Company must revive interest on Wall Street
By Thomas Kupper
UNION-TRIBUNE STAFF WRITER
July 21, 1998
SAN DIEGO -- Instead of celebrating the strongest year ever for a San Diego biotech company, Agouron Pharmaceuticals is facing hard questions this week about its prospects for the future.
As the company announces today what is expected to be its first profitable year, chief executive Peter Johnson also is expected to reveal a new strategy to maintain profits and revive interest on Wall Street.
The new strategy is a step that has become necessary amid fears of new competition for Agouron's successful Viracept AIDS drug and worries that costs for new Agouron drugs will eat into Viracept profits.
While Viracept has become the most popular of the protease inhibitors, an important component of AIDS "cocktails," investors have driven down Agouron shares nearly 50 percent over the last 10 months.
The shares plummeted to a 52-week low of $23 on July 7, shortly after glowing reports emerged about a new AIDS drug in testing, Sustiva, and one week after news that Agouron acquired two new AIDS compounds for further development.
That same day, Johnson sent Agouron employees and shareholders a memo blasting a "severe overreaction to simplistic media reports" and promising an "innovative plan" to regain momentum.
The stock has since rebounded somewhat and closed yesterday on Nasdaq at $29.50, up $2.12-1/2. "Some have conjectured that the advent of potent (new drugs) entails the demise of protease inhibitors, because protease inhibitors are not perfect," Johnson said in the memo. "We vehemently disagree."
A spokesman said Johnson would have more to say about the plan in discussions with analysts today, but would not comment beforehand.
Facing concern that it could become a "one-hit wonder," Agouron has recently taken bold steps to bolster its future pipeline, with a strategy of building a line of AIDS drugs that could be sold by the same marketing team as Viracept.
Last month, Agouron announced a deal to acquire the marketing rights for Remune, an AIDS treatment from Carlsbad-based Immune Response. Then came two compounds the company acquired from Japan, including a new protease inhibitor.
Additionally, Agouron already had its own research projects in the works, including a cancer drug on which it recently announced late-stage trials. But the reaction from Wall Street has been mostly negative, focusing on the potential for more research and testing to drag down profits.
The costs of the new deals led analysts to cut their consensus profit estimate to just 2 cents a share for the quarter Agouron will announce today, according to a survey of ten analysts by Zack's.
And for fiscal 1999, analysts have shaved 11 cents off their consensus estimate in the past month, according to Zack's. The latest consensus projection is $1.18 a share.
Analysts said they are expecting Agouron's response to be some type of off-balance sheet mechanism to separate the development costs for the new AIDS compounds from the Viracept profits.
James McCamant, editor of the Medical Technology Stock Letter in
Berkeley, said such a technique could allay Wall Street's fears that
development costs would erode the company's bottom line.
"It allows you to present good earnings and still do the things you need to do to ensure the long-term success of the company," McCamant said.
Though such an approach could take various forms, one example is the strategy of San Diego's Dura Pharmaceuticals, which set up a separate publicly traded company to develop its Spiros inhaler.
As for Viracept, Agouron said it sees a continuation of the growth the drug has shown since its launch in early 1997. In the most recent quarter for which Agouron posted results, Viracept fueled profits of $13.53 million, or 44 cents a share, while revenue reached $134.5 million.
For the fiscal year's first nine months, Agouron reported net income of $22.1 million, or 71 cents a share, on revenue of $331.0 million -- by far the strongest performance ever for a San Diego biotech.
Still, Johnson said in his memo that the company expects Viracept sales to continue to increase in the new fiscal year, and some analysts agree that it's unlikely new drugs would overtake Viracept soon.
"It would be completely irrational to assume that doctors who have two years of experience in prescribing Viracept and in seeing responses are going to all of a sudden change direction completely," analyst Alan Auerbach of Van Kasper & Co. said. |
