Citi: November 2008 - 9 pages
CV Therapeutics Inc (CVTX)
Change in New Label Mostly in Line - Downgrading to Sell With Lower EPS
Due to High Expense Guidance/Debt Issues - TP Reduced to $9
* Conclusions - We are downgrading to Sell from Hold. New TP Target price
is $9 from $10 due to higher expense guidance for '09 and change Y
balance sheet issues. Now adding highly dilutive $100M equity Estimate
financing in 2011. We anticipate CVT to burn $120M in '09/'10 change Y
before becoming profitable in '11. But convertible debt
obligations amount to $190M by '12. New Ranexa label is mostly
in line and we are raising sales estimates that are offset by
higher expenses. Demand for Ranexa not clear given $0.9M-$2.8M
diff between IMS Rx and Q3 sales.
* Label Change - New label does include language on A1c
reduction and anti-arrhythmic property. But the A1c reduction
is "small" and Ranexa "is not indicated for diabetes". More
so, anti-arrhythmic property did not translate into any
outcome benefits. The prominent warning on QT prolongation
remains.
* Ranexa Sales/Inventory - Ranexa sales ($30M vs. Citi $28M)
were boosted by inventory stocking of $0.9M (diff between 8%
q/q Rx growth per IMS and 11% q/q wholesaler demand) to $2.8M
(diff between 8% q/q Rx growth vs. 18% q/q sales growth). This
builds on the $1.6M inventory stocking in Q2.
* '09 Guidance Disappointing - We are raising Ranexa sales
estimates due to '09 guidance that also calls for a higher net
loss vs. Citi (<$75M vs. Citi $48M loss). But given the
+15-20% y/y on expenses (excl. COGS), revs must also be higher
(~+50% y/y). But we still can't get to meaningful
profitability and 2012 fully taxed EPS are reduced from $0.72
to $0.63.
* Weak Balance Sheet - The balance sheet remains difficult
($270M projected YE '08 cash vs. $332M debt). CVT will likely
need further financing given spending levels despite our
optimistic projections that total revs will increase +166%
from 2008 to '12.
* New TP $9 - We reduced the '12 EPS discount rate from 20% to
15% now that the label is approved. With 20x (unchanged) $0.63
'12 fully taxed EPS, new TP of $9. Our new GAAP EPS ests for
2008E-'12E are ($1.52), ($1.33), ($0.54), $0.14 and $0.66 from
($1.40), ($0.75), ($0.04), $0.36 and $0.75, respectively.
Sell/Speculative 3S from Hold/Speculative
Price (06 Nov 08) US$10.50
Target price US$9.00 from US$10.00
Expected share price return 14.3%
Yaron Werber, MD
C h a n g e s t o O u r M o d e l
We have increased Ranexa sales and also increased operating expenses from
Q408 onwards. For 2009, we increase Ranexa sales from $131M to $173M
due to expanded label and also increase operating expenses for 2009 from
$229M to $295M taking into account guidance of 15-20% increase in
expenses due to marketing and sales for 1st line Ranexa. Overall the bottom
line net loss for 2009 has increased to ($85M) from ($48M).
We also model in payment of convertible debt of ($44M) in May 2010 and
($145M) in May 2012. We now add equity financing of $100M in 2011 @
$10/share.
Our new GAAP EPS ests for 2008E-'12E are ($1.52), ($1.33), ($0.54), $0.14
and $0.66 from ($1.40), ($0.75), ($0.04), $0.36 and $0.75, respectively.
Figure 1. CVTX Changes to Model
Source: Citi Investment Research
Figure 2. CV Therapeutics Quarterly P&L in millions
Source: Citi Investment Research
Figure 3. CV Therapeutics Annual P&L, in millions
Source: Citi Investment Research
C V T h e r a p e u t i c s I n c
C o m p a n y d e s c r i p t i o n
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 and 1st line angina in November 2008 but the prominent warnings about
modest elevations in QTc remain. Ranexa's label now includes a small impact
on A1c in diabetes but the drug is not indicated for diabetes. The modest
reduction in arrhythmias did not correlate with any outcomes benefits.
Lexiscan, partnered with Astellas, is a selective A2A-adenosine receptor
agonist intended for use as a cardiac stimulating agent in myocardial
perfusion imaging studies. Lexiscan was approved in 2008.
I n v e s t m e n t s t r a t e g y
We now rate the shares of CVTX Sell/Speculative (3S). Our $9 target price
reflects: 1) acceleration of sales of Ranexa due to the new label but these
are offset by higher expenses; 2) significant balance sheet issues with
ongoing cash burn, need to pay back convertible debt and raise equity at
unattractive terms; 3) royalties on sales of Lexiscan (CVTX will receive ~20%
royalty rate from Astellas) and on sales of Ranexa (ex-U.S). In our view,
despite Ranexa's new 1st line angina label, sales will not be enough to drive
meaningful profitability given high operating expenses and weak balance
sheet. More so, Ranexa is very expensive and offers incremental efficacy.
Older generic drugs are well-entrenched in this market and Ranexa is facing
an uphill battle.
V a l u a t i o n
Our $9 target price is now based on a 20x multiple of our fully taxed 2012
fully taxed GAAP EPS estimate of $0.63.
We then discount this multiple by two years to reflect our forward PE
multiple based on our 12-month target price. We use a 15% discount rate
(was 20%).
A 20x P/E multiple is a discount to the historical low/mid 40s multiple for
promising new drug launches during their 2nd year of profitability. This
discount is justified since Ranexa is not as promising and given recent
multiple contraction in the group relative to historical valuations.
R i s k s
We rate the shares Speculative risk since the company's future growth
prospects are mainly dependent upon the successful development and
commercialization of Ranexa in angina. Thus far, Ranexa has disappointed.
Failure to capture significant market share based on the new label could
prevent the company from reaching profitability.
Several risks could drive the stock to materially outperform our target
price. As a case in point, if positive safety data from MERLIN drives
increased market penetration in 1st-line chronic angina, Ranexa sales might
be higher than we predict. In addition, if Lexiscan exceeds our estimates,
there could be an upside to the stock.
Appendix A-1
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