j. birchenough, barclays; 2009 outlook
Acadia Pharmaceuticals ACAD US$ 1.20 08 Jan 2009 1-Overweight / 2-Neutral
Amgen Inc. AMGN US$ 59.26 08 Jan 2009 1-Overweight / 2-Neutral
Amylin Pharmaceuticals AMLN US$ 11.76 08 Jan 2009 2-Equal weight / 2-Neutral
Arena Pharmaceuticals ARNA US$ 4.05 08 Jan 2009 2-Equal weight / 2-Neutral
ARIAD Pharmaceuticals ARIA US$ 1.21 08 Jan 2009 1-Overweight / 2-Neutral
Array BioPharma Inc. ARRY US$ 4.40 08 Jan 2009 1-Overweight / 2-Neutral
Biogen Idec BIIB US$ 47.95 08 Jan 2009 2-Equal weight / 2-Neutral
Cardiome Pharma Corp. CRME US$ 5.35 08 Jan 2009 2-Equal weight / 2-Neutral
Celgene Corp. CELG US$ 51.11 08 Jan 2009 1-Overweight / 2-Neutral
Cephalon Inc. CEPH US$ 77.60 08 Jan 2009 1-Overweight / 2-Neutral
CV Therapeutics CVTX US$ 9.33 08 Jan 2009 1-Overweight / 2-Neutral
Genentech Inc. DNA US$ 84.40 08 Jan 2009 1-Overweight / 2-Neutral
Genomic Health GHDX US$ 19.18 08 Jan 2009 2-Equal weight / 2-Neutral
Genzyme General GENZ US$ 65.69 08 Jan 2009 1-Overweight / 2-Neutral
Gilead Sciences GILD US$ 48.87 08 Jan 2009 2-Equal weight / 2-Neutral
Human Genome Sciences HGSI US$ 2.01 08 Jan 2009 2-Equal weight / 2-Neutral
Isis Pharmaceuticals ISIS US$ 14.01 08 Jan 2009 1-Overweight / 2-Neutral
NPS Pharmaceuticals NPSP US$ 6.35 08 Jan 2009 2-Equal weight / 2-Neutral
Onyx Pharmaceuticals ONXX US$ 36.40 08 Jan 2009 1-Overweight / 2-Neutral
OSI Pharmaceuticals OSIP US$ 39.06 08 Jan 2009 2-Equal weight / 2-Neutral
Regeneron Pharmaceuticals REGN US$ 18.28 08 Jan 2009 1-Overweight / 2-Neutral
Rigel Pharmaceuticals RIGL US$ 8.50 08 Jan 2009 1-Overweight / 2-Neutral
Synta Pharmaceuticals SNTA US$ 6.93 08 Jan 2009 1-Overweight / 2-Neutral
Theravance Inc. THRX US$ 13.64 08 Jan 2009 2-Equal weight / 2-Neutral
United Therapeutics Corp. UTHR US$ 65.47 08 Jan 2009 1-Overweight / 2-Neutral
ZymoGenetics Inc. ZGEN US$ 3.09 08 Jan 2009 2-Equal weight / 2-Neutral
January 12, 2009
Biotechnology
Industry Overview
Stock Selectivity After YE08 Rebound
Sector View:
New: 2-Neutral
Old: 2-Neutral
Investment Conclusion
We are maintaining our 2-Neutral rating on the US Biotechnology sector early in 2009 and suggesting stock selectivity weighted to mid
cap growth in 1H09. Following late 2008 recovery from an oversold position in large cap biotech in particular we believe that the group is
fairly valued and should trade more in line with the broader indices over the course of 2009. Investor feedback early in the year suggests
less focus on market sentiment and greater focus on fundamentals around key events which should create a better environment for
investment. To that end our top investment ideas for 2009 are CELG, GENZ and AMGN on the large cap side, ONXX, CEPH and UTHR
on the mid cap side and RIGL, ISIS and CVTX on the small cap side. From a trading perspective we believe that an opportunity may exist
for depressed value small caps with strong balance sheets as well although these seem to be few and far between
Summary
?? US Biotechnology stocks outperformed the broader indices in 2008 with the BTK down -17.5%, -12.3% and -17.7% for the most recent 3,
6 and 12 month periods as compared to the S&P which was down -22%, -29% and -38.5% respectively over the same time periods. As
can be seen, outperformance narrowed as the year progressed and at this point we expect the large cap group to largely track the S&P
for the balance of 2009. With valuation gaps developing into 4Q08 operating results we continue to prefer GENZ and AMGN at 11-13x
2009 EPS over GILD at 22x 2009 EPS and believe that the multiple contraction to 22x 2009 EPS for CELG is overdone given the
prospects for double the EPS growth at 40% and a long term CAGR of 30-35%. DNA minority shareholder buyout prospects by Roche
appear to have improved with better credit markets and we continue to believe that a price bump from the original $89 bid is appropriate
given option value to Avastin adjuvant and other potential pipeline opportunities. While shares of BIIB have held up relatively well as the
trade from high multiple to low multiple stocks has played out across the Street, we continue to expect a decline in Tysabri new patient
starts, continued sensitivity of Tysabri trends to new PML cases and inevitable new PML cases to weigh on BIIB shares over the course
of 2009.
?? Within the mid cap biotech group, we continue to prefer ONXX, UTHR and CEPH over OSIP, AMLN and THRX given prospects for
superior growth and potential catalysts in 2009. While ONXX will likely be constrained by Bayer from issuing firm guidance on its 4Q08
call we believe that Consensus estimates of $1.00 are too conservative and that EPS of $1.65 to $2.00 is achievable on JV OPEX of
$540M to $600M with potential for significant margin expansion and option value on mid year melanoma data. OSIP on the other hand
has virtually no forecast topline growth, no likely room for further margin expansion, limited opportunity for label expansion and significant
competitive risks from Zactima Zephyr study, Erbitux approval, Iressa EU relaunch with likely SATURN survival failure. UTHR continues
to grow its base Remodulin IV business supporting a 25% revenue CAGR through 2010 with upside potential to inhaled Remodulin
approval in April and oral formulation success longer term. AMLN, on the other hand, continues to see flat trends for Byetta, a no-win
situation into liraglutide PDUFA and significant regulatory and commercial risk to weekly LAR formulation. CEPH is approaching an
accelation of Treanda trends with multiple potential catalysts for Nuvigil, Actiq and pipeline while THRX is expected to have a slow launch
for telavancin with relative data drought in 2009 from NGA. Small cap cash positions remain an issue with partnerships as key potential
catalysts for CVTX and RIGL
January 12, 2009
Biotechnology
Industry Overview
Stock Selectivity After YE08 Rebound
Sector View:
New: 2-Neutral
Old: 2-Neutral
Americas
Healthcare
Biotechnology
LARGE CAP BIOTECH
Amgen (AMGN 1-Overweight, Sector 2-Neutral)
AMGN has re-emerged as a product growth story with stabilization of ESA sales trends, less restrictive final labeling than expected for
Aranesp in cancer and with positive fracture data for denosumab in phase III FREEDOM study in women with post-menopausal
osteoporosis (PMO). Further upside potential exists from denosumab in cancer as well as pipeline progress highlighted at the recent
Business Review Meeting.
Key Opinions
• Concerns regarding 4Q08 operating results appear over-done given poor correlation between IMS prescription data and actual results
in recent quarters – AMGN has recently highlighted poor historical correlation between actual sales and IMS trends specifically for
Aranesp, Neulasta and Neupogen and continues to suggest stabilizing ESA trends – we expect inline 4Q08 results
• Consensus estimates for flat EPS growth in 2009 appears appropriately conservative given challenges to topline growth in the US but
is likely to be exceeded given continued ex-US growth, OPEX flexibility and potential pricing leverage – expect EPS guidance of $4.75-
5.00
• Recent Business Review Meeting highlights P&L flexibility with significant pricing leverage for legacy products, OPEX cushion and
balance sheet strength allowing for aggressive share repurchase – while guidance has yet to be provided for 2009 we expect at least
10% EPS growth with further expense rationalization and R&D investment likely to reduce to 18% of product sales.
• Final labeling for Aranesp in cancer was better than expected in our opinion with no cancer specific limitations, no absolute contraindication
to use in earlier stage I-II patients with curative intent and in particular with physician discretion maintained at Hgb levels
>10g/dl to avoid transfusion – while AMGN has highlighted potential downside risk to restrictions on patients with curative intent we
believe that the definition remains vague and is unlikely to incrementally impact current prescribing habits.
• While AMGN has recently suggested that it will not pursue a reconsideration of the restrictive CMS National Coverage Decision (NCD),
the reimbursement policy remains out of step with current clinical practice guidelines as well as final FDA labeling and should ultimately
be revised – with 60% loss in Aranesp sales we do not believe that a termination threshold of 10g/dl is sustainable and expect oncology
groups to continue to push for greater physician discretion.
• The recent decision by United Health to maintain existing ESA reimbursement guidelines allowing physician discretion in the disputed
Hgb range of 10-12g/dl suggests upside potential to current concerns regarding broad ESA restrictions – we would note in particular
details in the United Health decision that would suggest that private payers may not be prepared to follow further FDA labeling
restrictions and recent CMS actions.
• Full detail of phase III FREEDOM study for denosumab in post menopausal osteoporosis (PMOP) was better than expected and
suggests an approvable drug with significant commercial differentiation – feedback from physicians at ASBMR suggests that superior
mode of delivery to Reclast, potential lower acquisition cost burden, favorable side effect profile and potency at the hip should
differentiate favorably – 68% fracture risk reduction at the L-Spine is at the high end of the 50-70% range for bisphosphonates and the
0.7% 3-year fracture rate at the hip is unprecedented and below that expected for normal age matched controls.
• Upcoming phase III data for denosumab in preventing skeletal related events (SRE) in patients with bone metastases should
demonstrate a favorable trend over Zometa given prior positive head-to-head data in phase II and mechanistic advantages.
• Recent data at ASCO for denosumab in Giant Cell Bone Cancer as well as competitor data from Zometa in metastatic breast cancer
should lend support for both a direct anti-tumor effect of denosumab as well as support for the importance of the bone
microenvironment in cancer metastases – more recent data publication suggesting a critical role for RANK in seeding of bone
metastases and a potential anti-VEGF role for denosumab provides further support for an anti-cancer role for denosumab
• Vectibix could re-emerge as a major competitor to ImClone’s Erbitux with recent attention on KRas testing as a guide to greater drug
activity and with results from 2 phase III CRC trials expected in late 09/early 2010.
• Further pipeline visibility is expected in 2009 with data expected from phosphate binder AMG-223, asthma drug AMG-317,DPP-IV
inhibitor AMG-222, VEGF multi-kinase inhibitor motesanib and a novel TRAIL antibody for cancer – we believe that AMGN has one of
the deepest pipelines in biotech and with recent success of denosumab and Nplate should start to command a greater premium
multiple for its pipeline, more in line with peers like DNA.
Biogen IDEC (BIIB 2-Equal weight, Sector 2-Neutral)
BIIB fundamentals remain weak with flat prescription trends for Avonex, expected loss of EU Rituxan contribution beginning in 2009 and
with re-emergence of PML cases for Tysabri – Prospects for further PML cases are expected to weigh on BIIB shares in the near term
• With BIIB making the decision to remain independent and reiterating guidance for a 15% revenue CAGR, 20% EPS CAGR, 4 new
product approvals and 100,000 patients on Tysabri, we believe that significant fundamental risk exists to BIIB meeting these high
expectations
• While 3Q08 results came in ahead of Consensus estimates we believe that slowing Tysabri new patient starts to 215/week from
438/week will make continued outperformance difficult – we believe that September Tysabri trends may not yet reflect true impact
of recent confirmed PML cases and expect further slowing through YE08
• Future Rituxan growth remains challenged with saturation of its primary NHL market and with safety issues in rheumatoid arthritis
limiting the drug to a niche role – while there has been some suggestion of Rituxan expansion in autoimmune disorders we believe
that anti-Rituxan antibodies and concerns regarding PML will severely limit adoption of the drug
• Expiration of EU royalty rights with Rituxan will begin in 1H09 and likely proceed over a period of 12 months with some of the
largest countries dropping out first– given dependence of BIIB growth on ex-US trends we view this as a significant under
appreciated challenge to growth beyond 2008
• With Tysabri as the remaining growth driver for BIIB we remain concerned regarding 2 recent cases of confirmed PML in Europe
as well as 1 new case in the US– With > 24 suspected cases reported since launch we believe that at least 1 new case per month
is being worked up for PML and expect an increase in suspected cases, greater scrutiny of existing patients on Tysabri and more
tentative initiation of new patients to result from the recent confirmed cases in Europe – Neurology consultant feedback suggests
that new patient starts will likely dramatically decline in the near term
• Immune reconstitution syndrome following plasmapharesis in 1 of 3 recent confirmed cases of PML suggests a further concern in
patients treated for suspected cases of PML highlighting risk beyond the PML itself – we understand that in recent conference calls
concerning confirmed PML that immune reconstitution syndrome was a key focus and as such expect this to be an issue ahead
• Pipeline prospects remain questionable following failure of baminercept for RA and with emerging competition to Lixivaptan in
patients with hyponatremia
Celgene (CELG 1-Overweight, Sector 2-Neutral)
CELG retains multiple drivers of long term earnings growth with continued frontline penetration of Revlimid in Myeloma, global expansion of
Revlimid and Thalomid and following recent failure of Vidaza competitor Dacogen in MDS
• Expect inline 4Q08 results based on historical bump in 4Q08 iMID trends with 2009 EPS guidance likely in the range of $2.20 vs
$2.29 Consensus – below Consensus guidance appears baked in but 40% potential EPS growth is not reflected by a 22x multiple,
in our view
• Potential drivers of future growth include possibility for Revlimid frontline market share expansion in the US beyond its current 25%
level, extended Revlimid dosing duration beyond the average 9.5 month level, EU market expansion with early launch restricted to
75% of the addressable market, Thalomid launch in Europe, Vidaza survival data label amendment in the US and EU Vidaza
approval with 10 year orphan protection
• Revlimid utility as a maintenance agent is gaining broader acceptance as successive data publications highlight improving
response rates beyond a year of continuous therapy, with a doubling of initial responses after 2 years of dosing – maintenance
data expected in 2009 could provide further impetus for extended Revlimid use following stem cell transplant
• VISTA data for Velcade is unlikely to adversely impact Revlimid opportunity in frontline Myeloma given relative barrier of twice
weekly infusion – hematologist feedback suggests that high CR rates from Velcade merely reinforced existing beliefs and should
continue to niche the drug in the smaller opportunity of younger patients considering stem cell transplant (SCT) while leaving the
larger elderly, non-transplant opportunity for Revlimid
• Recent failure of Vidaza competitor Dacogen in the large EORTC sponsored phase III MDS trial should give CELG dominant MDS
market share in the US and market exclusivity in the EU – we have recently raised our peak sales estimates for Vidaza to $750M
from $428M and would suggest further upside potential in the event of MDS market expansion
Genentech (DNA 1-Overweight, Sector 2-Neutral)
The proposed minority shareholder buyout by majority shareholder Roche has created a risk arbitrage opportunity where an initial bid of $89
appears inadequate, where a $120 bid may better reflect future growth prospects for DNA and where historical precedent would suggest fair
value and a final agreement at $105 assuming an equitable negotiation – while credit market conditions increase funding risk we believe
that Roche has access to debt markets and can raise sufficient funds to complete the transaction
• We believe that Roche’s proposed $89 bid for remaining DNA shares is inadequate when considered against historical acquisition
premiums in biotech, past minority shareholder buyouts and given potential for significant earnings accretion for Roche at higher
price points and given considerable option value in 2009 from key pipeline events
• With growth re-emerging for Avastin in mBC and with several key label expansion opportunities ahead for Avastin in adjuvant CRC
as well as HRPC we believe that a premium valuation could effectively be argued for
• Positive RIBBON-1 data should eliminate any doubt regarding the benefit of Avastin in Her 2- metastatic breast cancer (mBC) and
should support further frontline penetration beyond the current 40% level
• Assuming an equitable negotiation process between Roche and independent board members representing DNA minority
shareholders we believe that a compromise offer of $105 could be reached that would better value DNA business prospects and
retain earnings accretion for Roche
• From a fundamental perspective we would note that a $105 bid by Roche would represent a 35% premium to the average 30-day
closing price prior to the original bid, an 8.5x sales multiple and a 50% premium to our NPV estimate of $70 and would be at the
lower end of historical biotech acquisition premiums
• Independent analysis by our risk arbitrage research team has suggested an average price bump of 17% in prior minority
shareholder buyouts across various sectors and suggested improvement in terms to $104-106
• Ultimately we believe that Roche will be motivated to complete a transaction prior to final adjuvant CRC data expected in mid 2009
and risks substantial disruption with its relationship with DNA employees if the process drags on too long
• While credit market conditions remain difficult overall and feedback from our Barclays Capital Healthcare Credit analyst suggests
that deal financing may have to wait until 1H09 we believe that Roche will need to provide a counter offer to avoid further
disruption with DNA employees
• With roughly $4.00 in EPS forecast for 2009 and with peers like GILD trading at 22x we believe that a premium multiple for DNA is
appropriate and assess downside support at roughly $88 per share assuming a 19x multiple
Genzyme (GENZ 1-Overweight, Sector 2-Neutral)
Most focus remains on Myozyme 2000L manufacturing approval in the US and potential for 4000L scale approval in Europe – Despite the 3-
month PDUFA extension we expect full approval on February 28th with a resultant step function on Myozyme sales
• Flat product trends in 3Q08 were seasonal and more pronounced than peers given greater ex-US exposure and impact of EU
summer holiday schedule on enzyme therapeutic dosing
• Attractively valued at 13.5x 2009E EPS vs. 15.5x 2009E EPS for peers growing at a much lower rate and current guidance for 5-
year EPS CAGR of 20% more credible than for peers like BIIB, in our view
• Cerezyme model of growth likely to be replicated with Fabrazyme and Myozyme and management seems sensitive for need to
provide better visibility - with 150 patients currently receiving free Myozyme under MTAP we do believe that a step function in
Myozyme sales will be a driver once manufacturing issues are resolved
• Positive recommendation for approval of Myozyme 2000L for adult onset patients along with likely mid year EU approval of
Myozyme 4000L should support 550 incremental patients in 2009 with resultant sales increase of $180M from $306M to $488M
• Mixed vote from CRDAC panel on pre-dialysis phosphate binder use is likely to result in qualified label expansion for stage IV
patients but unlikely to impact existing practice guided by KDOQI recommendation for stage III and IV patients
• Approval of Renvela provides a more attractive option for off-label pre-dialysis stage III/IV use with lower propensity for metabolic
acidosis which can compound renal osteodystrophy – we expect Renvela to roughly double GENZ phosphate binder sales given a
comparable opportunity with 300,000 stage IV patients
• Updated 3-year Campath data in MS with 70%+ reduction in relapses and accumulated disability and actual improvement in mean
disability represents major competitive threat for BIIB particularly given less onerous monitoring – we expect completion of phase
III enrollment by YE08 with potential 1-year data by YE09
• Mipomersen opportunity remains under estimated given the potential for premium pricing and access to a broader high risk lipid
population than currently assumed under HoFH development
Gilead Sciences (GILD 2-Equal weight, Sector 2-Neutral)
While the recent sell-off in GILD shares may appear to be a more attractive entry point for biotech investors, we continue to believe that on
a relative basis GENZ, CELG, DNA and AMGN offer more compelling opportunity particularly given maturing of GILD’s HIV franchise
• While GILD shares have been under pressure during recent market turmoil, we would note that the company still trades at a
premium to our $30 NPV estimate and relative to peers continues to trade at a premium
• Better than expected results in 3Q08 are encouraging; however, given lumpiness of HIV sales we are not yet convinced that optout
screening and abacavir switching will have a sustainable effect at driving topline growth – recent changes to DHHS guidelines
supporting tenofovir as a preferred agent and abacavir as an alternative should further entrench Truvada and Atripla as frontline
standards of care but are unlikely to impact existing patients on treatment
• HIV sales growth in Europe is likely to continue although we estimate incremental sales potential of only $350M as compared to
Consensus estimates of $425M in incremental growth by 2010 – With patient numbers less than half that identified in the US and
with a higher rate of anti-retroviral use in Europe already we believe that market share gains remain the sole vehicle for EU growth
• Letairis launch has been slower than expected and with a run rate in 3Q08 of $120M we believe that Consensus estimates for
$250M in 2009 may prove aggressive – lagging market share of only 25% in newly diagnosed patients suggests that competitor
Tracleer remains the ETRA of choice and new data will likely be required to gain preferred status with pulmonologists
• Pipeline investment appears inadequate with only 12% of sales invested in R&D and with only 10 clinical candidates as compared
to 42 with Amgen – overall pipeline is relatively early stage with limited diversification away from the anti-viral space
MID CAP BIOTECH
Amylin Pharmaceuticals (AMLN 2-Equal weight, Sector 2-Neutral)
We expect AMLN share price performance to continue to lag peers on renewed pancreatitis concerns – we believe that weakness has been
warranted given clear association between Byetta and pancreatitis, specific FDA concerns regarding severe cases of hemorrhagic
pancreatitis, potential for blackbox warning and inevitable impact on Byetta prescriptions as well as exenatide LAR regulatory risk
• Flat sales trajectory for Byetta likely to continue given PCP hesitancy, DPP-IV competition and limitations of positioning for weight
loss on long term compliance – absence of traction with intensified sampling, new messaging and direct to consumer (DTC)
advertising highlights the barrier at the PCP level, likely driven most by time/resource constraints around education for new
products/injectables
• Recent FDA advisory regarding 6 severe cases of hemorrhagic pancreatitis with 2 patient deaths likely to further increase PCP
tentativeness around Byetta prescribing and could result in actual decline in prescription trends – recent IMS prescription data
suggests early signs of decline in new prescriptions (NRxs)
• Recent monotherapy data suggesting HbA1c reduction of 0.7-0.9% unlikely to position Byetta favorably against 1.4% reduction
described in the metformin label – potential blackbox warning regarding pancreatitis risk is likely to further blunt any monotherapy
impact and risk remains to monotherapy approval given heightened FDA concern regarding pancreatitis risk – we believe that
likelihood of monotherapy approval in 1H09 is <50%
• HbA1c lowering of 1.9% demonstrated with Exenatide LAR in DURATION-1 is difficult to generalize given outlier result with Byetta
BID 1.5% HbA1c reduction – ultimately Exenatide LAR data appear to position the drug no differently than current positioning of
Byetta BID with preferential use in refractory patients with HbA1c >9%
• Recent NIH diabetes study results suggesting a 3/1000 patient year excess risk of death with intensive blood sugar lowering in
those at higher cardiovascular risk could further temper primary care physician (PCP) enthusiasm for aggressive blood sugar
lowering with exenatide LAR
• FDA unlikely to maintain line extension designation for Exenatide LAR given differential PK/PD and clinical data and we expect
FDA to request additional data to define safety of Exenatide LAR, particularly given recent pancreatitis warning for Byetta – further
extension of filing timelines to YE09 is likely given potential requirements for manufacturing bridging work – recent feedback from
FDA suggests that IVIVC data is insufficient to establish comparability of different product scales and with parameters for
DURATION-1 crossover study not prospectively defined we expect FDA to require a specific bridging study
• Recent characterization of GENZ’s Myozyme at larger scale as a distinct product requiring separate BLA should raise similar
questions as to similarity of product for Byetta between commercial scale and prior intermediate scale given that there is no clinical
data supporting the safety/efficacy of Byetta produced at commercial scale in Ohio
• FDA letter to diabetes drug IND holders requesting meta-analysis of clinical data to rule out 80% increase in cardiovascular risk
could be problematic if a line extension designation is not maintained for exenatide LAR given limited patient numbers from
DURATION-1 and dependence on >4000 patients worth of Byetta safety data
• Suspected pancreatitis association with Byetta is particularly problematic for Exenatide LAR given self-perpetuating nature of
pancreatitis, necessity for immediate discontinuation of potential associated drugs and inability to do so with extended half life
Exenatide LAR
• Further risks to Exenatide LAR include suboptimal dose form with 23 gauge needle and inconvenience of drug reconstitution,
challenges of manufacturing scale up and emerging competitive visibility for Liraglutide, Syncria and BIM-51077 – Final liraglutide
phase III LEAD data seems to confirm superiority to Byetta in treatment naïve patients and should position liraglutide as the short
acting GLP-1 of choice
• While strategic options remain following activist shareholder involvement we believe that recent pancreatitis concerns will likely
temper enthusiasm of strategic partners that may be more apt to take a wait-and-see approach to Byetta trends and LAR
regulatory review
Cephalon (CEPH 1-Overweight, Sector 2-Neutral)
Recent approval of novel alkylator Treanda for NHL should provide longer term visibility on CEPH growth and support a multiple expansion
from current depressed levels. While prescriptions for lead wakefulness drug Provigil remain relatively flat we see upside potential from
continued pricing flexibility and launch of approved next generation product Nuvigil in mid-09.
• Flat prescription growth for Provigil and fentanyl products likely due to sales force re-alignment and should pick up in 2009 with
further upside potential from recent 14% price increase for Provigil and given the precedent with 70%+ price increase with Actiq in
2006 ahead of Fentora market entry – recent price increase supports an incremental $150-170M in pre-tax income not
contemplated by current Street estimates
• Top-line guidance for 2009 of roughly 15% growth is conservative given pricing discretion and incremental contribution from Amrix
and Treanda
• Paragraph IV Certification and ANDA filing by Watson for a generic Fentora is unlikely to impact CEPH’s business for many years
given recent FDA tentativeness towards generic approval of potent rapid acting opioids and increasing focus on risk management
programs – failure of Barr Labs (Teva) to gain Actiq ANDA approval after >40 months is evidence of this tentativeness and we
expect supply agreement with Barr Labs (Teva) to expire in September 2009 without ANDA approval
• Potential upside opportunity from projected 25% 3-year EPS CAGR, Amrix launch, and Treanda data – Amrix positioning as once
daily Flexeril without the sedation is highly leveragable given 40% market share for Flexeril generic – Recent new patent issuance
covering difficult to replicate formulation of Amrix should extend visibility to 2023 from 2010 and represents a major event for CEPH
with Amrix in a position to exceed Provigil blockbuster status
• ANDA acceptance by FDA for a generic Amrix will be followed by a 30 month stay and should be put in perspective relative to the
difficulty of formulating a once daily cyclobenzaprine – as with other ANDA filings we expect that generics are seeking concessions
in a settlement as opposed to having conviction in actually circumventing patents and given CEPH success in handling generic
challenges we would not assume generic entry until >2012
• Recent FDA review of expanded labeling for transmucosal fentanyl brand Fentora was more constructive than expected with both
panel members and FDA representatives recognizing the unmet need of non-cancer breakthrough pain (BTP) and expressing
significant enthusiasm for CEPHs innovative risk management program – While panel voted 14-3 against approval of expanded
labeling it is clear that with greater patient exposure to the new RiskMap that CEPH has a very real opportunity to gain label
expansion approval
• Treanda opportunity in hematology could approach $1bln and seems more tangible following NCCN guidelines for use in NHL and
in combination with $2.8bln drug Rituxan – feedback from Fox Chase and other large cancer centers suggests a preference for
Treanda over CHOP and CVP in NHL with absent hair loss, lower neutropenia, overall better tolerability, comparable efficacy and
greater economic incentives for use
CV Therapeutics (CVTX 1-Overweight, Sector 2-Neutral)
While the market continues to take a wait-and-see approach to CVTX shares we believe that the company is on the verge of transformation
following approval of cardiac stress agent Lexiscan (regadenoson), approval and partnership for Ranexa in the EU, and better than
expected label expansion for Ranexa US. Ranexa TRx trends appear to be accelerating and should support near term upside
• Better than expected 3Q08 results should address bear arguments on future financial solvency – cash burn guidance for 2009 of
<$75mln is conservative given BCS estimates for breakeven and CVTX maintains multiple options for non-dilutive financing
following the prior $185M TPG-Axon deal and with potential to monetize remaining Lexiscan and Ranexa EU royalties
• Label expansion opportunity for unrestricted angina indication, anti-arrythmia claim and HbA1c reduction claim in diabetics with
CHD are highly leveragable claims that should attract large pharma interest – we understand that CVTX has been at term sheet
stage with at least 10 companies and with better than expected labeling believe that CVTX ability to retain topline sales, secure a
revenue split and avoid dilution of expanded sales effort has strengthened
• Ranexa approval in Europe should support a larger opportunity than Ranexa in the US with larger chronic angina population, lower
rate of coronary intervention, strong product labeling and with the recently Menarini partnership – we estimate $4/share in
incremental NPV assuming $300M in peak sales and 20% royalty to CVTX and would suggest that these estimates may provide
conservative
• As Ranexa continues to accelerate and prospects for improved labeling appear more likely we believe that sustainability of long
term growth has become a focus with particular attention on Ranexa patent protection – we would emphasize that ANDA filing
cannot occur before January 27, 2010 and that with a 30-month stay following Hatch-Waxman expiration on January 27, 2011 that
the generic entry is prevented before July 27, 2013
• With recent Lexiscan (regadenoson) launch we have estimated an incremental $4/share NPV and more importantly realistic
prospects for FY09 profitability – review of labeling suggests multiple advantages over market leader Adenoscan in the $600M US
market and with fixed dose, single vial, bolus injection, single IV line requirement, superior safety and premium pricing driving
better economics on ASP+6% we can see no reason for cardiology practices to use any other pharmacologic stress agent
• The recent partial asset sale of 50% Lexiscan rights to TPG-Axon in exchange for $185M in cash provides substantial financial
stability, provides a path to profitability, allows CVTX to pay down its near term debt obligation due in 2010 and importantly sets a
higher valuation on Lexiscan at $6/share
Human Genome Sciences (HGSI 2-Equal weight, Sector 2-Neutral)
Prior announcement of severe pulmonary adverse events (SAEs) with Albuferon 1200mcg and DMC recommendation for dose reduction to
900mcg confirms our prior concerns regarding excess cough and dyspnea observed in phase II. Given the occurrence of excess cough and
dyspnea at 900mcg in phase II we would question the adequacy of HGSI’s dose selection and at a minimum expect significant scrutiny of
this issue by FDA.
• Positive results for Albuferon from ACHIEVE 2/3 are tempered by numerical trends favoring Pegasys, inferior efficacy in patients
from Asia (SVR of 79.8% vs 95.5%) and higher discontinuation rates (4.8% vs 3.6%)
• With the data monitoring committee (DMC) recommending dose modification to 900mcg from 1200mcg in the Albuferon phase III
ACHIEVE 1 and 2/3 studies due to excess severe adverse pulmonary events at the higher 1200mcg dose we would highlight
higher rates of pulmonary AEs in phase II at 900mcg ( cough 24% vs 13% with Pegasys, dyspnea 9% vs 5% with Pegasys) as
continued cause for concern
• Recent data for PEGIntron suggesting a more optimized profile with weight based dosing at lower levels suggests that fixed dosing
of albuferon may be inadequate and will certainly receive significant FDA scrutiny
• Lymphostat B phase III trials (BLISS-52, 76) carries substantial risk given limited cushion from phase II data and limitations of
subset analysis underlying selection of ANA positive patients – Recent absolute failure of potent anti B-cell therapy with Rituxan
increases risk to Lymphostat where B-cell effects are believed to be more modest although upcoming LUNAR data for Rituxan in
Lupus Nephritis may provide greater validation for anti- B cell therapy in a more homogenous patient group
• Recent randomized phase II data for TRAIL antibody mapatumumab was disappointing and suggested no incremental response
rate benefit when added to Velcade in patients with advanced multiple myeloma – PFS data is expected to follow suit
Onyx Pharmaceuticals (ONXX 1-Overweight, Sector 2-Neutral)
We continue to believe that 2009 EPS of $1.65 is achievable and should support multiple expansion given significant room for further topline
growth as well as potential margin expansion – with volatility likely to continue around individual quarterly results we would advise
buying on dips either in front of or after quarterly calls
• Better than expected 3Q08 EPS of $0.21 highlights tremendous earnings leverage and reduction in 4Q08 JV OPEX guidance by
$30M highlights ONXX commitment to driving near term profitability
• 4Q08 results are difficult to predict given limited market tracking data although $10M sequential increase seen in 3Q08 during
summer slow down in Europe should be readily replicable in a fuller 4Q08 treatment period – guidance for 2009 is constrained by
Bayer and as such we expect conservative guidance that should readily be exceeded - feedback from ONXX suggests that higher
JV OPEX in 2H08 will not serve as a run rate for FY09 and that JV leverage should in fact emerge in 1H09
• In-licensing of pre-clinical next generation Alimta anti-folate product removes the overhang of near term deal dilution and at the
same time diversifies long term risk away from Nexavar
• Second deal for JAK2 inhibitor from S*BIO provides further opportunity for tiered investment in future pipeline, diversifies risk away
from Nexavar development in additional indications and maintains near term earnings power with Nexavar
• Global HCC opportunity of $4.5bln appears to have been underestimated with current estimates largely ignoring broader EU and
Asian opportunity – Nexavar roll-out across >70 countries for RCC provides a guide to similar expansion potential for HCC
• Recent feedback from large treatment centers suggests that US HCC incidence of 20,000 is underestimated, could increase 4-fold
over the next 10-years, and is being treated increasingly in the community with Nexavar since approval
• SHARP data reviewed at the January 25-27th ASCO GI meeting in Orlando and more recently at ASCO in June highlights benefit
of Nexavar in Pugh A and Pugh B HCC patients, confirms benefit in patients with sub-optimal liver function and highlights
comparable OS/PFS and AE profile in patients with normal, mild and moderately elevated liver enzymes
• Feedback from EU HCC sites suggests increasing use of Nexavar with utility in both Pugh A and B patients – in Germany, Italy
and UK specifically estimates suggest Nexavar as an option in roughly 35% of newly diagnosed and >50% of refractory patients
each year
• Aggressive investment in expanded Nexavar development is reasonable in the near term and should ultimately provide a return
given broad activity of the drug and demonstrated synergy with chemotherapy – ONXX shares could benefit however from a more
cogent explanation regarding the rationale for individual investments and better transparency on clinical trial progress specifically
and we expect new CEO Dr. Tony Coles to provide such transparency
• Phase III data in melanoma should come by mid-09 following completion of enrollment in early 2Q08 – a near doubling of PFS in a
randomized phase II should provide a reasonable guide for expectations in phase III
• Our prior roadshow with new CEO Dr. Tony Coles suggested potential upside to increasing use of Nexavar as a bridge to
transplant and concurrent with chemo-embolization in earlier stage patients, significant costs associated with Nexavar free drug
programs in the EU and Asia and sensitivity to achieving JV profitability
OSI Pharmaceuticals (OSIP 2-Equal weight, Sector 2-Neutral)
Recent strength in OSIP shares appears to overlook flat Tarceva sales in the US as well as potential competition from Erbitux, Zactima and
return of Iressa in 2009 and appears to over-estimate upside potential from the SATURN maintenance study
• Lack of growth for Tarceva in the US and recent flattening of Tarceva trends in Japan and Europe suggest that a low end multiple
of 10x forward EPS and 2-3x sales may be more appropriate for OSIP shares
• Positive SATURN study results were expected given relatively low bar of improving PFS but are unlikely to impact Tarceva trends
given absent survival data – As with prior maintenance studies for Alimta, Taxotere and Gemzar we expect limited impact on
Tarceva sales trends as most physicians remain skeptical of maintenance treatment and characterize the approach as early 2nd
line use with no impact on actual patient numbers – we expect SATURN survival data by mid-year and based on prior Iressa
maintenance results expect no impact on overall survival (OS)
• BETA-Lung disappointment will limit OSIPs ability to pair Tarceva with Avastin and will likely leave Tarceva as a 3rd line treatment
option in patients failing earlier chemotherapy
• Frontline NSCLC FLEX data could also raise concerns regarding 2nd line use of Tarceva in patients failing a frontline EGFR
targeted regimen although with most Tarceva use for 3rd line use we expect impact to be limited
• iPATH data for iressa in frontline NSCLC unlikely to have substantial impact on Tarceva frontline use given pre-selection of Asian
patients with light smoking history and existing use already for that group of patients – a 36% rate of successful mutation analysis
in the trial also highlights the difficulty with genotypic analysis and we expect phenotypic characterization to continue to
predominate
• While failure of Zactima to demonstrate superiority to Tarceva in the phase III ZEST trial eliminates a potential overhang we
believe that with impending ZEPHYR data in 3rd line NSCLC significant competitive risk remains
Regeneron Pharmaceuticals (REGN 1-Overweight, Sector 2-Neutral)
Most focus for REGN remains on potential pipeline catalysts for VEGF-TRAP in oncology as well as age-related macular degeneration
(AMD). While overall timelines for phase III data for both indications remains extended we believe that data for VEGF-TRAP in symptomatic
malignant ascites (SMA) could provide a catalyst in 2009 and potential path to early market approval
• Approval of IL-1 TRAP Arcalyst (rilonacept) for Cryopyrin-Associated Periodic Syndromes (CAPS) could support peak global sales
of $100mln at a premium price of $250,000 per patient year – we estimate a $4/NPV and as such believe that prior reaction to
Arcalyst approval understated the products potential, particularly given potential upside opportunity from the IL-1 TRAP in gout and
opt-in for REGN on NVS’s IL-1 antibody -885
• Positive data for rilonacept in allopurinol induced gout suggests an 81% reduction in flares, in-line with the 70-80% benefit
demonstrated for Colchicine – Data should be reproducible in phase III but differentiation from Colchicine, perhaps by virtue of
better tolerability, will be key to commercial success in what is estimated to be a 750,000 patient market
• Antibody collaboration with SNY with equity investment at $26/share and 50:50 profit split on pre-clinical compounds highlights the
value of REGNs VelocImmune antibody platform with targeting of both validated targets like IL-6 as well as exciting novel targets
like DLL-4 also being pursued by DNA
• VEGF-TRAP for anaplastic astrocytoma (AA) and Glioblastoma multiforme (GBM) appears just as active as Avastin in an
indication where DNA is pursuing an accelerated phase II filing – while concern emerged at ASCO regarding lower 6 month PFS
rates than in earlier Avastin studies we believe that cross-study comparisons can’t be made for time dependant endpoints where
sicker patients and time lag bias often affect results
• VEGF-TRAP in oncology appears at least comparable to Avastin with 8% response rate in refractory Ovarian cancer in line with 3-
8% response rates for similar Avastin trials
• Recent phase II data for VEGF-TRAP in AMD suggests comparability to Lucentis with potential for less frequent dosing and lower
immunogenicity – recent updated 48 week data suggests better durability of visual acuity improvements over the longer term with
improvements of 5.4-9 letters as compared to 0.5-2 letters with Lucentis in the SAILOR study
Theravance (THRX 2-Equal weight, Sector 2-Neutral)
While THRX shares have bounced from lows following surprising telavancin panel recommendation we believe that an incremental NPV of
$4/share is fully reflected in current share price and that likely restrictive label, slow launch as well as extended timelines and development
risk for the Next Generation Advair (NGA) will limit further upside potential
• Surprising positive panel recommendation for telavancin use in cSSSI will likely yield to a protracted label negotiation over panel
concerns regarding QTc prolongation, excess renal events and pregnancy risk – risk management program for each could be
involved and we do not expect FDA action before mid-09
• With vancomycin generic broadly used, limited description on VISA and VRSA and with other alternatives available in cubicin and
Zyvox we expect restrictive telavancin labeling to be a major impediment to early uptake
• While telavancin prospects could be better in hospital acquired pneumonia (HAP) we expect hospital formulary inclusion to take
considerable time and for telavancin to be reserved for use in vancomycin failures
• Assumptions for next generation Advair timelines and market potential appear aggressive given potential delays beyond YE11 and
with both generic and branded competition in that time frame
United Therapeutics (UTHR 1-Overweight, Sector 2-Neutral)
We believe UTHR shares appear oversold following FREEDOM-C oral Remodulin disappointment with above average growth for IV
Remodulin, intact approval prospects for inhaled Remodulin, incremental contribution expected from Cialis PAH and additional opportunities
for oral Remodulin success following dose response lessons learned from FREEDOM-C
• UTHR valuation appears compelling at 16x times 2009 Consensus GAAP EPS and at 3 x 2009 Consensus revenue estimates
given projections for 26% sequential revenue growth and 42% sequential earnings growth on IV Remodulin alone
• Sell-off in UTHR shares following FREEDOM-C failure was overdone, in our view, given ongoing growth opportunity for IV
Remodulin growth, potential for inhaled Remodulin approval in April '09, additional contribution from Cialis in-licensing and
potential for FREEDOM-M success
• Continued sales growth for IV Remodulin is expected with >20,000 patients diagnosed with PAH, only 3000 patients receiving IV
Remodulin and with virtually all patients progressing to a later terminal stage over time
• Prospects for inhaled Remodulin approval remain unaffected by oral trial disappointment and indeed with a highly statistically
significant (p=0.006) improvement in 6MWD we expect timely approval on the PDUFA date of April 30- consultant feedback
suggests that inhaled Remodulin should double the prostacyclin opportunity in PAH given likely earlier use following oral drug
failure
• Incremental Cialis opportunity in PAH could approach $100M in the US with 80% operating margins supporting substantial
earnings contribution
• While oral Remodulin failure in FREEDOM-C is disappointing we believe that proof-of-concept has been established with a clear
dose response and an ability to achieve optimal dosing with lower dose tablets - we expect UTHR to upsize FREEDOM-M to
leverage insights from FREEDOM-C and to maximize patient exposure to 0.25mg and 0.5mg tablets
ZymoGenetics (ZGEN 2-Equal weight, Sector 2-Neutral)
Following approval of Recomthrom (rThrombin) as a surgical hemostat focus has shifted to commercial launch which we continue to believe
will be limited by lack of perceived need, competition from JNJ and P&T committee sensitivity to acquisition cost
• Recothrom (rThrombin) approval was expected following positive phase III data and suggestion of lower immunogenicity than
market leading bovine Thrombin JMI
• Commercial launch for Recothrom will likely continue to be limited by small market, lack of pressing concern regarding existing
hemostats and JNJ/Omrix head start with P&T committees
• Pipeline visibility remains limited into 2009 although could provide future value over the longer term
SMALL CAP BIOTECH
Acadia Pharmaceuticals (ACAD 1-Overweight, Sector 2-Neutral)
We believe that ACAD shares are attractively valued below cash levels following the unexpected failure of clozapine metabolite ACP-104 in
the phase IIb schizophrenia trial – financing risk remains a key consideration with cash runway limited to 1H10 and as such we believe that
non-dilutive financing in the form of partnership milestones could provide significant catalyst for ACAD shares
• Appears well positioned in a $15 billion-plus antipsychotic market, based on Phase II results for pimavanserin (ACP-103) in
schizophrenia defining a new treatment paradigm as add-on therapy to atypical antipsychotics – partnership remains a gating item
to value creation and we look for a 1Q09 update to provide further clarity
• Undervalued based on our product NPV analysis, which arrives at a risk-adjusted value of $10 per share for U.S. sales and royalty
opportunities alone for pimavanserin (ACP-103) in Parkinson’s Disease Psychosis (PDP) alone
• We see significant further upside potential on partnership opportunity for pimavanserin in schizophrenia and progress with the
Phase III Parkinson’s disease psychosis (PDP) program for pimavanserin into 3Q09 data
Arena Pharmaceuticals (ARNA 2-Equal weight, Sector 2-Neutral)
With focus on upcoming BLOOM study data expected in March we believe that weight loss benefits seen in phase II will be insufficient to
provide upside and that downside risk exists to any differences in AEs, SAEs and drug discontinuations . Valuation gap with ACAD is
significant despite more pressing financing needs for ARNA with questionable cash runway to YE09
• We remain relatively unimpressed by the 7-pound average placebo-adjusted weight loss established for lorcaserin in Phase II and
would advise a wait-and-see approach regarding heart valve effects, as well as new onset seizure risk
• We do not believe that a 12-month valve assessment is sufficient to allay theoretical concerns of either investors or potential large
pharma partners, given the uncertainty on baseline valve dysfunction rates, intra-patient variability, and time course for actual druginduced
valvulopathy
• In addition, with a single new onset seizure in only 100 patients treated with lorcaserin 20mg in Phase II, we believe that investors
should wait for more mature patient exposure data to rule out this potential drug effect as well as other adverse CNS effects
• Failure of insomnia drug candidate APD125 in phase II and expected program discontinuation removes a potential future value
driver and more importantly eliminates an important source of non-dilutive financing – with <1 year of cash we believe that
partnership of pre-clinical assets will be critical to bringing in new sources of cash but expect upfront payments to be small
Ariad Pharmaceuticals (ARIA 1-Overweight, Sector 2-Neutral)
Focus for ARIA remains on potential catalysts for mTOR inhibitor deferolimus in its broadening program in oncology. While data from newly
initiated phase II trials is unlikely in the near term, we continue to view ARIA as a top tier oncology company heading into YE09 SUCCEED
• Recent positive data for a 2nd mTOR inhibitor, RAD-001, in renal cell cancer (RCC) provides further validation for mTOR as a
target in difficult to treat cancers and should reduce ultimate technical risk with deferolimus (AP-573) in the ongoing sarcoma
phase III SUCCEED trial with 2nd interim data expected by YE09
• Attention at the annual NCCN meeting in Hollywood, Florida highlights the potential of mTOR inhibition across multiple cancers
and in combination with multiple agents - We view deferolimus as a best-in-class mTOR inhibitor with significant prior validation
from related approved compound Torisel (Wyeth) as well as RAD-001
• Significant attention at AACR on new classes of dual mTOR inhibitors suggests further validation for the class and we would
suggest that competitive threat from new dual mTOR inhibitors is low given early phase I stage of development
• We believe that likelihood of success is high relative to other development stage oncology companies, based on guidance from
molecular markers, support from partner Merck, and broadening development to include endometrial, prostate, lung, and breast
cancer, as well as combinations with Erbitux and other targeted therapies
• We anticipate further potential upside on resolution of NF-kB patent litigation with LLY (estimated NPV of $2.50) and following
Phase I initiation for Gleevec resistance drug -534
Array Biopharma (ARRY 1-Overweight, Sector 2-Neutral)
While data flow in 2008 was relatively light for ARRY development stage candidates, we expect significant data flow over the next 12
months with proof-of-concept data expected from 5 separate programs
• Eight of the ten drugs that will be in the clinic are wholly owned by ARRY, and given recently favorable economics on earlier stage
pipeline deals, we expect shareholders to benefit from potential out-licensing, partnership, and/or M&A
• Positive data at ACR for ARRY-797 support comparability to higher dose Celebrex in a model of acute dental pain and should
position the product favorably for upcoming studies in ankylosing spondylitis (AS) and rheumatoid arthritis (RA)
• Additional upside potential from phase II data for MEK inhibitor ARRY-162 in Rheumatoid Arthritis (RA) and erb-B2/EGFR inhibitor
ARRY-543 in metastatic breast cancer (mBC) with data expected in 2H09
Cardiome Pharma (CRME 2-Equal weight, Sector 2-Neutral)
Following the recent approvable letter for Kynapid IV we expect considerable uncertainty amongst investors as well as with potential
strategic partners – with approval unlikely prior to mid-09 we believe that a weakening balance sheet limits CRME negotiating leverage
significantly in a process that does not appear particularly competitive (as evidenced by inability to close a deal in previously announced 8
week timeframe)
• Recent approvable letter for Kynapid IV announced on August 11th suggests that FDA has focused on substance of cautious FDA
panel comments as opposed to final positive vote – with increased scrutiny of product safety, request for additional data regarding
adverse events seen in a subset of patients, a required update of safety from all ongoing and completed studies for vernakalant
and potential for additional clinical data requirements we believe that Kynapid IV approval is unlikely prior to mid-2009
• While CRME has suggested potential strategic options in the nearer term we believe that negotiating leverage has diminished with
the Kynapid disappointment, increased hurdle for oral drug success following dronedarone success, and with limited cash
reserves.
• Based on FDA panel commentary we anticipate that significant post-marketing study commitments will also be required for
Kynapid and that restrictive labeling including duration of use limited to 48 hours, exclusion from use in patients with recent
myocardial infarction or heart failure (two of the main causes of AF), a very high bar set by the current standard of care (electrical
cardioversion), and limited overall patient safety exposure will sharply limit the ultimate market opportunity the drug
• With CRME attention for the oral program on extending time to recurrent atrial fibrillation over 90 days we believe that impact on
overall atrial fibrillation burden is more meaningful and would suggest investor attention on relative percentage of patients in
normal sinus rhythm which does not appear that different from placebo
Genomic Health (GHDX 2-Equal weight, Sector 2-Neutral)
Primary focus remains on ultimate FDA regulatory action on IVDMIAs and implications for Oncotype DX. While inclusion of Oncotype DX in
NCCN guidelines has suggested broadening acceptance of the test service as a standard of care we would note that FDA and NCCN have
diverged in other situations such as use of ESAs. We believe that draft guidance suggesting a differential burden of proof for chemo-benefit
claims could place payer agreements at risk which depend on these claims
• Fairly valued at 3.7x 2009 sales estimate as compared to 4.5x median sales multiple for profitable biotech peers – lower barriers to
entry and potential regulatory risk suggest that GHDX should trade at a discount to therapeutics companies
• While 3Q08 results suggest strong growth from 3Q07 we would note that sequential growth of +540 tests billed has slowed from an
incremental +1950 tests billed in 1Q08 and +1250 tests billed in 4Q07
• While inclusion in ASCO and NCCN guidelines are clearly positive, in our view, we do not expect an immediate increase in the rate
of adoption for Oncotype DX with awareness of the test already very high
• In addition, with ASCO highlighting additional tests in development and guidelines encouraging patients to enroll in clinical trials
that focus on the use of additional tumor markers, we continue to expect credible competition will likely eventually emerge
ISIS Pharmaceuticals (ISIS 1-Overweight, Sector 2-Neutral)
We believe that ISIS is approaching an inflection in value over the next 12 months with expanding clinical pipeline, key safety data for lead
lipid lowering drug mipomersen and with phase III data for mipomersen expected in 2009
• ISIS offers a rare combination of dominant therapeutic platform ownership, broad pipeline opportunity, and compelling lead product
growth potential, in our view
• We view upside potential for ISIS shareholders given recent acquisition and deal premiums for antibody and RNAi technologies
• With current focus on lead lipid-lowering drug mipomersen (ISIS 301012) we believe that nearer term opportunity in HoFH patients
could be expanded to broader apheresis market, that timelines for 2010 filing may be conservative and that outcome study results
should come no later than 2012
• With mipomersen liver safety remaining as a gating factor to broader product success we would highlight the recent liver imaging
study results presented at the November AHA meeting as supporting a benign profile
• With acknowledgement of the importance of mipomersen in providing nearer-term growth opportunity and validating secondgeneration
antisense chemistry, we believe that following recent partnership announcement in January 2008 with GENZ, deal
terms including the very high premium paid by GENZ validate blockbuster potential and further validate ISIS' antisense technology,
should bode well for partnership and Phase III success
• Solid balance sheet with >$500M in cash at YE08 and likely cash flow neutral structure in 2009 differentiates ISIS favorably from
development stage peers and allows for greater retention of value on pipeline products
NPS Pharmaceuticals (NPSP 2-Equal weight, Sector 2-Neutral)
Additional support for Gattex low dose hypothesis in SBS is encouraging as are proof-of-concept data NPSP558 in hypoparathyroidism,
however timelines for full validation are extended and balance sheet risk remains an issue
• While we are encouraged by positive steps taken by NPSP management over the last several years to extend cash we expect a
financing overhang to re-emerge in 2009 with roughly 1 year of cash expected at YE08
• While expanded indications for Gattex in necrotizing enterocolitis (NEC) and chemo induced mucositis may offer future value, as
may NPSP558 for hypoparathyroidism, near term visibility remains limited
• In particular, with recent announcement of NPSP’s intent to initiate an additional confirmatory Gattex trial in SBS following
feedback from FDA we believe that catalysts in 2009 may be limited
Rigel Pharmaceuticals (RIGL 1-Overweight, Sector 2-Neutral)
RIGL shares appear oversold following R788 data presentation at ACR where phase II efficacy and safety data was no different than prior
top-line data release and where prospects for near term partnership remain high
• While we will ultimately want to see radiographic responses from future trials with R788, phase 2 results in RA are comparable to
or better than those that have been demonstrated by anti-TNF agents (e.g. Enbrel) and appear to even exceed phase 2 data for
Pfizer's oral Janus kinase 3 (JAK3) inhibitor, CP-690,550, which were the best reported to date for a small molecule
• With regards to safety and tolerability, the 100mg side effect profile for R788 was tolerable and included just 4% (2/49) rates each
of diarrhea, upper GI side effects, and hypertension, and there were no cases elevated liver enzymes (ALT >3x ULN); the 10%
(5/49) rate of neutropenia observed in the 100mg dose group was manageable with dose reductions and most importantly with no
infections
• Hypertension is an uncommon finding with R788, is readily treatable and is less concerning than infection/lymphoma risk with anti-
TNFs
• Based on management feedback we continue to expect a near term partnership with significant upfront payments that should
serve to validate recent data and mitigate capital market exposure
Synta Pharmaceuticals (SNTA, 1-Overweight, Sector 2-Neutral)
With focus on final phase III SYMMETRY data for elesclomol in melanoma we believe that current valuation reflects limited expectations
and that historical challenges in melanoma development are well reflected
• With some uncertainty as to timing of phase III SYMMETRY data we expect completion of enrollment around February 2009 with
data likely to follow in late 1Q09/2Q09
• While melanoma patient heterogeneity is difficult to control for in smaller studies we believe that randomized phase II results
compare favorably to data for prior development stage candidates in melanoma
• Deals with GSK and Roche provide downside support and risk diversification away from any single event and differentiate SNTA
favorably from development stage peers
• Recent success with JNJs IL-12 antibody ustekinumab in demonstrating superiority to anti-TNF Enbrel should provide further
support for SNTAs IL-12 small molecule program with apilimod |
