citi: CVTX: More Shares, More Shareholder Dilution - Reducing Target Price
HOLD (2)
Speculative (S)
Mkt Cap: $460 mil.
August 17, 2006 SUMMARY
* CVT announced earlier this week that its plans to sell 9M of its shares in a public offering for $9.50/share, raising a total of $85.5M. In addition, the underwriters Lehman Brothers and Merrill Lynch have been granted a 30 day option to buy up to 1.35M additional shares to cover over-allotments.
* This transaction will dilute shareholder value by 20% while raising only a quarter's worth of cash. Current cash total of 416M will last approx. 5Qs, and CVT will to raise additional capital in H2:07, by our estimation.
* Recall that CVT has $400 million in convertible debt and the ability to meet the annual interest rate payments (~$11M) related to these bonds will be important, especially with the high cash-burn and the need for additional financing.
* Despite no meaningful near-term catalysts and poor Ranexa sales prospects, we maintain a Hold due to a substantial upside in the stock if Merlin is positive, although the outcome is tough to call. We are reducing our TP to $12 from $16.
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) ($0.27)
Price/Book Value (37.4x)
Revenue (12/06E) $47.2 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) (1123.0%)
Long-Term Debt to Capital(a) 103.6%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (8/17/06) $10.21
Rating (Cur/Prev) 2S/2S
52-Week Range $29.62-$9.75
Target Price (Cur/Prev) $12.00/$16.00
Shares Outstanding(a) 45.1 mil.
Expected Share Price Return 17.5%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 17.5%
OPINION
Earlier in the week, CVT announced its plans to sell 9M of its shares in a
public offering for $9.50/share, raising a total of $85.5M. In addition, the
underwriters Lehman Brothers and Merrill Lynch have been granted a 30 day
option to buy up to 1.35M additional shares to cover over-allotments.
The announced transaction will dilute shareholder value by 20% while only
raising a quarter's worth of cash at the current expenditure levels.
In our note, "Poor Ranexa Sales Continue -- All Attention Turned to Merlin," we
previously conjectured that the company would likely draw down their equity
line with Azimuth in Q3, especially as the stock continued to move towards the
$10/share level under which the company will not be able to access additional
funds from this agreement. In our view, CVT's current cash position of $416M
will last approximately 5 quarters, suggesting that additional financing are
likely in H2:07. The fact that CVT decided to tap into the public markets
instead of drawing down on its equity line with Azimuth also supports our view
that further financing are likely in the future.
Recall that CVT has $400 million in long-term debt in the form of convertible
debt. While the first set of convertible bonds do not mature until 2012, the
ability to meet annual interest rate payments (~$11M) related to these bonds
will be important, especially with the high cash-burn and the need for
additional financing.
Despite no meaningful near-term catalysts and poor Ranexa sales prospects,
positive results from Merlin will lead to a significant upside in the stock,
although the outcome is tough to call. If the outcome is negative, however,
the stock could have a substantial downside. A negative outcome could also
provide difficulties for the company to raise additional financing, further
jeopardizing CVT's ability to meet its debt obligations over the long-term.
We are maintaining our Hold rating and reducing our target price to $12 from
$16.
VALUATION
We are reducing our target price to $12 from $16. Our $12 target price is
based on an average of two different valuation metrics: 1) 20x our discounted
fully taxed 2010 EPS estimate of $0.54 (previously $0.62); and 2) 4x 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.
Previously, we applied a forward P/E multiple 24x 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 suggested a $10/share price target.
However, we feel that this comparable assignment is no longer justifiable,
given disappointing Ranexa sales, CVT's flagship product, uncertainty
surrounding the pivotal MERLIN outcome and probability of further dilutional
events. Therefore, we assign a 20x, which represents a discount to the peer
multiple and reflects more accurately the current systematic and non-systematic
valuation risks of CVT. This methology implies a $7/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. Previously, we assigned a 5x EV-to-2010
revenue multiple which represents parity to the peer group and suggested a
target price of $22. However, we feel that this comparable assignment is no
longer valid, given similar reasons in the P/E multiple analysis mentioned
above.
Therefore, we assign a 4x EV-to-2010 revenue multiple which represents a
discount to the peer group multiple. This methodology yields a target price of
$17.
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 additional funding in late 2007 to meet
its convertible debt obligation and operating expenses. If market conditions at
that time are not favorable, CVT's financial outlook disappoints, or the
outcome in MERLIN is negative, 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.
INVESTMENT THESIS
Our $12/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 the outcome of the
ongoing MERLIN study in patients with acute coronary syndromes (ACS). The
results could 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.
I, Yaron Werber, research analyst and the author of this report, hereby certify
that all of the views expressed in this research report accurately reflect my
personal views about any and all |
