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Biotech / Medical : Biotech Valuation

CRSP 53.97

-0.4%

1:45 PM EST

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To: Biomaven who wrote (10643)	2/26/2004 11:55:04 AM
From: Ward Knutson	Read Replies (1) of 52153

Showing a willingness to eat a little crow - on 12/20/2003 Garren followed-up on MGI with this: The opportunity arises for new drugs that are coming onto the market and don’t have a current billing code. These drugs will still be reimbursed at 95% of the AWP. Given that they are as good as or better than older competitors oncologist will switch very quickly to the new drug because of the enormous reimbursement differential. One such new drug opportunity is Aloxi (palonosetron), a 5-HT3 receptor antagonist from MGI Pharma (MOGN). Please see archives fro notes on MOGN. This drug was recently approved to treat chemotherapy induced nausea and vomiting. In a nut shell it lasts much longer than competing products, which makes it a better drug. In a normal environment I would expect a slow to moderate uptake by oncology practices perhaps driven by oncology nurses who are always very sensitive to patient discomfort. However this is the “perfect storm” for MOGN. Two currently used drugs in this class, Anzemet and Kytril, are scheduled to be reimbursed at 80% AWP while Zofran is scheduled at 85% of AWP starting Jan. 1. The new medicare pricing will drive oncology practices to Aloxi overnight. They are already signing contracts to convert on Jan 1. The market for this class of drugs in North America is about $850 million/year, which includes the use of both the IV and the oral versions of 5-HT3 inhibitors. Oncologists will usually give the drugs IV in the office at the time of chemotherapy infusions followed by pills to be taken when the patient goes home. Aloxi will be given IV and lasts long enough to eliminate the use of pills. MOGN intends to price Aloxi at about 3 times that of other agents in its class—this premium takes into account the fact that patients will no longer have to pay for pills. The company pays about a 33% royalty to Helsinn (a Swiss company) but this includes cost of goods— MOGN’s major cost will be marketing. I got out of most of my MGI Pharma just before the FDA PDUFA date on the fear that some untoward event might delay the drug and crash the price. I wish I had stayed in. MOGN now trades at $40.50 with a market cap of about $1.27 billion (the company has about $100 million in cash). So the question is how much more could the company be worth considering its already lofty market cap. I think the medicare change reflects a change in this company’s fortunes. In my estimation it is likely that MGON could get half the market in the first year and maybe even more—considering that most private practices will convert. Hospital use, which makes up about 35%, may be a little slower to follow. Hospital formularies usually take a number of months to make changes but again reimbursement should drive that market as well. MOGN has also recently licensed Aloxi for post-operative nausea and vomiting in NA. Using a conservative metric of 5X sales and estimating an aggressive ’04 sales of $400 million you arrive at a valuation of $2 billion which is almost twice where it is now (deducting cash gives a current valuation of about $1.15 billion). I think the trajectory will become apparent after release of 1st quarter ’04 sales data. I bought MGI Pharma in my personal account last week at approximately $39/share.

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