citi: CVTX: Cardiologists Note That Ranexa Will Be Niche Drug, As Expected
January 31, 2006
Yaron Werber, MD
yaron.werber@citigroup.com
Raymond Bower, MD
raymond.bower@citigroup.com
Speculative (S)
Mkt Cap: $1,095 mil.
SUMMARY
* On Monday, we hosted a client conference call with two cardiologists to discuss Ranexa's label and outlook for ACEON.
* The panel noted that Ranexa will most likely be relegated to the refractory angina pop'n (~5% of total angina market) due to its modest symptomatic relief. Due to the unmet medical need, Ranexa might be adopted quickly in this setting, suggesting that the launch might be swifter than expected. However, the panel does not plan on using Ranexa in front-line patients (even if indicated) due to lack of outcomes data that is required to trump current options.
* While the modest QTc effect is not concerning, Ranexa should not be used w/QTc prolonging drugs. They were also cautious on ACEON due to little difference between ACE inh. and attribute any clinical benefits to a class effect.
* With modest expectations & fav risk/reward on MERLIN data, we're positively inclined but wld only estab. new pos w/ signif. wkness due to val'n constraints.
FUNDAMENTALS
P/E (12/05E) NA
P/E (12/06E) NA
TEV/EBITDA (12/05E) NA
TEV/EBITDA (12/06E) NA
Book Value/Share (12/05E) $0.17
Price/Book Value NA
Revenue (12/05E) $22.0 mil.
Proj. Long-Term EPS Growth NA
ROE (12/05E) (508.4%)
Long-Term Debt to Capital(a) 98.3%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (1/31/06) $24.61
Rating (Cur/Prev) 2S/2S
52-Week Range $29.62-$19.48
Target Price (Cur/Prev) $30.00/$30.00
Shares Outstanding(a) 44.5 mil.
Expected Share Price Return 21.9%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 21.9%
OPINION
On Monday, we held a conference call with two expert cardiologists to analyze
Ranexa's label in the wake of Friday's approval for the treatment of refractory
angina. During the call, we also discussed the outlook for CVT/Solvay's ACEON
for the treatment of hypertension and stable coronary artery disease.
Our conclusion from the call is that Ranexa will most likely be relegated for
use in patients who have failed other anti-anginal drugs and is unlikely to
find popularity as a front-line agent. The limited use in an estimated 5% of
patients who fit this criterion is due to the fact that Ranexa has not shown
any outcomes data to support usage in earlier setting even if approved on the
heels of the ongoing MERLIN study.
Encouragingly, the physicians were enthusiastic about the drug's ability to
reduce angina attacks and nitroglycerin use and were not overly concerned about
its modest efficacy given the dearth of other options. In addition, they noted
that the drug's QTc prolongation is minor and should not prevent broad use
although they do plan on ensuring that Ranexa is not used with other QTc
prolonging therapies.
Overall, while the physicians appeared to be cautious about the size of the
market potential for this drug, we believe that their comments are generally
appreciated by investors. In our view, Street consensus sales estimates for
Ranexa of low to mid $30s million for the year are achievable (we model $37
million).
Our Hold rating on the stock stems from our view that Ranexa is unlikely to
materially exceed our sales estimates off the gate. Thus, we would look for a
better entry point on any significant weakness if initial sales disappoint.
Inherently, we like the risk/reward profile of the stock ahead of release of
data from the ongoing MERLIN study in late '06/early '07 since expectations for
the study are modest. In our view, we would expect that MERLIN will prove
Ranexa's safety, thereby leading to a label expansion. While we concur with our
physician consultants that Ranexa is unlikely to unseat the current standard of
care for angina (i.e. beta blockers, ACE inhibitors, statins, and aspirin), the
drug might become an attractive addition in place of calcium-channel blockers
or long-acting nitrates in second-line. If that occurs, Ranexa might become a
higher seller than we currently project since we do not model any sales into
this segment.
Alternatively, while our physician consultants note that the bar is high for
Ranexa to meet the composite efficacy endpoint of ACS in MERLIN, the stock is
not discounting lofty expectations for this study either. Thus, we see more
upside than downside heading into this event.
CVT is planning on launching Ranexa at the American College of Cardiology (ACC)
meeting in March 7-11th. We expect that the company will announce the price of
Ranexa before that event. Currently, we predict that Ranexa will carry a $1,000
annual price tag net of rebates. However, given that the refractory angina
population is relatively inelastic to pricing, CVT might opt to price this drug
more aggressively with an option to reduce the price at a future time if the
ongoing MERLIN study expands the label to earlier patients. A higher price is
likely to be viewed positively by investors and expand the commercial potential
of the drug.
PHYSICIANS EXPECT BRISK UPTAKE OF RANEXA IN REFRACTORY SETTINGS
On the call, our panel expressed their opinion that Ranexa is an exciting,
albeit modestly effective, new therapy for refractory angina patients. In their
view, the small magnitude of reduction in angina frequency and nitroglycerin
use should not detract from use because in clinical setting some patients may
respond over an above the mean benefit seen in the trials.
In addition, the panel was only modestly concerned about the 6msec mean QTc
prolongation seen with Ranexa, but noted that this is not clinically
significant and should not detract from usage.
Encouragingly, the physicians noted that they expect to use Ranexa immediately
in their refractory patients, but cautioned that only upwards of 5% of patients
fall into this criterion. This suggests that the launch might be swifter than
expected due to the unmet medical need.
Surprisingly, the panel was not impressed by Ranexa's neutral hemodynamic
profile (lack of effect on heart rate or blood pressure) since the number of
patients who have co-morbid conditions such as congestive heart failure, heart
block, or hypotension is relatively modest. Instead, they noted that they like
the fact that other therapies can lower blood pressure while reducing angina
(such as beta blockers) since this allows them to treat to several conditions a
single drug.
...BUT RANEXA IS UNLIKELY TO FIND STRONG USAGE IN FIRST-LINE PATIENTS WITHOUT
OUTCOMES DATA
The panel also noted that while Ranexa is attractive for refractory angina
patients, the drug is unlikely to find popularity as a front-line agent due to
lack of outcomes data. In their view, while the ongoing MERLIN study could
prove Ranexa's safety and garner an expansion of the label to include front-
line angina, this study is not designed to illustrate Ranexa's activity in this
population. Thus, it may not lead to significant increases in use since it is
unlikely to unseat the current standard of care.
In addition, our consultants were equivocal in their view about the lower
activity in Ranexa in women than in men. Given that women tend to develop
angina later on in life than men suggests that women are typically more
advanced than men. This would suggest that women are in a position to
demonstrate robust response to the drug.
Either way, the experts agreed that in refractory setting, where there is lack
of other options, Ranexa is likely to be used broadly in women. However, in
front-line settings, this differential effect might draw more scrutiny when
other options are available.
PHYSICIAN VIEW ACE INHIBITORS HAS HAVING A CLASS EFFECT -- ACEON MIGHT LACK
DIFFERENTIATION
Despite having received a recent label expansion to include the treatment of
stable coronary artery disease (CAD), our physician consultants noted that
ACEON is viewed as being relatively undifferentiated compared to other
currently available generic ACE inhibitors.
Given that the American College of Cardiology (ACC/AHA) guidelines call for all
CAD patients to receive a beta blocker, statin, aspirin and ACE inhibitors, our
consultants often prescribe a generic ACE inhibitor to minimize the cost of
this regimen.
Our consultants also believe that ACE inhibitors are more similar than
different in terms of cardiac outcomes. In support of this argument, they note
that braded ACE inhibitors with better penetration into tissues (tissue ACEs)
might not necessarily confer better clinical benefits. In their view, the HOPE
(Altace), EUROPA (ACEON) and PEACE (Mavik) studies proved that it was not the
selection of a tissue ACE inhibitor that conferred superior clinical benefits,
but the underlying cardiac risk factor of the patients. In support of this
argument, they note that the best data was displayed in the HOPE study that
enrolled the highest risk patients while the EUROPA study enrolled more
moderate risk patients, thereby outlining more moderate clinical benefits. In
turn, the PEACE study failed since it included patients with low cardiac risks.
In summary, they do not expect that usage of ACEON will change significantly
due to the inclusion of the EUROPA study on the label, but note that head to
head studies would be required to prove that ACEON is superior to generic
versions of other, non tissue, ACE inhibitors.
MILESTONES
Source: Company reports
INVESTMENT THESIS
We assign a Hold/Speculative rating to the stock since we believe that the
stock should be fully valued at $30/share, meriting this rating given the
expected total return. In our view, Ranexa will be off to a slow launch since
it will be limited initially to the narrow market of refractory angina.
Currently, only 5-10% of all chronic angina patients are not adequately treated
by current therapies. However, since investors appreciate the challenges facing
the drug, expectations are reasonable. By year-end/early 2007, we expect that
the on going MERLIN study will prove that Ranexa is safe, thereby broadening
the label to the whole angina population. While this would be a positive, we do
not currently anticipate robust sales into the front-line population since
Ranexa has only shown symptomatic relief that will not be sufficient to unseat
the current standard of care. In our view, the stock is unlikely to post
significant near-term appreciation since we do anticipate that ACEON would
surpass our in-line with consensus sales estimates either. We would become more
positive with a robust Ranexa launch or if the ongoing MERLIN study also proves
Ranexa's activity in acute coronary syndromes (ACS), thereby further broadening
the label to another indication.
COMPANY DESCRIPTION
CV Therapeutics is focused on developing small molecule drugs for
cardiovascular diseases with unmet medical needs. CV Therapeutics has receive
approval of Ranexa for refractory chronic stable angina in January 2006 with
prominent warnings about modest elevations in QTc that theoretically could lead
to life-threatening arrhythmias. In addition to Ranexa, CVT also co-promotes
Solvay Pharmaceuticals's ACEON for the treatment of hypertension and stable
coronary disease using its 250 person cardiovascular sales force. Regadenoson,
partnered with Astellas, is a selective A2A-adenosine receptor agonist in phase
III development intended for use as a cardiac stimulating agent in myocardial
perfusion imaging studies. Tecadenoson is a selective A1-adenosine receptor
agonist in phase III trials for the conversion of rapid heart rate during
atrial arrhythmias. Rounding up the pipeline is CVT 6883, an adenosine A2B
antagonist, for asthma in phase I.
VALUATION
Our $30 target price is based on an average of two different valuation metrics:
1) 45x our discounted fully taxed 2010 EPS estimate of $0.93; and 2) 8x our
discounted EV-to-projected 2010 revenues estimate of $439 million. We use an
average of these two diverging valuation techniques to neutralize the effects
on any single parameter and obtain a more balanced view of the underlying value
of the business.
In our valuation analysis, we compare CV Therapeutics to a group of mid-cap,
emerging biotech companies. We use this particular group of comparables as
these stocks approximately reflect the range of multiples that the market has
been willing to attribute mid-stage companies in the period around their
product launch and preceding profitability.
Figure 1. Mid-Cap, Emerging Biotechnology Comparable Stock Group
Source: Citigroup Investment Research, First Call, FactSet
Our analysis suggests that investors typically attribute a 46x trailing P/E
multiple to the earnings during the second year of profitability (first year of
profitability by which we can comfortably value the company) to is group of
mid-cap biotech companies. In our valuation analysis, we use a 45x multiple to
our 2010 EPS estimate for CVT (second year of profitability) as we believe that
CVT should be allocated a similar multiple to its peer group. This valuation
technique suggests a $20/share price target.
We used a 25% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We apply a 25% discount rate to
unapproved products that have successfully completed clinical development with
solid data as outlined in a first call note titled "Visiting Valuation"
published on May 26, 2004.
We also employ an enterprise value-to-revenue multiple approach in valuating
mid-cap, emerging biotech companies since this technique allows the valuation
of stocks that have not yet achieved profitability. Once again, we argue that
CVT should receive an equivalent multiple to its peer group since we expect
that Ranexa will largely perform in line with expectations and do not see a
reason to apply a multiple that either exceeds or lags this of the group.
We thus assign an 8x EV-to-2010 revenue multiple (again, the second year of
profitability), in line with its peer group multiple. We also used a 25%
discount rate in this analysis. This valuation methodology represents a target
price of $40/share.
We used a 25% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We apply a 25% discount rate to
unapproved products that are in mid-clinical development with solid data as
outlined in a first call note titled "Visiting Valuation" published on May 26,
2004.
VALUATION METRICS
Source: Citigroup Investment Research
RISKS
We rate CV Therapeutics shares Speculative risk since the company's future
growth prospects are mainly dependent upon the successful development and
commercialization of Ranexa in stable angina and ACEON for hypertension and
stable coronary artery disease. Since these markets are highly competitive, CV
Therapeutics must successfully compete to establish these drugs in their
indications. Failure to do so could prevent the company from reaching
profitability.
In the following, we discuss the primary risk factors that could have a
material impact on the potential for the shares to achieve our target price:
Ranexa is approved with a narrow label for use in refractory stable angina, a
relatively small market. Since the angina market is highly competitive and
dominated by well-entrenched, generic drugs, Ranexa might be off to a slow
launch. While we believe that expectations are reasonable, the launch might be
more gradual than expected.
Ranexa label includes prominent warnings about a potential for modest increase
in QTc prolongation that can lead to life threatening arrhythmias. If patients
develop this side effect in commercial setting, this could detrimentally impact
the market potential of Ranexa.
The ongoing MERLIN study is also facing a high bar to show efficacy in acute
coronary syndromes. However, we believe that expectations are reasonable in
this regard.
The composition of matter patent on Ranexa expired in 2003, but several patents
have been issued on the sustained release formulation that will be used
commercially. In addition, method of use patents of sustained release Ranexa in
the treatment of angina will offer protection through 2019. There is always a
risk that these patents will be challenged. The two composition of matter
patents on Regadenoson and ACEON expire in 2009 and 2019, respectively.
CV Therapeutics is dependent on partner Astellas Pharma for the marketing of
Regadenoson if approved in 2007. Astellas is currently marketing Adenoscan, the
market leading myocardial perfusion imaging (MPI) agent. Adenoscan could face
generic competition in 2007 at approximately the same time when Regadenoson
could be launch. The entrance of generic competition could disrupt the dynamics
of the market and reduce its commercial value.
CV Therapeutics is dependent on outside contract manufacturers to produce their
products leaving the company exposed to lapses in quality control or
interruptions to the supply if these supply contracts are disrupted.
We project that CV will need to seek funding in late 2006 to finance ongoing
development of their pipeline. If market conditions at that time are not
favorable or CVT's financial outlook disappoints, attaining additional funds
might be difficult.
Given our Hold rating, there are several risks that could drive the stock to
outperform our rating. As a case in point, if Ranexa is used off-label, sales
might be higher than we predict. In addition, if the interim analysis of the
MERLIN study is positive in Q2, CVT could conceivably file an sNDA for an
expanded indication in 2006 instead of 2007, leading to significant stock price
increases.
If the impact of these risk factors is greater than we anticipate, shares may
have difficulty achieving our target price. Conversely, if these risks have
less of an impact than we envision, the stock may exceed our target price.
I, Yaron Werber, MD, research. |
