Here are some of the key points from the Merrill report...
Agouron Pharmaceuticals Inc. - 18 May 1998
Price: $34 3/8
Estimates (Jun) 1997A 1998E 1999E
EPS: d$1.60 $1.00 $1.05
P/E: NM 34.4 32.8
EPS Change (YoY): NM NM
Cash Flow/Share: d$1.44 $1.22 $1.29
Price/Cash Flow: NM 28.2 26.7
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-2-2-9
Mkt. Value / Shares Outstanding (mn): $1,134.4 / 33
Book Value/Share (Mar-98): $7.18
Price/Book Ratio: 4.8x
ROE 1998E Average: 15.0%
LT Liability % of Capital: 2.3%
Est. 5 Year EPS Growth: NM
Stock Data
52-Week Range: $56 « - $26 _
Symbol / Exchange: AGPH / OTC
Options: AMEX
Institutional Ownership-Spectrum: 52.8%
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-95)
Growth: Overweight (07-Mar-95)
Income & Growth: Overweight (07-Mar-95)
Capital Appreciation: Overweight (31-Aug-94)
Market Analysis; Technical Rating: Above Average (24-Feb-98)
**The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
ú Initiating coverage of Agouron with a rating
of Intermediate and Long Term Accumulate.
ú It's lead drug Viracept, for the treatment of
AIDS, has gathered significant market share
and is expected to generate $400 of sales in the
US this year.
ú Our C1998-2000 EPS estimates are $0.90,
$1.26, and $1.63 (excluding one-time items).
Our 12-18 month price objective is $40 per
share, based upon a 25 multiple applied to our
C2000 EPS estimate.
Fundamental Highlights:
ú Viracept, the company's lead product for
AIDS, is likely to achieve worldwide revenues
of $950 million by 2001.
ú Viracept does not seem to be threatened for
the next three years, and the company is
working on follow-on AIDS drug candidates.
ú Other product candidates are in early clinical
testing with no proof of efficacy.
ú At the end of F3Q98, the company had $117
million in cash, and little debt. Positive cash
flow is projected through 2002.
Overview
Agouron's sole marketed product is Viracept, an HIV
protease inhibitor, that was approved by the FDA in
March 1997 for the treatment of AIDS. In the first three
quarters of fiscal 1998, Viracept US sales totaled $283
million. Viracept is marketed by Agouron in the US and
by Roche in Europe. Japan Tobacco collaborated on the
development of the drug and receives a 50% split of
the profits from the US, and has retained marketing
rights in Japan.
We expect worldwide Viracept sales to achieve $465
million in the 1998 calendar year, $675 million in 1999,
$850 million in 2000, and more than $950 million in 2001.
At peak, we believe more than 150,000 patients worldwide
will be on Viracept therapy.
Viracept
Viracept is an oral protease inhibitor (PI) designed for the
treatment of AIDS. The drug demonstrates an ability to
decrease the HIV viral load and increase CD4+ cell count.
These positive effects are most evident when Viracept is
given in combination with reverse transcriptase inhibitors.
The drug is well tolerated. Viracept has to be taken three
times per day, but not at strict eight hour intervals like its
main competitor, Crixivan. In addition, patients can take
Viracept with food. Agouron is currently testing whether
Viracept can be given twice daily and still retain efficacy,
and whether it will be effective as a member of a dual
PI regimen.
Agouron has positioned Viracept as the protease inhibitor
of choice, because if patients become resistant, they can
switch to a regimen containing a different PI and get a
second chance. This idea is controversial, but does have
some support in the research and clinical community. For
this to be true, the change in drug regimen has to be done
rapidly to insure that mutant strains do not have time to
emerge. Thus, careful and frequent monitoring of patients
is essential.
Competition for Viracept
The major risk for both the stock and the company stems
from competition in the AIDS arena, including Merck's
Crixivan, dual PI therapy with Norvir/ Fortovase and the
perceived threat of other protease inhibitors in
development, including Vertex/Glaxo's Amprenavir and
Abbott's ABT-378. Data has been presented that indicates
that Amprenavir, like Viracept, has less resistance overlap
to Crixivan, Norvir, and Invirase/ Fortovase. In the
longer-term, we estimate that there are at least four other
protease inhibitors in clinical testing and many more in the
research stage.
Other Products
Agouron has two anti-cancer compounds in clinical
development, AG3340 and AG2034. AG3340, is an
orally-administered, matrix metalloprotease (MMP)
inhibitor that blocks angiogenesis. Agouron has just
announced the initiation of two Phase II/III clinical trials
of AG3340 in patients with advanced lung or prostate
cancer. AG3340 in combination with Taxol and
Paraplatin will be administered to patients with advanced
non-small cell lung cancer. The primary endpoint of this
trial is time to progression. In the second trial, patients
with advanced prostate cancer will receive AG3340 in
combination with Novantrone and prednisone. The
primary endpoint in this trial is time-to-symptomatic
progression of disease. Results from these trials are
expected in 2000.
AG2034 is an inhibitor of glycinamide ribonucleotide
formyl transferase (GART), an enzyme necessary for
cellular proliferation. A Phase I study has just been
completed and results are expected this month.
Financials and Valuation
We expect Agouron's F1998 $400 million estimated US
sales to grow only modestly to about $500 million in 2001.
Outside the US, sales should continue to grow well from
$54 million in 1998 to $470 million in 2001. Worldwide
sales should increase from $460 million in 1998 to $950
million in 2001, for an annual sales growth rate of 25%
over this period.
This anticipated sales growth will not be clearly reflected
in comparable EPS growth for Agouron because of
marketing agreements with Japan Tobacco and Roche. On
US Viracept sales, AGPH and JT equally split the profits,
which we have modeled as an effective sales royalty of
17% to JT. As for European sales, Agouron receives an up
front payment for delivery of bulk product to Roche and
royalty based on sales. We estimate that this marketing
arrangement results in royalties to Agouron amounting to
about 10% of total Viracept sales in Europe.
We have modeled R&D expenditures of $121 million and
$127 million in F1998 and F1999 respectively, as the
company pushes forward with clinical development of
AG3340. Likewise, SG&A is expected to grow from $58
million to $65 million over the next year to accommodate
increased Viracept marketing efforts, and then stabilize
over the next 3 years. The operating structure should
allow operating margins to be 14-15% through 2002. Our
EPS estimates for F1998 to F2002 are $1.00, $1.05, $1.46,
$1.80 and $1.83, with a 3 year compounded annual growth
rate of 20%. The bulk of the EPS growth would occur in
F2000 and F2001 during the rapid growth of international
sales of Viracept. Agouron should end F1998 with $120
million in cash and almost no debt.
Valuation
Assuming Agouron can achieve our earnings targets, what
is the appropriate multiple to pay for a company with one
significant product and nothing else significant in late
stage development? Based on recent analyses, we believe
a reasonable trading range for a mature, single-product
company is 20-25 times mature earnings.
Currently the stock trades at about 28 times our calendar
1999 estimate of $1.26, versus 29 times for the drug group
and 25 times for the Big 6 Biotechs. We believe the
growth of earnings will be mostly driven by royalties from
international sales.
By year end 1999 we expect the stock to trade at 25 times
our C2000 estimate of $1.63 or $40 per share in the next
12-18 months. Over the long term, the company needs to
undertake strategic initiatives to become a multi-product
company with long tailed earnings growth.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend. |
