ANALYSTS' BEST CALLS: AGOURON PHARM.
04/20/98 TYPE: REPORT BY: ELISE WANG
INVESTMENT THESIS
We continue to expect robust sales of Viracept, Agouron's first commercial product, and the release of additional clinical
data related to viracept to drive price appreciation in the near term. Among biotechnology products, Viracept has achieved an
unprecedented level of sales in its first year on the market and is now one of two leading protease inhibitors (PIs) for the treatment
of HIV infection. With key trends including support from thought leaders to utilize earlier and more aggressive treatment with
combination therapy (including a P1) reinforcing strong growth, we continue to expect the market for PIs to expand rapidly, with
Viracept capturing a significant portion of that growth. In addition, Agouron's broad technology platform has allowed it to build a
pipeline of products that is likely to fuel its growth with its lead cancer product, AG3340, or the MMP inhibitor currently in two
Phase III clinical studies for lung and prostate cancer. If Viracept is as successful as we anticipate, market penetration by this
product and key program developments could drive share value to our $65-70 12-month price target.
VIRACEPT MOVING TO THE HEAD OF THE P1 CLASS
Viracept has captured 30% of the HIV protease inhibitor market and continues to gain on the current market leader,
Merck's Crixivan. As the first HIV protease inhibitor to receive marketing approval (for both adult and pediatric formulations)
without an FDA advisory panel meeting, Viracept, the fourth PI to enter the market, appears to be the choice for first-line therapy
among the HIV protease inhibitors, as growth appears to be driven primarily by P1-naive patients. Furthermore, given excellent
clinical data supporting a twice-daily dosing regimen, we believe Viracept will continue to capture market share. We expect
Viracept to command a leading market position based on equivalent efficacy data, a superior safety and ease-of-use profile, and a
compelling cross-resistance and resistance profile.
SUPERIOR PRODUCT PROFILE
With Viracept, Agouron is effectively gaining entry into the $1.0 billion-plus HIV protease inhibitor market. We believe
the product label is the cleanest and strongest among the HIV protease inhibitors.
Equivalent Efficacy. As with other protease inhibitors, Viracept is highly effective in reducing viral levels and increasing
CD4 T-cell counts when used in combination with two reverse transcriptase inhibitors (e.g., AZT 3TC and d4T). Data released at
the Retrovirus meeting (February 1998) indicating prolonged positive responses for a 52-week period hold promise for the
durability of the product's effect.
Superior Safety. The safety profile of Viracept is extremely favorable compared with those of other HIV protease inhibitors. Side
effects associated with competing protease inhibitors include kidney stones, liver toxicity and limiting drug interactions. Only six
adverse events were noted on Viracept's label, of which only one (mild to moderate diarrhea) is due to the drug. As a point of
comparison, Roche's Invirase has 18 adverse events, Merck's Crixivan 16 adverse events, and Abbott's Norvir over 20 adverse
events noted on their respective product labels. In our opinion, based on this data, Viracept has significant safety profile advantage
over other protease inhibitors.
Convenient Dosing Regimen. Viracept's dosing regimen of three times daily is less restrictive compared with those of other
protease inhibitors. Viracept can be taken with meals, unlike Merck's Crixivan, which must be take on an empty stomach. In
addition, Crixivan requires a strict regimen of dosing exactly every eight hours to avoid the emergence of resistance. It is also
recommended that a fair amount of water (minimum 48 ounces) be taken with Crixivan in order to avoid kidney stones.
Compelling clinical data of a twice-daily dosing regimen (BID) for Viracept released at the Retrovirus meeting may lead to an even
more convenient regimen.
Compelling Cross-Resistance Profile. Development of resistance and cross-resistance among antiviral medications is a
major concern in treating HIV infection. Data on Viracept's label on resistance and cross-resistance demonstrate that Viracept is
unique in that it appears that patients who become resistant to Viracept do not develop resistance to combinations of other protease
inhibitors. Providing a patient with the flexibility to have access to alternative medications is of primary importance in determining
the optimal mode of treatment for a patient. Both Merck's Crixivan and Abbott's Norvir have demonstrated a high degree of cross-
resistance to other protease inhibitors. Consequently, in our opinion, Viracept has become the optimal first-line therapy among
HIV protease inhibitors. Market data appear to confirm this premise.
FAVORABLE MARKET DYNAMICS
The market for antiretroviral therapies is highly dynamic. According to a variety of industry sources, there are 850,000 to 1
million HIV-infected individuals in the United States. Only about 25%, or 250,000; are being treated with antiretroviral
medications. An estimated 200,000 are currently taking protease inhibitors in combination with reverse transcriptase inhibitors
(RTIs) and about 50,000 are currently taking RTIs only. Given the trend toward early and aggressive treatment upon diagnosis as
endorsed by two expert panels (NIH Department of Health and Human Services and the U.S. panel of the International AIDS
Society), the 300,000 diagnosed yet untreated HIV patients also represent a major market opportunity.
VIRACEPT MARKET SHARE GROWTH CAN DRIVE SIGNIFICANT EARNINGS GROWTH
Our financial projections for Agouron in fiscal year 2000 assume a market share of 13% of the estimated 850,000 HIV-
infected U.S. patients, representing nearly 114,000 patients and generating approximately $560 million in total Viracept U.S.
revenues. We believe these market penetration numbers are quite achievable. In addition, Viracept is currently being launched in
Europe and South America by partner Roche. We expect foreign sales to contribute to the company's profitability.
BROADLY APPLICABLE TECHNOLOGY APPROACH
Agouron was founded on the premise of structure-based, or "rational," drug design. By determining and modeling the
three-dimensional atomic structure of a target protein, Agouron rationally designs or alters chemical compounds to specifically
interact with the targeted protein. Through this approach, new drugs could be developed that would be highly specific in action and
avoid many of the side effects associated with drugs discovered using traditional pharmaceutical screening methods.
VALUATION
Since Agouron became profitable in fiscal fourth quarter 1997, its financial results have continued to exceed our
expectations. We expect Agouron to be profitable throughout fiscal 1998, with estimated EPS of $0.98. We project a 12-month
price target of $65-70 per share, based on our fiscal 2000 EPS estimate of $3.43, using a 25-30% discount rate and a 30x multiple
(comparable to the multiples of other high-growth, profitable biotechnology companies). The stock is currently trading at a P/E
multiple of 23.6x our calendar 1998 EPS estimate of $1.56.
RISKS
Agouron faces competition from other currently available HIV protease inhibitors manufactured by Merck, Abbott and
Roche, from the introduction of future products under development (from Glaxo/Vertex1 for example). In addition, patients taking
PIs risk becoming resistant to these drugs as well as developing cross-resistance to other PIs.
Prices of companies mentioned Abbott5 AST $77 3/16, Glaxos GLX $58 7/8, Merck5 MRK $131 15/16, Vertex2 VRTX $32
15/16.
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information is available upon request. All prices are a of the close on April 6, 1998.
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