Geneva conference:
Patient compliance remains the primary barrier to success with the current "cocktail" treatments. Skipped doses invite resistance.
Patients who become resistant to a given ART treatment regimen should be switched to another effective regimen quickly. Prolonged treatment with a resistant ART regimen invites cross-resistance to other available drugs.
Resistance monitoring will become increasingly common in the clinical setting as a means of optimizing ART. New technologies for testing HIV genotypes and phenotypes are becoming increasingly available.
Because immune recovery becomes increasingly difficult as HIV progresses, the "hit hard, hit early" paradigm remains valid for patients who are able to strictly adhere to HIV protease-containing treatment regimens. This principle was affirmed in the newly issued International AIDS Society guidelines released at the converence.
For patients unwilling or unable to adhere to strict treatment schedules, HIV protease-sparing treatment regimens are preferred.
Treatment regimens containing two protease inhibitors continue to hold promise, and may forestall resistance seen with single protease strategies.
Treatment regimens continue to become simplified. Twice and once daily dosing schedules are quickly becoming the norm.
Lipodystrophy (abnormal accumulations of fat tissue) continues to be a problem among some HIV patients. Early reports that it is caused by HIV protease inhibitors may have been premature, as it is now being seen with patients taking HIV reverse transcriptase inhibitors alone. The mechanism of action remains a mystery and may be related to a metabolic change associated with successful therapy. Data are scant on the current extent of the problem, but should evolve over the next year.
Remune: New Optimism for immune enhancement
The primary defect in AIDS is impairment of the immune system. While ART halts viral replication, it does nothing to restore immune function. Remune is an immune stimulant that appears capable of invoking dramatic immune responses against HIV. The agent has gotten a significant amount of attention recently. It was the subject of a June 1998 comprehensive supplement in AIDS research and Human Retroviruses and recent data debuted at a Geneva satellite symposium entitled "Therapeutic Advances in Immune Reconstitution; Implications of Immune Based Therapies an Combination Antiretroviral Therapy." Dr. Robert Gallo of the Institute for Human Virology discussed the growing understanding of the importance of natural immune hormones, called chemokines, in battling the disease. Patients who do well clinically tend to have high levels of circulating chemokines MIP-1alpha, MIP-1beta, and RANTES, which turn off (downregulate) CCR5, a key receptor used by HIV to infect immune cells. Dr. Bruce Walker, Massachusetts General Hospital, presented data confirming that virus-specific T helper cells are the central mediators of the HIV immune response. As the infection progresses, these cells become depleted, allowing the virus to overcome the immune system.
Fred Valentine, NYU Medical Center and former chairman of the FDA antiviral advisory committee, presented new data on Remune, showing dramatic increases in HIV immune stimulation indexes among patients who received the agent along with standard ART. Remune increased levels of circulating chemokines and increased virus-specific T helper cell counts. It also decreased virus blood levels. Interim data at 16 weeks in a 40-patient study showed that 86% of patients who received Remune in combination with Crixivan/AZT/3TC had undetectable viral levels (<40 copies/ml) vs. 67% of patients with Crixivan/AZT/3TC alone. Given the small number of patients in this Phase II trial, the result was not statistically significant.
They symposium clearly outlined a clinical rationale for use of Remune in HIV. We were impressed with both the caliper of the investigators identified with the agent and with the standing room only audience attending the Geneva symposium. We look for full results of the 32 week trial at the ICAAC meeting in September.
Implications for Agouron
Agouron now has four plays in the HIV arena: Viracept, Remune, JE-2147 and S-1153. Viracept has exceeded clinical and commercial expectations in becoming the dominant HIV protease inhibitor on the market. While increasing use of "protease-sparing" regimens will be a negative, increased use of dual protease regimens and continued share gains against competing PI's will continue to be positives. Viracept revenues grew dramatically in fiscal (June) 1998, and should exceed our estimate of $350 million in U.S. revenues for the year. We continue to forecast moderate, but slowing domestic growth through year 2000. Our U.S. revenue estimates remain $450 million in 1999 and $512 million in 2000.
Remune data were suprisingly strong, and provide solid rationale for the company's aggressive stance in the competitive battle to license the product. If the data are borne out in larger clinical trials, the agent could become an essential component to AIDS treatment, and could provide important revenue growth as Viracept matures. Data from the 32 week Valentine study should be reported at ICAAC in September. An interim six month analysis of the 300 patient AZT/ddI Spain study coule be presented at the Europe AIDS meeting in November. In mid 1999, we anticipate six-month data from the 200 patient Viracept study.
S-1153 is the only next generation reverse non-nucleoside transcriptase inhibitor in development. Preclinical studies suggest it will have a unique resistance profile vs. other RTI's, including Sustiva. The compound could reach the market in 2001 by our forecast. JE-2147 is a next generation protease inhibitor also with a unique resistance profile that could be launched in 2002. Revenues from neither of these compounds are in our current forecast.
To sum it up, we continue to believe Viracept will live up to expectations and that Remune has good potential to become an important new treatment for HIV. While the company appears to be doing everything right as it looks to build an HIV franchise, the stock market's current focus on near-term earnings and risk-avoidance could dampen performance through the summer. We would use this time as an opportunity to position portfolios for the second half of the year, when Agouron shares could show significant gains with continued Viracept growth and additional Remune data.
Financial note: We have reduced our fiscal 4Q98 eps to a loss of $0.27 from a gain of $0.04 to reflect upfront license fees paid for Remune, S-1153, and JE-2147 totaling $26 million. Further modifications to our earnings forecast await guidance from management on changes in capital structure, which would allow off-balance sheet treatment of some R&D expenses. Potential formats include establishment of a research and development limited partnership of the establishment of a tracking stock associated with a general division, similar to the Genzyme structure. Clarification is expected during the company's quarterly conference call in July.
Investment Thesis
While we believe Agouron's long-term outlook extends beyond Viracept into the fields of cancer and infectious diseases, we anticipate AGPH shares will largely track the commercial progress of VIRACEPT during 1998. We look for fiscal (June) 2000 Viracept revenues of $512 million (106,000 patients in the U.S., estimated annual wholesale acquisition cost of $4850). Our price target is $45, based on a 25x multiple on FY2000 EPS estimate of $2.14 discounted at 20% over one year. Upside to our numbers and price target could arise should we add additional revenues from REMUNE, S-1153, or JE2147, three recently licensed HIV therapeutics. Agouron shares are rated Outperform.
Risks
Risks generally applicable to the biotechnology sector should be considered, including high volatility, commercial market risk (competing products and price pressure), clinical development risk (possibility of unfavorable clinical trial outcomes), finance risk (dependence on availability of future financing on favorable terms), regulatory risk (possibility of FDA delays or non-approval), intellectual property risk (possibility of patent litigation), collaboration risk (unforseen termination of current corporate collaborations), manufacturing risk (loss of key suppliers, possibility of adverse regulatory action causing manufacturing delays or shutdown), and technology risk (potential breakthrough therapeutics often lack definitive proof of principle present with established therapeutic classes of drugs).
Anticipated Milestones
AG3340 Initiate Phase I trial in acute macular degeneration - 3Q98
Solve crystal structure of cancer target - 3Q98
Rhinovirus protease inhibitor enters Phase I clinical trials - 1Q99
GART inhibitor enters Phase II clinical trials - 1Q99
JE-2147 initiation of clinical trials - 1H99
Remune Phase III clinical endpoint data - 2Q99
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