Merrill - it's kept its buy through quite a downslope:
OSI Licensed key diabetes franchise drug to Eli Lilly
OSI licensed its glukokinase activator program, including PSN010, which is in
Phase 1 trials for diabetes, to Eli Lilly for $25mn in upfront payments, $360mn in
potential milestone payments and low to mid-teens royalties on sales. In addition
to upfront cash and future milestones/royalties, the deal will also remove a
potentially significant source of future R&D spending, which should help drive
forward earnings growth. We continue to believe the Street does not give OSI
credit for the full value of Tarceva profits or its diabetes franchise, including the
underappreciated value of OSI’s royalties on sales of DPIV diabetes drugs
(Januvia, Galvus). Maintain BUY.
Expect low to mid teen royalties on PSN010
We expect OSI to receive low to mid teen royalties on sales of PSN010, assuming
the drug is approved. Because the drug is currently in Phase 1, approval is likely
to occur after 2010. However, a large portion of the milestones may be related to
clinical progress, which could be paid out over the next 3 years.
Outlicense will eliminate spending on PSN010, improve EPS
OSI will no longer have expenses related to the development of PSN010, which
was the company’s most promising and novel drug in the pipeline for diabetes. As
a result, this deal should help the company better manage its R&D expense line,
possibly by as much as $15mn - $30mn per year. Combined with winding down
spending on Macugen and continued expansion of Tarceva margins, we believe
OSI will be able to significantly ramp up profitability over the next 3 years.
Licensing Deal Limits Potential Acquirers
We believe the current licensing deal limits the number of potential acquirers of
the company. With the key diabetes program now controlled by Eli Lilly and
Tarceva primarily controlled by Genentech and Roche, the potential acquirers of
OSI should be limited to these companies. Importantly though, after recent stock
weakness, we believe the share price no longer reflects any acquisition premium. |
