Citi: CVTX: Poor Ranexa Sales Continue - All Attention Turned To MERLIN
HOLD (2) Speculative (S) Mkt Cap: $569 mil.
August 3, 2006 SUMMARY
* CVT announced disappointing Q2 results tonight. Ranexa sales of $1.2M were below our $1.6M while ACEON sales were in line with our $0.8M. SG&A supporting Ranexa's launch was $81M, slightly below our $82M. Net loss was $73M or $1.59 per share vs our $74M or $1.64 per share.
* The conf call was not upbeat, as mgmt's responses left more questions than answers related to Ranexa's sluggish sales. Due to its exorbitant cash burn (op. exp. of >$330ME) and only $330M in cash on hand, we anticipate that CVT will have to draw down their equity line with Azimuth by YE.
* We do not see any meaningful catalysts to drive appreciation until release of data from the MERLIN study in early 2007. However, since the outcome of this study is tough to call, we would expect that the stock will likely remain in the $10-$14 range until the data is released. Over the near-term, we expect further weakness in the stock due to poor sales & high expenses.
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) ($0.29)
Price/Book Value (43.0x)
Revenue (12/06E) $47.2 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) (1120.6%)
Long-Term Debt to Capital(a) 103.7%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (8/2/06) $12.62
Rating (Cur/Prev) 2S/2S
52-Week Range $29.62-$11.92
Target Price (Cur/Prev) $16.00/$16.00
Shares Outstanding(a) 45.1 mil.
Expected Share Price Return 26.8%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 26.8%
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/05A Actual ($1.31)A ($1.43)A ($1.26)A ($1.65)A ($5.66)A
12/06E Current ($1.57)A ($1.59)A ($1.37)E ($0.99)E ($5.52)E
Previous ($1.57)A ($1.50)E ($1.39)E ($1.02)E ($5.48)E
12/07E Current NA NA NA NA ($3.64)E
Previous NA NA NA NA ($3.70)E
12/08E Current NA NA NA NA ($2.22)E
Previous NA NA NA NA ($2.26)E
First Call Consensus EPS: 12/06E ($5.86); 12/07E ($3.87); 12/08E ($1.45)
OPINION
After the market close, CV Therapeutics released their second quarter earnings
results. Top line results of $7 million were slightly lower than our estimate
of $8.2 million. The difference was due to lower Ranexa and collaborative
research revenues of $1.2 million and $4.9 million vs. our $1.6 million and
$5.7 million, respectively. ACEON sales were in line with our $0.8 million.
Operating expenses of $81 million were slightly below our $82 million.
Finally, the net loss for the second quarter was $73M vs our estimate of $74M.
In our view, Ranexa continues to show a slow start mainly due to the drug's
high price, modest benefit and low awareness. As such, we do not see any
meaningful catalysts to drive appreciation in the stock until release of data
from the MERLIN study in early 2007. However, since the outcome of this study
is very tough to call and current prescriptions trends do not stimulate
confidence in the long-term prospects for the drug, we expect the stock to
remain in the $10-$14 range until the outcome of MERLIN is known.
CVT will continue to invest in the sales and markeing efforts of Ranexa,
although the marginal return on investment is questionable. With its
exorbitant cash burn, the current cash of $331M will last approximately a year.
We anticipate that CVT will continue to draw down its equity line with Azimuth
Opportunity, especially as further investor scrutiny might continue to pressure
the stock towards the $10/share level under which the company will not be able
to access this financing vehicle. We remain concerned as this financing
vehicle is highly dilutive.
Also worth noting is the data from the second phase III trial of Regadenoson
expected to be released in the second half of 2006. However, it is largely
expected to be positive and is already accounted for in our financial model.
WHAT WE LIKED ABOUT THE CALL
Overall, the conference call left much to be desired, as the management's
answers created more questions than answers. In addition, the four-pronged
Ranexa sales strategy and pipeline update did little to boost our confidence in
the outlook for the stock.
ACCRUAL OF IN MERLIN STUDY IS COMPLETE
On the call, management noted that the 6,500 patients MERLIN study enrollment
is complete with final event related to cardiac death occurring this fall.
They plan to announce the results at the American College of Cardiology
Convention (ACC) in New Orleans in March of 2007.
The MERLIN study is a 6,500 patients study evaluating the activity of Ranexa in
acute coronary syndromes (ACS). We expect the stock to remain in the $10-$14
range until the outcome of Merlin is known. If Ranexa meets the primary
clinical endpoint, this could boost sales to the $500 million to $1 billion
range.
OPERATING EXPENSES AND CASH BURN CONTINUE TO BE HIGH
Operating expenses of $81 million related to Ranexa's launch continue to be
disproportional to the actual current sales levels suggesting that the company
is betting heavily that MERLIN will be successful. With the current expense
run-rate, spending is on track to be approximately $340 million in 2006, ahead
of the guidance of $310-$330 million. Moreover, on the call, management
outlined changes in the sales force, increased promotional and medical affairs
programs, and ramping up managed care efforts, all of which will significantly
contribute to the cash burn.
POSITIVE AWARENESS DOES NOT TRANSLATE INTO INCREASED TRIAL AND ADOPTION FOR
RANEXA
The management noted three important stages in the pharmaceutical adoption
model: awareness, trial and adoption. They stated that physician awareness
increased from 23% to 84% in a recent audit. Regarding trial, there were about
3000 Ranexa prescribers and approximately 9400 prescriptions as of first week
in July, translating into an average of three prescriptions per physician.
While the number of Ranexa prescribers (3000), which account for ~14% of
cardiologists in the U.S., was somewhat impressive, the total number of
prescriptions written (9400) was not, since this adds up to approximately one
prescription per month per physician since the Ranexa launch. This may be
telling us that adoption among the physicians is low, as physicians are not re-
prescribing the drug, or that physicians are not prescribing Ranexa in general.
SUCCESS WITH MANAGED CARE
On a positive note, the management stated that CVT signed a contract with one
of the largest companies, adding over 30 million covered lives and bringing to
total, 70 million cover lives. They surmised that about 90% of covered lives
have access to Ranexa and that coverage would translate into approximately 50
to 60 cents per day.
WHAT WE ARE WATCHING
RANEXA IS OFF TO A SLOW LAUNCH AS EXPECTED, BUT MERLIN WILL DETERMINE FUTURE
OUTLOOK
Continuing the disappointing trend from Q1, Ranexa launch is off to a slow
start due to modest physicians' awareness, high price, and modest clinical
benefit. Previously, in our note "Ranexa Off to Slower Than Expected Launch --
Reducing Estimates" published on June 23, we noted that sales were slower than
what we expected according to prescription trends and reduced our estimates for
Q2 and into the future. However, the quarterly sales were even more modest
than our reduced sales. While management cited that physician awareness and
experience with Ranexa has increased, they admitted that this has not
necessarily translated into increased adoption.
ALL EYES ARE TURNED TO MERLIN
While we continue to expect that Ranexa will be found to be safe, thereby
leading to label expansion to encompass all angina patients, we question
whether the drug will meet the primary composite endpoint in reduction of ACS
morbidity/mortality. In our view, expanding Ranexa's label due to a clean
safety profile will not be sufficient to drive sales to meet our long-term
sales estimates for this product.
In our view, if Ranexa fails to meet the primary endpoint of efficacy in the
trial, we would expect the stock to be weak, since the majority of investors
are looking at that trial as the single most important value driver for the
stock. Thus, we see little reason to have an over-weight position in this
stock at the present time, as we see more risk than reward over the near-term.
EXPECT MEANINGFUL DRAWDOWN OF AZIMUTH OPPORTUNITY EQUITY LINE AT HIGH DILUTIVE
COST
During the quarter, CVT drew down $20 million at a cost of 1.0M shares from its
$200 million potential equity line. Given that on a cash basis, CVT posted a
$73 million net operating loss, at the current spending level, the company has
4.5 quarters worth of cash on hand. In our view, CVT's guidance to post $310-
$330 million in operating expenses in 2006 is unrealistic given that if the net
operating expenses remain flat over the balance of the year, then the total
operating expenses will come in at about $340M. With the increasing spending
trends, we anticipate that CVT will increase their spending guidance during the
next quarterly earnings call.
We are concerned that CVT is continuing to expand their commercial force by
additional 30 full-time equivalents even though sales of Ranexa are marginal.
This level of spending lead us to anticipate that CVT will draw down their
equity line with Azimuth over the balance of the year and likely in Q3,
especially as the stock continues to move towards the $10/share level under
which the company will not be able to access this financing vehicle.
EXPECT STOCK TO CONTINUE FLUCTUATE BETWEEN $10 & $14 OVER NEAR-TERM
In summary, tonight's conference call left much to be desired and provided
little assurance than sales will increase materially by year-end. At the same
time, increasing levels of spending appear to be out of sync with the actual
commercial potential of the product based on the current label. This suggests
that management is betting the future of the company on the success of MERLIN.
Due to the slow launch, we remain concerned about whether our sales estimates
for Ranexa in 2006 and into the out-years are achievable.
MILESTONES
Source: Company reports
INVESTMENT THESIS
Our $16/share target reflects a slow uptake of Ranexa leading us to conclude
that the commercial opportunity is more modest than we originally projected.
Our target price supports our Hold/Speculative rating. In our view, Ranexa's
slow launch is due to the drug's narrow label for refractory angina
encompassing <5% of all chronic angina patients. Over the balance of the year,
we see little catalysts to change the recent trajectory of sales that could
change our opinion on the stock. In early 2007, we expect that the ongoing
MERLIN study in patients with acute coronary syndromes (ACS) 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 that this will
lead to a strong uptake in the front-line population since Ranexa has only
shown symptomatic relief that will not be sufficient to unseat the current
standard of care. We would become more positive on the stock only if Ranexa's
launch picks up steam or if the ongoing MERLIN study also proves that Ranexa
shows a clinical improvement in ACS, thereby substantially broadening the
label.
COMPANY DESCRIPTION
CV Therapeutics is focused on developing small molecule drugs for
cardiovascular diseases with unmet medical needs. CV Therapeutics has received
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 $16 target price is based on an average of two different valuation metrics:
1) 24x our discounted fully taxed 2010 EPS estimate of $0.62; and 2) 5x our
discounted EV-to-projected 2010 revenues estimate of $352 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.
We are valuing CV Therapeutics compared to a group of similar mid-cap, emerging
biotech companies based on forward P/E multiples (based on 2009 average peer
group P/E and EV/R multiples) applied to our projected 2010 revenues and fully
taxed, non-GAAP earnings projections. We employ 2009 P/E multiples since in 12
months' time, investors will be willing to attribute similar multiples to 2010
earnings. We then discount these by 2.5 years to mid-2007 to reflect our 12-
months target price.
Our analysis suggests that investors typically attribute a 25x forward P/E
multiple to the 2009 projected non-GAAP earnings of the peer group. In our
valuation analysis, we apply a forward P/E multiple to our 2010 EPS estimates
for CVT to reflect the multiples that investors will be willing to attribute on
a NTM basis. This valuation technique suggests a $9/share price target.
We used a 20% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We discount our 2010
projections by 2.5 years to account for the value in mid-'07 reflecting our 12-
months price target based on NTM forward multiples.
We also employ an enterprise value-to-revenue multiple approach in valuating
commercial stage biotech companies. Once again, we argue that CVT should
receive a multiple that is similar to that of its peer group of emerging, mid-
cap biotech companies.
We thus assign a 5x EV-to-2010 revenue multiple which represents parity to the
peer group. This valuation methodology represents a target price of $22/share.
We also applied a 20% discount rate over a 2.5 year period to this analysis as
noted above.
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 has been off to a slow
launch. Our sales estimates reflect this slow uptake. However, it is possible
that our projections might still under estimate the degree by which Ranexa's
high costs and modest efficacy might be a barrier to uptake.
Ranexa's 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. MERLIN is a 6,500 patient global study evaluating Ranexa's
ability to reduce the rate of angina, myocardial infarction, and death in an
acute coronary syndrome (ACS) populations.
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 2008. Astellas is currently marketing Adenoscan, the
market leading myocardial perfusion imaging (MPI) agent. Adenoscan could face
generic competition in 2007, approximately a year earlier than 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.
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.
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
ANALYST CERTIFICATION APPENDIX A-1
I, Yaron Werber, research analyst and the author of this report, hereby certify
that all of the views expressed in this research report ... |
