Top Stories: Embattled Agouron CEO
Reassures Employees, Investors
By Jesse Eisinger
Senior Writer
7/9/98 6:01 PM ET
Facing poor reports out of an important conference, a round of
cuts in analysts' earnings estimates and increasing skepticism
concerning the overall efficacy and safety of its drugs, biotech
upstart Agouron (AGPH:Nasdaq) continues to be on the
defensive.
With the share price plummeting, Agouron CEO Peter Johnson
is trying to resuscitate faith in the company with three new
licensing deals for anti-AIDS drugs. In a memo circulated
Tuesday meant to pep up employees and select analysts and
investors, Johnson said that later this month the company will
reveal "an innovative plan to aggressively pursue development"
of the newly licensed drugs.
It's not clear what Agouron's "innovative plan" will be. What is
clear is that Johnson is under pressure to boost the biotech's
sagging share price, which has plunged about 23% in the last
week and a half and is down over 50% since early October.
Agouron will do some sort of off-balance-sheet financing to fund
one or more of the three compounds, according to Donna
Nichols, an Agouron spokeswoman. She would not comment
on the potential equity or debt financings. In the last several
weeks, Agouron licensed a protease inhibitor from the Japan
Energy Corp., a Japanese conglomerate, and a promising new
AIDS treatment from Shionogi, a Japanese drug company. That
new compound is from a new group of AIDS drugs called
NNRTIs, or nonnucleoside reverse transcriptase inhibitors.
Johnson's rush to license even led him to do a deal for Immune
Response's (IMNR:Nasdaq) Remune, which was once was
supposed to be a vaccine for AIDS and now is meant to act as
an immune system enhancer. But analysts consider this a
controversial move, since after years of testing it continues to be
unclear what place, if any, Remune will have in AIDS treatment.
Immune Response stock rose about 55% in the days before the
conference but fell more than 20% during and after the meeting.
Johnson has sought to play up Agouron's new drug efforts as
the outlook has continued to dim for the entire class of protease
inhibitor drugs, of which AGPH's Viracept is the best-selling
member. In numerous news reports and Wall Street notes
coming from the early July AIDS meeting in Geneva, doctors and
analysts openly worried that protease inhibitors have
demonstrated severe limitations. As a class, they are not as
effective as they initially appeared, according to data from the
conference. Not only that, but many patients find the
protease-inhibitor regimens difficult to adhere to, while others
have shown increasing resistance to the drugs and new
resistant strains of HIV. The long-term side effects, like
excessive fat accumulation, may begin to pose problems. Many
of these problems were evident after last year's ICAAC meeting
in October.
Many investors on Wall Street now believe that the traditional
AIDS combination treatment -- a triple combination of a protease
inhibitor like Viracept or Merck's (MRK:NYSE) Crixivan and two
reverse transcriptase inhibitors such as Glaxo Wellcome's
(GLX:NYSE ADR) AZT and 3TC -- will be supplanted by a new
regimen. What replaces it is likely to be a combination both
nucleoside RTIs and non-nucleoside RTIs, such as DuPont's
(DD:NYSE) Sustiva, which could cut protease inhibitors out of
the mix entirely as the first choice for AIDS patients.
Also worrisome for Agouron and Merck is that once patients fail
on their first protease inhibitor, their doctors don't simply switch
their prescription to the other company's PI; they instead switch
to a combination of two other PIs: Abbott's (ABT:NYSE) Norvir
and Hoffmann-La Roche's Fortovase. Both of these now look
stronger, according to Craig Parker, an analyst for Donaldson
Lufkin & Jenrette. "I think PIs will be displaced as first-line
therapy," said DLJ's Parker, who attended the conference. And it
also looks like "Crixivan and Viracept will be displaced as
salvage [therapy]."
Parker said the main question is not when, but how fast Viracept
sales will erode, which is difficult to gauge. He guessed that the
erosion rate could be 20% over the next year.
But Agouron's Johnson is mounting an aggressive defense
against this view. Terming the reports out of the Geneva
conference "sensationalistic," Johnson's memo defends
Agouron's research against the increasing evidence that it is
being surpassed in efficacy by the NNRTIs. His memo states,
"Some have conjectured that the advent of potent NNRTIs such
as efavirenz [DuPont's Sustiva] entails the demise of protease
inhibitors, because protease inhibitors are not perfect. We
vehemently disagree."
If so, he's got an uphill battle. Even before the Geneva meeting,
investors were worried that Viracept sales were flattening and
that Agouron's balance sheet was weak, with inventories rising
faster than sales. Wall Street analysts, already struggling with
earnings estimates in light of the recent licensing deals, spent
much of last week cutting their Agouron earnings and sales
estimates.
Agouron spokeswoman Nichols insists that Agouron will meet
its target of $350 million to $360 million in Viracept sales in
fiscal 1998. And, in the memo, Johnson says that the company
expects to sell more Viracept this fiscal year than last. Nichols
said that the current consensus of earnings of 1 cent per share
in the fiscal fourth quarter and 68 cents per share for the year
are likely to be adjusted. Agouron will announce its earnings
results for the fiscal fourth quarter on July 21.
Short-sellers focus on Agouron's balance sheet as a point of
worry for the company. Inventories have risen 57% from $57.9
million in its first fiscal quarter to $91 million in the third quarter,
or nearly three months' worth of sales. While Agouron has
always had a high ratio of inventories-to-sales as it rolled out
Viracept, why, if the company is as successful as it claims, do
they remain so high, one California short-seller asks. Agouron's
most recent short position was 9.1 million shares, around 29%
of the shares outstanding.
When queried, Chief Financial Officer Steven Cowell said that
the balance sheet was strong and that the company's earnings
were of high quality: "There is no smoke, no mirrors. There is no
suspicion as to the quality of earnings." He said that receivables
and inventory were rising due to increased demand, primarily
from its European partner Roche.
As Cowell pointed out, as sales go up, receivables do, too. And
he said that the inventory level, at about $100 million, was "not
unreasonable." In the fiscal fourth quarter, he foresees inventory
"ticking up" by less than 10%, based on the company's ongoing
need to satisfy Roche's demand. He said receivables would be
down a bit in the fourth quarter.
Agouron wasn't the only AIDS stock to run into trouble during and
after the sober, even depressing, Geneva conference. Vertex
(VRTX:Nasdaq), which licensed its protease inhibitor to Glaxo,
has fallen about 25% since late June.
If Agouron is in difficult straits, then Vertex is probably worse off.
The company has a market cap of $530 million, but has yet to
launch its long-delayed PI. Its protease inhibitor is still not
launched and was shown to not have a potency or resistance
advantage at the Geneva meeting, according to several
investors who attended. Rumors abound that Glaxo will give
back rights to the drug to the biotech company -- always a bad
sign. "I think to justify the current valuation, Vertex has to sell
more Amprenavir than Viracept," said DLJ's Parker. Is that
unlikely?
"Yes."
Also, Gilead (GILD:Nasdaq) plummeted 27% on worries about
the kidney and liver toxicity of its AIDS drug Preveon. Several
firms, including DLJ, Merrill Lynch and Furman Selz,
downgraded the stock last week.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
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