Citigroup; CVTX: Q4 Uneventful, Setting Stage for Ranexa Launch
Yaron Werber, MD
yaron.werber@citigroup.com
Raymond Bower
raymond.bower@citigroup.com
HOLD (2)
Speculative (S)
Mkt Cap: $1,135 mil.
March 3, 2006
* CV Therapeutics reported Q4 financial results posting ($1.65) versus our ($1.47) and consensus ($1.40). Pre-launch Ranexa expenses were high.
* Ranexa commercialization plans are well underway and CVT expects that patients will pay co-pays of $30-$50 per mos in line with Tier 3 formulary status. The company will launch Ranexa at ACC next week and will initially provide 1,000 thought-leading cardiologists with several weeks of samples and 25,000 prescribers in the top 5 deciles with 3-day samples shortly thereafter.
* While CVT did not provide revenue guidance, operating expenses will reach $310-$330 million inclusive of $20-$25 million of option expenses in 2006.
* Management expects a slow launch of Ranexa as physicians gradually gain experience and add the drug to their practice. While we like the risk/reward ahead of release of MERLIN data in Q4:06/Q1:07, we would only get more aggressive on significant weakness.
FUNDAMENTALS
P/E (12/06E) NA
P/E (12/07E) NA
TEV/EBITDA (12/06E) NA
TEV/EBITDA (12/07E) NA
Book Value/Share (12/06E) $0.02
Price/Book Value NA
Revenue (12/06E) $69.0 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) NA
Long-Term Debt to Capital(a) 99.8%
(a) Data as of most recent quarter
RECOMMENDATION
Price (3/2/06) $25.52
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 17.6%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 17.6%
OPINION
CV Therapeutics reported Q4 earnings of ($1.65) versus our and consensus
($1.47) and ($1.40), respectively. The increased losses were due to higher than
expected expenses of $75.5 million versus our $73.0 million.
As expected, there were no royalties for the sales of ACEON this quarter. While
CVT reported that sales of ACEON had increased three fold in their core group
of 1,000 cardiologists, and scrips were trending upwards, they were still below
the threshold for overall sales to trigger a royalty from partner Solvay
Pharmaceuticals.
CVT management also discussed their launch plans for Ranexa, highlighting a
two-phase rollout strategy. The company plans to immediately start with their
core cardiologist group composed of the same 1,000 thought-leading, academic
cardiologists that are the focus for ACEON's detailing and as described above,
and provide them with samples that will allow patients to take the drug for a
few weeks without getting a script filled at the pharmacy. After a launch
meeting with the national sales force, which will immediately follow the
American College of Cardiology (ACC) meeting later this month, they will next
target the top 5 deciles of physicians with 3-day samples. At the ACC meeting,
CVT will sponsor a CME event on angina therapy featuring well-known
cardiovascular researcher Peter Libby, M.D. from the Brigham and Women's
Hospital in Boston. This will be the main event surrounding the launch of the
drug at the conference.
CVT is also in formulary discussions with managed care and noted that Ranexa's
$5.50/day costs is competitive given that angina patients cost the healthcare
system upwards of $25,000 per year, according to company market research.
Initially, however, most patients will need to pay third tier copays of $30-$50
per month to get the new drug. Management expects that the launch will build
gradually as physicians gain experience with the drug and slowly adopt in their
practice.
The company has chosen not to provide revenue guidance for 2006, but has
specified that expenses will be between $310-$330 million, inclusive of stock
options of $20-$25 million. These expenses are expected to be higher in the
front end of the year due to higher R&D and SG&A costs associated with ongoing
MERLIN study and launch of Ranexa and somewhat taper off in the back end. COGS
will be low initially as a pre-launch stockpile of Ranexa (that has already
been expensed) is consumed and then trend upwards over the course of the year
to a rate consistent with small molecule manufacturing and a high single digits
royalty to Roche.
We continue to be cautious on the launch of Ranexa, as our physician checks
suggest that symptomatic angina patients composed an estimated 5%-10% of all
angina therapies. However, given that this population has inelastic demand,
Ranexa's aggressive pricing might actually make the initial sales estimates
beatable.
We would look for significant weakness for an entry point into the stock given
that the risk/reward in front of the MERLIN study is attractive due to
appropriately low investor expectations in the acute coronary syndromes (ACS)
setting. However, if that trial is positive, we would see tremendous upside
from current levels.
CHANGES TO OUR MODEL
We have updated our model with YE 2005 data, and brought 2006 numbers into
alignment with guidance.
Source: CIR
MILESTONES
Source: Company reports
INVESTMENT THESIS
Our 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 10: Mid-Cap, Emerging Biotechnology Comparable Stock Group
Source: CIR, 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: CIR
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 target price. 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 analyst and the author of this report, hereby
certify... |
