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Headline: Agouron Pharma: Upgrading to a 1-BUY and Raising EPS estimates
Author: CA Butler,PhD/E.Ende,MD(212)526-4410
Rating: 2
Company: AGPH
Country: COM CUS
Industry: BIOTEC
Ticker : AGPH Rank(Old): 2-Outperform Rank(New): 1-BUY
Price : $31 1/2 52wk Range: $57-19 Price Target (Old): $46
Today's Date : 09/21/98 Price Target (New): $46
Fiscal Year : JUN
* We are increasing EPS estimates for Agouron Pharmaceuticals (AGPH) for FY99 (June fiscal year) from $0.94 to $1.33 and initiating FY00 EPS estimates of $1.85. In addition, we are raising our rating on the stock from a 2-Outperform to a 1-Buy.
* The EPS estimate increases reflect quicker penetration and greater market share assumptions for Viracept, the company's protease inhibitor. We are increasing our Viracept revenue assumptions to reflect two factors.
* First, we expect Viracept to capture market share from Merck, which sells a competing protease inhibitor (Crixivan), more quickly than previously anticipated.
* Second, we expect Viracept sales to accelerate over the next year as it captures market share due to a recently announced Norvir (a competing protease inhibitor by Abbott) manufacturing problem.
* We also believe that the increased competitiveness of Viracept could hasten a possible takeover of the company by several potential suitors. We have estimated a takeover price of approximately $48 per share.
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SUMMARY
We are increasing EPS estimates for Agouron Pharmaceuticals (AGPH) for FY99 (June fiscal year) from $0.94 to $1.33 and initiating FY00 EPS estimates of $1.85 to reflect quicker penetration and greater market share assumptions for Viracept, the company's protease inhibitor to treat HIV infection. We expect an incremental sales increase for Viracept of $28.4 million ($13.3 million in the US and $15.1 million in the ROW) in FY99 and $25.0 million ($12.0 million in the US and $13.0 million in the ROW) in FY00. In addition, we are raising our rating on the stock from a 2-Outperform to a 1-Buy.
The incremental revenue increases are a function of our expectation that Agouron will capture greater share of the protease inhibitor market from Merck (Crixivan) and Abbott {ABT, $42 7/8, NR} (Norvir). We are increasing our assumptions to reflect two factors.
First, we expect Viracept to capture market share from Merck (MRK, $134 7/16, 2-Outperform), which sells a competing protease inhibitor (Crixivan), more quickly than previously anticipated. A strong competitive advantage for Viracept has surfaced given that twice-a-day dosing is achievable for Viracept while it is not possible with Crixivan.
An analysis of data from a study, which was designed to compare Crixivan's (HIV protease inhibitor) approved dosing of three times-a-day (TID) to Crixivan dosed two times-a-day (BID) lead Merck to stop the clinical trials.
The company found that the TID regimen was significantly more effective at reducing viral load to undetectable levels (<400 copies/ml) at 24 weeks than the BID regimen (91% vs. 64%). Therefore, TID dosing will remain the suggested and approved dosing regimen.
Viracept has reported equivalent efficacy of BID vs. TID dosing and we expect an FDA filing for BID dosing to occur in six to nine months. We believe Viracept will capture greater market share from Merck given the newly recognized competitive advantage. We are projecting the incremental sales increase for FY99 to be $5.0 million ($4.0 million in the US and $1.0 million in the ROW) and $14.0 million ($9.0 million in the US and $5.0 million in the ROW) in FY00.
Second, we expect Viracept sales to accelerate over the next year as it captures market share due to a recently announced Norvir (a protease inhibitor by Abbott) manufacturing problem. Prior to the problem, Norvir sales were estimated at $250 million for FY98 equating to approximately 48,000 patient-years during the next twelve months.
For Agouron, we have estimated that every 275 patient-years captured in the US and every 550 patient-years captured in the ROW are worth $0.01 of EPS. We project an incremental sales increase of approximately $23.4 million ($11.0 million in the US and $12.4
million in the ROW) over the next 12 months and $11.0 million ($5.0 million in the US and $6.0 million in the ROW) in FY00 as physicians are forced to switch patients off their existing Norvir treatments converting patients primarily to Viracept-containing regimens.
Moreover, we believe that Agouron could be acquired by a major pharmaceutical company over the next year as an increasingly competitive Viracept franchise would add nicely to a potential suitor's bottom line. Viracept is likely to become the top selling protease inhibitor over the next twelve months. We have valued Viracept's cash flow at $850 million. Agouron's powerful sales force could provide an acquirer with a significant marketing effort as well as allowing a pharmaceutical company currently selling an HIV drug to spread selling expenses across other HIV products. We estimate that synergistic cost savings would be worth approximately $500 million to a pharmaceutical company.
Agouron has three HIV products in or close to entering human clinical
development, which we have conservatively valued at $300 million. These compounds could hit the market during the next 3 years, which would provide a strong pipeline to potential acquirers, such as DuPont, Pharmacia & Upjohn, Roche, Bristol-Myers or Abbott. In addition, Agouron's cancer business worth $125 million, net cash position of $80 million and tax loss carryforwards worth $50 million creates a potential takeover price of $48 per share (fully diluted to 40.0 million shares).
We are also adjusting FY99 quarterly numbers. We are decreasing our 1Q99 EPS estimate from $0.33 to $0.19 to be more in line with street consensus. In addition, we are lowering 3Q99 EPS from $0.28 to $0.08 to account for an expected $20.0 million milestone payment in the quarter. We are raising 2Q99 and 4Q99 numbers (for the reasons discussed above) from $0.24 and $0.11 to $0.51 and $0.56, respectively.
BUSINESS DESCRIPTION: Agouron is a biotechnology company with a rational drug design platform technology focused on the development of novel therapies for cancer, AIDS, and other life-threatening diseases.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. |
