citi CVTX: Physician Checks At ACC Reveal Modest Awaress of Ranexa
HOLD (2)
Speculative (S)
Mkt Cap: $1,097 mil.
March 13, 2006 SUMMARY
* We attended the American College of Cardiology (ACC) meeting where CVT has launched its new anti-anginal drug, Ranexa. At the meeting, CVT sponsored a well-attended symposium on anti-anginal therapy and sponsored ads on shuttle buses announcing the recent approval of Ranexa.
* However, despite these efforts, we found only modest physician awareness of Ranexa and traffic into CVT's booth was light. This is leading us to re-affirm our view that Ranexa will be off to a gradual launch and is unlikely to materially surpasses our sales estimates.
* Over the next 2 wks, CVT will officially commence detailing efforts to the target 20,000 physicians in the top 5 deciles once marketing materials will be approved by FDA and after completion of national sales meeting.
* While we like risk/reward ahead of MERLIN data release in late '06/early '07, we would wait for material pullback to become more aggressive on stock.
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) $0.23
Price/Book Value NA
Revenue (12/06E) $76.3 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) (4420.4%)
Long-Term Debt to Capital(a) 97.4%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (3/13/06) $24.45
Rating (Cur/Prev) 2S/2S
52-Week Range $29.62-$19.48
Target Price (Cur/Prev) $30.00/$30.00
Shares Outstanding(a) 44.9 mil.
Expected Share Price Return 22.7%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 22.7%
OPINION
We attended the American College of Cardiology (ACC) meeting where CVT has
launched Ranexa for the treatment of chronic angina in patients who have failed
other products. As per its label, Ranexa should be used in combination with
beta blockers, calcium channel blockers, and nitrates. At the meeting, the
company hosted a well-attended symposium of current management of chronic
angina where the merits of Ranexa were discussed. In addition, CVT sponsored
ads on shuttle buses announcing the recent approval of Ranexa.
However, despite these ads and symposium, from numerous informal discussions
with practicing cardiologists we have found only modest awareness about Ranexa
and our periodic checks into CVT's booth on the exhibit floor uncovered only
light traffic. The modest awareness about Ranexa is not surprising given that
the company is in the early stage of this launch with a modestly sized sales
force of 250 reps facing the task of building awareness. At ACC, CVT also
hosted an analyst event where the company affirmed the notion that it expects a
gradual adoption of Ranexa by physicians.
Over the past two weeks, CVT's sales force has been detailing Ranexa to
approximately 1,000 physician thought-leaders and handed out several days'
worth of samples for this target group. Within the next 2 weeks, CVT is
planning on holding its national sales meeting after which the sales forces
will set out to target the 20,000 physicians who are in the top five deciles
that account for 50% of angina prescriptions. As part of the plans, this
target audience will receive enough samples to last patients 3 days. The
sampling program will include live samples as opposed to vouchers. Thus, these
samples will not be included in IMS Health reported prescription trends.
By the end of March, CVT marketing materials for Ranexa are also expected to be
approved by the FDA enabling the company to commence its full marketing
efforts. At the ACC meeting, CVT was not able to provide marketing materials
about Ranexa other than the product insert information. In our view, this also
somewhat detracted from the company's ability to use this venue as a launching
pad for Ranexa.
The fact that the company will not fully start marketing Ranexa until the end
of March along with modest awareness largely affirms our expectations that
Ranexa will be off to a slow launch and is unlikely to materially surpass
consensus sales estimates. Thus, all else equal, we would look for a
meaningful pullback in the stock to become more aggressive on the shares.
MARKET FOR REFRACTORY ANGINA IS RELATIVELY SMALL
At ACC, we also conducted several informal discussions with practicing
cardiologists to supplement routine checks that pre-date the conference. From
these discussions, we also learned that the vast majority of cardiologists
believe that only 5%> of their chronic angina patients are not adequately
addressed by current therapy and could benefit from Ranexa. The consistency of
these comments has compelled us to reduce the incidence of refractory angina
from our previous estimates of 10% to 7%.
We concede that 7% is somewhat higher than the 5%> estimate reported by
physicians in informal discussions. However, we have opted to keep this
estimate higher to remain conservative and account for the possibility that
larger numbers of patients will be found to be candidates for Ranexa once
active detailing efforts are underway. In addition, in our view, as physicians
become more comfortable using Ranexa, they are likely to use it slightly
earlier in the disease course.
RANEXA IS PRICED AGGRESSIVELY FOR THE INELASTIC REFRACTORY ANGINA MARKET
Currently, between 70-80% of chronic angina patients on beta blockers and ACE
inhibitors typically remain on the starting dose prescribed. As a result, CVT
largely expects that the vast majority of patients will receive the 500mg BID
dose of Ranexa routinely in their care and will not be titrated up to the
1,000mg BID dose. Thus, the company has opted to price Ranexa aggressively at
$5.50/day (this is higher than the $4-$5 daily price of highly effective
cardiovascular therapies such as Pfizer's Caduet and Bristol-Myers Squibb's
Plavix) since the refractory angina market is relatively inelastic and could
support this high price point.
Once reimbursement for Ranexa is established, we expect that patients will
likely need to pay $50 per month in co-pays that will correspond to the
projected 3rd tier placement in most formularies during the initial stage of
the launch. Over time, CVT hopes to be able to change the formulary placement
to 2nd tier corresponding to $30 co-pay per month.
In our view, this high price point could somewhat detract from uptake since
Ranexa has only shown symptomatic relief thus far in clinical studies. Thus,
many patients and physicians might be hesitant to reach for Ranexa given its
modest clinical benefit.
However, we believe that if Ranexa meets the primary composite endpoint of
reducing recurrent ischemia, myocardial infarction, and death in the ongoing
phase IIIb MERLIN study in acute coronary syndrome (ACS) when data is released
in late '06/early '07, then the price will be justified.
JURY IS OUT ON LIKELIHOOD OF MEETING PRIMARY ENDPOINT OF ACS IN ONGOING MERLIN
STUDY
Based on our checks, we believe that physicians are mixed in their views about
the prospects of Ranexa to meet the composite endpoint of reduction in
recurrent ischemia, myocardial infarction, and death in the ongoing MERLIN
study being conducted by the prestigious TIMI group. This study is currently
enrolling 6,500 patients with acute coronary syndromes (ACS) to receive
intravenous Ranexa during their inpatient treatment phase followed by oral
Ranexa during their outpatient follow-up period. Thus, this study is
evaluating Ranexa's ability to reduce cardiovascular events during the acute
phase as well as for secondary prevention during the chronic phase.
Since Ranexa has been found to be an effective anti-ischemic agent in previous
studies, there is optimism among physicians that Ranexa will meet the primary
objective of the study since the vast majority of events are expected to be
recurrent ischemia.
However, from our discussions we found that there are also several outstanding
concerns since Ranexa has not been studied for its ability to reduce myocardial
infarctions and death and is untested in acute settings. Physicians also point
out that the bar for success in the study is high since Ranexa will be used as
an adjunctive therapy on top of the standard of care. In the MERLIN study,
patients will receive a background regimen that is composed of various
combinations of aspirin, beta blockers, statins, ACE inhibitors, Plavix,
heparin, Angiomax, and glycoprotein IIb/IIIa inhibitors. This is eliciting
concerns over whether Ranexa will be able to further improve clinical outcomes
in this well treated population.
Based on Ranexa's profile in previous clinical studies, it is widely expected
that the MERLIN study will prove that Ranexa is safe, thereby driving label
expansion into the front-line chronic angina population. While this will
inevitably broaden the target population of the product, we do not believe that
Ranexa will be routinely used ahead of beta blockers and ACE inhibitors, drugs
that are associated with long-term outcomes benefits. Instead, it is possible
that Ranexa might compete with calcium channel blockers and long-acting
nitrates in patients who cannot tolerate these drugs.
However, in our view, Raenxa's high price, relative to the generic versions of
above mentioned drugs, might detract from usage in these patients. This is
leading us to believe that Ranexa is unlikely to materially surpass our sales
estimates, unless the drug yields an outcomes benefit in the ongoing ACS study.
CHANGES TO OUR MODEL
We have increased our projected annual price for Ranexa from $1,000 previously
after discounts and rebates to $1,600 since CVT has announced its plans to
price Ranexa at $5.50 per day at the low dose (500mg BID) or $2,000 per patient
per year. In our calculation, we are assuming a 20% provision for rebates and
discounts of the average wholesale price.
In addition, based on our discussions with physicians, we believe that the
refractory angina market represents 7% of all chronic angina patients, down
from our original forecast of 10%. In our view, while Ranexa will become the
dominant player in this market, we have modestly reduced our penetration
assumptions in the market due to Ranexa's high price that requires $30-$50 in
co-pays on a monthly basis.
We have also reduced our ACEON market penetration assumptions since the IMS
Health reported prescription trends suggest that ACEON sales are increasing
slower than we originally projected due to the inclusion of the EUROPA data on
the label. In our view, physicians are not differentiating between ACEON and
other generically available ACE inhibitors, thereby somewhat limiting the
impact of the label expansion on sales.
Source: CIR
MILESTONES
Source: Company reports
VALUATION
While we are making slight changes to our model, these are not sufficient to
change our target price. Our $30 target price is based on an average of two
different valuation metrics: 1) 45x our discounted fully taxed 2010 EPS
estimate of $0.96 (previously $0.93); and 2) 8x our discounted EV-to-projected
2010 revenues estimate of $4446 million (previously $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 $22/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 $38/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
Near-term market volatility and short-term trading patterns may cause the
expected total return to become temporarily misaligned relative to the hurdle
for this stock's fundamental rating, as defined under our current system.
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.
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% 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.
CV THERAPEUTICS QUARTERLY P&L ($MMS)
Source: CIR
CV THERAPEUTICS ANNUAL P&L ($MMS)
Source: CIR
CHRONIC ANGINA MARKET MODEL (OOOS)
Source: CIR
HYPERTENSION MARKET MODEL (OOOS)
Source: CIR
I, Yaron Werber, research analyst and the author of this report, hereby certify... |
