Wachovia's report from January:
WACHOVIA SECURITIES ### ###
January 28, 2003
TLRK: Q4 2002 In Line--Lowering Estimates On Higher R&D
Earnings Estimate Revised Down
Tularik Inc. (TLRK-NASDAQ) Stock Rating: 1
Price: $4.85 Leah Rush Cann / (212) 891-5088
52-Wk. Rng.: $23-5 David Garrett / (212) 909-0969
Shares Out.:(MM) 54.0 Vanessa A. Rath / (212) 909-0952
Market Cap.:(MM) 261.9
[HI
EPS 2002A 2003E 2004E REV.2003 2004
FY(Dec.) Current Prior Current Prior Current Prior
Q1(Mar.) ($0.41) NC ($0.46) ($0.40) ($0.51) $6.3MM $6.6MM
Q2(June) (0.48) NC (0.49) (0.41) (0.52) 6.3 7.2
Q3(Sep.) (0.45) NC (0.52) (0.42) (0.53) 6.3 8.3
Q4(Dec.) (0.48) (0.42) (0.59) (0.41) (0.56) 6.3 9.6
Full FY ($1.83) ($1.76) ($2.06) ($1.64) ($2.11) $25.1MM $31.7MM
FY P/E NM NM NM
Full CY ($1.83) ($1.76) ($2.06) ($1.64) ($2.11)
CY P/E NM NM NM
]
Source: Company data and Wachovia Securities estimates.
NA = Not Available, NC = No Change; NE = No Estimate; NM = Not Meaningful
Float:(MM) 39.1 LT Debt: $0.0
Avg. Daily Vol.: 180,727 LT Debt/Total Cap.: 0.0%
S&P 500: 852.02 ROE: NM
Div./Yield: $0.00/0.0% 3-5 Yr. Est. Grth. Rate: NM
CY2003Est. P/E-to-Grth.: NM
Key Points
* Diluted loss per share for Q4 2002 was $0.48, $0.06 below our estimate of a
loss of $0.42 and $0.04 below the FirstCall consensus estimate of a loss of
$0.44.
* First patient is expected to enroll any day in the Phase II/III pivotal trial
of T67. Four Phase II T607 trials should be completed by year-end 2003. Rest
of pipeline is on-track.
* Q4 2002 revenue was $6.96 MM and exceeded our estimate of $6.66 MM by 4.5%.
Revenue decreased, year over year, as a result of the expiration of certain
research and development collaborations. Tularik stated that it expects revenue
to be at least in the range of $20-25 MM for 2003. Therefore, we are adjusting
our estimated 2003 revenue to $25 MM from $28.5 MM.
* Operating expenses in Q4 2002 were $32.6 MM, 8.7% higher than our estimated
$30.0 MM, primarily due to higher R&D. With the large Phase III trial for T67
underway as well as several Phase II studies for T607, we are increasing our
estimate for R&D expenses by 18% in each year from 2003-2006.
* Lowering 2003 EPS to ($2.06) from ($1.64), to account for higher R&D and lower
revenue. Lowering 2004 estimated EPS to ($2.11) from ($1.78), to account for
higher R&D.
* The first-tier biotechnology companies historically trade at a
price-to-estimated one-year forward revenue multiple of 11x. If we apply this
revenue multiple to Tularik's 2008 estimated product revenue of $211.8 MM, then
we arrive at a 2007 target price per share of $42. Discounting this at 40% per
year, we arrived at a 12-month target price of $11 per share. We believe the
most important risk factor for Tularik is FDA approval. If the FDA delays or
does not approve one of Tularik's late stage product candidates, we believe the
market would increase the discount rate to 60% from our estimated 40% in order
to reflect increased risk. Under this scenario, we estimate Tularik's stock
would be worth $7 per share by the end of 2003. We rate the shares Outperform
with a 12-month target price range of $7-$11.
Investment Thesis
In our opinion, Tularik possesses an exceptional scientific team. The company is
developing a promising new therapy, T67, for the treatment of hepatocellular
cancer, the most common type of liver cancer, for which there are no acceptable
therapies. If successful, we believe this product will be rapidly adopted and
will drive Tularik to profitability. Ultimately, we believe Tularik's oncogene
drug discovery platform will be a source of products and growth.
Investment Conclusion
We believe the best valuation model for late-stage, unprofitable biotechnology
companies is a one-year forward multiple, based on the price-to-revenue multiple
of commercial, profitable biotechnology companies. The first-tier biotechnology
companies, as a group, historically trade at a price-to-estimated one-year
forward revenue multiple of 11x. If we apply this revenue multiple to Tularik’s
2008 estimated product revenue of $211.8 million, then we arrive at a 2007
target price per share of $42. Discounting this at 40% per year, we arrived at
a 12-month target price of $11 per share.
Following the positive Phase II data presented at the 2002 ASCO meeting on T67
in HCC, we believe the greatest near-term risk for Tularik is the initiation of
the pivotal Phase II/III trial in this setting. Given the FDA’s endorsement of
T67’s pivotal trial design, we believe this risk has been greatly diminished. We
believe the most important risk factor for Tularik is FDA approval. If the FDA
delays or does not approve one of Tularik’s late stage product candidates, we
believe the market would increase the discount rate to 60% from our estimated
40% in order to reflect increased risk. Under this scenario, we estimate
Tularik’s stock would be worth $7 per share by the end of 2003.
On the basis of our perceived risk/reward for this stock, we rate the shares
Outperform with a 12-month target price range of $7-$11.
Analysis of Q4 2002
Tularik’s revenue decreased 20.4% to $6.96 million from $8.75 million in Q4 2001
and exceeded our estimate of $6.66 million by 4.5%. Revenue decreased as a
result of the expiration of certain research and development collaborations. The
company stated that it expects revenue to be at least in the range of $20-25
million for 2003. Therefore, we are adjusting our estimated 2003 revenue to $25
million from our prior estimate of $28.5 million.
Operating expenses in Q4 2002 grew 8.6% to $32.6 million from $30.0 million in
the same quarter last year. Operating expenses were 8.7% higher than our
estimated $30.0 million, primarily due to higher R&D. With the large Phase III
trial for T67 underway as well as several Phase II studies for T607, we are
increasing our estimate for R&D expenses by 18% in each year from 2003-2006.
Tuarik’s diluted loss per share for Q4 2002 was $0.48, $0.06 below our estimate
for a loss of $0.42 and $0.04 below the FirstCall consensus estimate for a loss
of $0.44. Tularik had a loss of $0.45 in Q3 2002 and a loss of $0.27 in Q4
2001. As a result of increasing R&D spending, we are increasing our expected
losses from 2003-2006 by 18%. This combined with lowered revenue estimates in
2003 is leading us to lower our EPS to a loss of $2.06 from our previous
estimate of a loss of $1.64. We are lowering our 2004 estimated EPS to a loss of
$2.11 from our prior estimate of a loss of $1.78, to account for higher R&D.
Pipeline Update
T67. Tularik expects to begin enrolling patients in Q1 2003 in a Phase II/III
pivotal study of T67 for the treatment of hepatocellular carcinoma (HCC). T67
will be tested in up to 750 patients
at sites worldwide. The company has 35
sites currently lined up for participation and expects to have 75 sites in
total. The first patient is expected to enroll any day and global approval for
patient enrollment is expected later this year. Tularik expects to take an
interim look at this data through a data safety monitoring board at 100 patients
but the data will remain confidential.
T607. Tularik's second anti-cancer drug candidate, T607, is an anti-tubulin agent
that does not cross the blood brain barrier. The company
is currently conducting four Phase II studies with T607
for the treatment of hepatocellular
carcinoma (HCC), non-Hodgkin's lymphoma (NHL), ovarian cancer, gastric cancer and
esophageal cancer. Radiological response rate is the primary endpoint in
each of these trials and alpha fetal protein levels is a secondary endpoint in the HCC trial.
These trials have a modified Flemming design which means they will each enroll 20
patients and then expand to 35 patients if efficacy is noted. Tularik continues to expect to complete
these trials this year and have
data by the end of this year or early next year.
T131. On January 24, 2003, the company began a Phase I clinical trial of T131, a drug
candidate to treat type 2 diabetes, in the U.K. The trial will evaluate the safety
and pharmacokinetics of T131, a compound that activates PPARgamma
(peroxisome proliferator-activated receptor gamma), a target involved in the
body's ability to respond to insulin. Tularik expects to begin a Phase IIa, proof of
concept, trial by year end 2003. Data from the Phase I trial may be available for presentation
at the American Diabetes Association meeting in June of 2004 or sooner.
T487. Tularik's novel drug candidate for the treatment of inflammatory
diseases, T487, completed the single-dose component of a Phase I study. The
company is preparing to initiate the multiple-dose component in February 2003.
T487 is a novel, small molecule antagonist of CXCR3, a specific cell surface
receptor involved in regulating the immune response. Management stated on
today’s call that Phase I data could be available in early 2004 and that Phase
II trials in psoriasis and rheumatoid arthritis would begin before year-end
2003. Safety data from the Phase I trials has demonstrated that T487 is
well-tolerated and more complete safety data will likely be shared later this
year.
Collaborative Update
An integrase inhibitor resulting from a collaboration with Merck & Co. began
Phase I studies. This drug candidate represents a new therapeutic approach for
the treatment of HIV/AIDS.
Tularik earned a milestone payment from its corporate partner Eli Lilly and
Company, upon Lilly's initiation of clinical development of an orally available
Factor Xa inhibitor. Tularik is entitled to additional payments as the Factor Xa
inhibitor for the prevention and treatment of thrombotic diseases progresses
through clinical trials to registration. Royalties are payable to Tularik on
sales of products emerging from the collaboration.
PreClinical Pipeline Update
Tularik stated that the oncogene program is progressing with 29 oncogenes now
identified. According to manangement, approximately half of these are good
targets for small molecule drug discovery and half are good targets for antibody
drug discovery. The company stated that it has several antibodies moving along
in the research stage but does not expect any of the antibodies to enter the
clinic before 2004.
Tularik expects 1-2 new compounds to enter the clinic in 2003. Tularik
currently has six IND candidates: two in obesity, one in metabolic disease, two
in immunology, and one in cancer.
Recent Staff Changes
The company announced the appointment of industry veteran Jack M. Anthony as
Senior Vice President, Business and Commercial Development. In his new position,
Mr. Anthony will lead Tularik’s worldwide business development initiatives.
Management stated on today’s call that they expect business development to play
a significant role in 2003.
The company announced that Corinne H. Lyle, Vice President and Chief Financial
Officer, has resigned to become CFO of a multinational company outside of the
biopharmaceutical industry. Andrew J. Perlman, M.D., Ph.D., Executive Vice
President, and William Rieflin, Executive Vice President, Administration, will
assume her responsibilities on an interim basis until a replacement is
identified.
TLRK Price Performance
Update Date Closing Price Target Price Rating
6/21/02 7.65 11.00 BUY
1/4/03 7.18 NE OUTPERFORM*
*Rating Scale Conversion |
