Citi: CVTX: Merlin's Outcome is Key to Future Success
HOLD (2)
Speculative (S)
Mkt Cap: $1,099 mil.
January 16, 2006 SUMMARY
* On Jan. 27, Ranexa is widely expected to be approved for refractory angina, a relatively small U.S. market (~$600M).
* Our physician consultants note that Ranexa will be a niche product due to narrow label and marginal clinical benefit (only symptomatic relief). Since investors largely share this outlook, we believe that expectations are low.
* While ACEON has recently received label expansion due to EUROPA label, ACE inhibitor market is competitive and dominated by KG/WYE's Altace, a tough competitor to unseat. This should translate into modest sales.
* However, modest investor expectations for Ranexa and ACEON should moderate downside pressure on the stock. But we also do not expect signif. NT appreciation since upside surprise to estimates is only possible if the ongoing MERLIN study shows positive data in late '06/early '07. Thus, we are initiating coverage with Hold/Speculative rating and $30 target price.
FUNDAMENTALS
P/E (12/05E) NA
P/E (12/06E) NA
TEV/EBITDA (12/05E) NA
TEV/EBITDA (12/06E) NA
Book Value/Share (12/05E) $0.17
Price/Book Value NA
Revenue (12/05E) $22.0 mil.
Proj. Long-Term EPS Growth NA
ROE (12/05E) (508.4%)
Long-Term Debt to Capital(a) 98.3%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (1/16/06) $24.70
Rating (Cur/Prev) 2S/NA
52-Week Range $29.76-$19.15
Target Price (Cur/Prev) $30.00/NA
Shares Outstanding(a) 44.5 mil.
Expected Share Price Return 21.5%
Div(E) (Cur/Prev) $0.00/NA
Expected Dividend Yield 0.0%
Expected Total Return 21.5%
OPINION / INVESTMENT THESIS
CV Therapeutics is poised to become a commercialization stage biotech company
with the launch of first in class anti-anginal Ranexa in March, and its co-
promotion of Solvay's ACE inhibitor, ACEON. However, since Ranexa is likely to
be a niche product due to a narrow label, we believe that the stock is fully
reflecting the value of this market segment. Future upside is possible by label
expansion to front-line patients that hinges on a positive outcome in the
MERLIN study in late '06/early '07.
WE ANTICIPATE APPROVAL FOR RANEXA IN REFRACTORY ANGINA.
In clinical studies, Ranexa has demonstrated improvements in angina frequency,
nitroglycerine use, and exercise tolerance. On the heels of these data, we
expect approval for the treatment of refractory angina by the January 27th
PDUFA action date. Based on our discussions with practicing specialists, we
believe only 5%-10% (or 600,000) of all patients suffering from angina fit into
this indication, translating into a relatively modest market opportunity of
$600 million in the U.S. We forecast a gradual launch and peak sales of $322
million, lower than Street consensus. In our view, upside surprise to current
estimates is possible if the ongoing MERLIN study is successful in late
'06/early '07 since this could drive label expansion that would include the
entire angina population (estimated at 7M patients) and could acute coronary
syndrome (ACS) population of 1.5M patients.
ACEON - A NICHE PRODUCT- BUT ROYALTIES REVS SHOULD BOOST EPS.
CVT has built a 250-person cardiology sales force to promote Ranexa and co-
promote ACEON alongside partner, Solvay Pharmceuticals, in exchange for an
estimated 55% royalty rate. ACEON has been a modest seller due to a narrow
label for hypertension. Due to an expanded label that includes stable
cardiovascular disease, we expect that sales will grow from $43 million in '06
to $99 million by 2010. However, ACEON will remain a niche product due to lack
of perceived differentiation by physicians and the potential availability of a
generic version of market-leading Altace over the next 2-3 years.
STOCK ADEQUATELY DISCOUNTING RANEXA'S INITIAL LABEL - INITIATING WITH HOLD
RATING.
We are initiating coverage with a Hold/Speculative rating since we believe the
stock is adequately reflecting the value of Ranexa given its expected
restricted label. This leads us to believe future upside potential will depend
on obtaining label expansion into the bigger first-line setting. While
expectations for the MERLIN study are modest, we do not expect significant
stock price appreciation ahead of that data release since we do not expect that
Ranexa will materially surpass our inline-with-consensus estimates.
Furthermore, we share the current sentiment that ACEON only has modest sales
potential. Thus, we do not expect that this product would provide upside
surprise to our estimates over the next 12 months either.
ON THE VERGE OF BECOMING A COMMERCIAL STAGE COMPANY
After receiving an approvable letter for Ranexa (ranolazine) for stable angina
in October 2003 that left investors skeptical about the potential for future
approval, CV Therapeutics commenced its comeback in November 2004 when
enrollment in the subsequent pivotal ERICA trial completed ahead of schedule.
Then in April 2005, the company announced that the ERICA study was successful,
thereby boosting confidence about the approvability of Ranexa since the study
was conducted under a special protocol assessment (SPA).
In July 2005, CVTX resubmitted the new drug application (NDA) for Ranexa and we
expect approval by the January 27th, 2006, FDA Prescription Drug User Fee Act
(PDUFA) deadline. If approved, Ranexa will be the first class of drugs to be
approved for chronic stable angina in two decades. We believe that CVT will use
the American College of Cardiology meeting March 11-14th as the springboard to
launch Ranexa, and forecast sales for Ranexa starting in the second quarter.
This milestone will trigger the entry of CVT into the exclusive club of biotech
companies with internally developed products.
In December 2004, CV Therapeutics also entered into a co-promotion agreement
with Solvay Pharmaceuticals for ACEON, an angiotensin converting enzyme (ACE)
inhibitor. The agreement provides CV Therapeutics with detailing rights for
ACEON in exchange for royalties on sales. CVT commenced detailing of ACEON in
October 2005 and should start receiving royalties on sales in the first quarter
of 2006. ACEON was originally indicated for the treatment of hypertension
(high blood pressure), but received label extension to reduce the risk of
cardiovascular mortality or non fatal myocardial infarction in patients with
stable coronary artery disease in August 2005.
CV Therapeutics will market ACEON and Ranexa in the U.S. through its 250-person
cardiovascular specialty sales force, which is already fully deployed. Since
its lows in October 2003, shares of CV Therapeutics appreciated by 112% as
investors come to appreciate the value of these two products.
Figure 1: CV Therapeutics Stock Chart
Source: FactSet
EXPECTING A SLOW RANEXA LAUNCH DUE TO NARROW LABEL
Based on our discussions with practicing specialists, we believe that Ranexa
will be off to a slow launch driven by its expected narrow label that restricts
use to patients with refractory angina. In our view, the stock is already
reflecting the opportunity inherent in this market segment (since our revenue
assumptions are mostly in line with consensus estimates), leading us to believe
that future upside potential will depend on obtaining label expansion for
Ranexa into the bigger first-line setting. While we like the risk/reward
heading into release of data from the MERLIN study in late 2006/early 2007 that
could drive this label expansion, we do not expect significant stock price
appreciation until we get closer to that event.
Furthermore, we share the current sentiment that ACEON only has modest sales
potential and reflect this view in our model. Thus, we do not expect that this
product would provide upside surprise to our estimates either.
While we like the potential financial leverage offered in the model by CVT's
focus on cardiology with 2 marketed products and potential to receive royalty
payments from sales of Regadenoson, we also expect high financial losses over
the next two years before the impact of this leverage becomes apparent.
RANEXA -- FIRST IN CLASS PFOX/LATE SODIUM CURRENT CHANNEL INHIBITOR
Ranexa was originally believed to be a partial fatty acid oxidation inhibitor
(pFOX) that improved the metabolic efficiency of the heart, thereby reducing
cardiac exertion. However, more recent research has suggested that the drug
predominately exerts its effects via inhibition of the late sodium current
channel. The late sodium current is thought to be an abnormal influx of sodium
seen in angina, which makes the ventricular wall stiff and inflexible. As
oxygen consumption is directly proportional to cardiac muscle tension, this
lack of elasticity in the ventricular wall increases oxygen consumption and
decreases cardiac efficiency. In angina, where the heart muscle is already
starved of oxygen due to coronary artery blockage, this loss of efficiency is a
severe burden and could exacerbate the underlying cardiac disease.
RANEXA HAS SHOWN EFFICACY IN SEVERAL PIVOTAL STUDIES...
Ranexa was initially evaluated in two exercise tolerance studies, first as
monotherapy (MARISA) and the second as combination therapy with other commonly
used anti-anginal drugs such as calcium channel blockers (CARISA). In both
cases, treadmill exercise duration was measured at trough drug concentrations
in the blood and showed significant increases over placebo. In MARISA and
CARISA, Ranexa improved exercise duration over placebo by 33 seconds (1,000 mg
dose, p=NS) and 24 seconds (750mg and 1000mg doses pooled, p=0.01)
respectively. In addition in the CARISA study, Ranexa reduced angina attacks by
1 episode per week and reduced nitroglycerine use by 1 tablet per week (p=0.02
for each). These two studies were the basis of the original new drug
application (NDA) application for Ranexa in December of 2002.
However, since the Food and Drug Administration (FDA) was not satisfied that
the population included in those two studies adequately assessed the effects of
Ranexa on top of maximally prescribed background therapy, an additional pivotal
study was requested. The ERICA trial was designed to address the deficiencies
outlined in the approvable letter received in October of 2003, and was covered
by a special protocol assessment (SPA).
ERICA enrolled patients who were treatment refractory (symptomatic despite
conventional therapy) and had at least 3 angina attacks per week despite
maximal doses of the calcium channel blocker amlodipine (Norvasc). In
addition, approximately 50% were on long acting nitrates as background therapy.
Ranexa reduced angina attack frequency, the primary endpoint, by a modest 0.4
attacks per week (p=0.028), and reduced nitroglycerine use by 0.6 tabs a week
(p=0.0014). On the Seattle Angina Questionnaire, a measure of quality of life,
only the angina axis was significantly improved, however there were suggestions
on other axes that patients' were able to increase their overall activities of
daily living.
While this improvement is relatively incremental, it does offer a new option
for patients. On the heels of this data, CVT submitted the supplemental NDA
for Ranexa to the FDA in July 2005 and we expect approval by the January 27th
deadline.
...AND QTC PROLONGATION CONCERNS HAVE MOSTLY BEEN RESOLVED...
In both the CARISA and MARISA studies, patients on Ranexa experienced a small
and clinically insignificant upwards of 9 milliseconds (msec) prolongation of
the QTc interval (the electronic conduction current controlling synchronized
heart beats). In a pooled analysis of Ranexa trial data, between 1.1% and 3.7%
of patients had a prolongation of the QTc interval on EKG of >60 msec, a
threshold that requires further clinical monitoring.
Cardiologists are wary of drugs that prolong this interval due to the potential
to develop a Torsade des Pointes (TdP) arrythmia (potential life threatening
irregular heart beat). Encouragingly, thus far there have not been any episodes
of TdP in patients treated with Ranexa including in a 24-patient study where
Ranexa at 4-8x the commercial dose was administered intravenously.
In our view, while the issue of the QTc prolongation has been largely put to
bed, there will inevitably be a mention on this in Ranexa's label that will
likely draw some mild concerns from physicians. The upcoming MERLIN study will
further investigate Ranexa's safety. If Ranexa's safety is further proven in
that study, this should both enable Ranexa to obtain a label for the treatment
of chronic angina as first-line therapy (as opposed to refractory angina as is
expected upon approval) and fully resolve any safety concerns.
RANEXA WILL BE INDICATED FOR REFRACTORY ANGINA, AND UPTAKE WILL BE SLOW
INITIALLY
Angina is usually treated medically unless a direct surgical intervention is
indicated to relieve a distinct arterial blockage with a percutaneous coronary
intervention (dilating the vessel with a balloon catherter) or by open-heart
bypass, where venous grafts are used to provide paths around blockages. When
patients need medical therapy, a beta blocker is typically the first line of
therapy since this class of molecules has shown the best evidence of preventing
mortality in angina patients. If beta blocks are poorly tolerated or
ineffective, calcium channel blockers or nitrates are typically the next line
of therapy. However, unlike beta blockers, these agents have not shown a
mortality benefit.
Since Ranexa was used in the ERICA study in patients who were symptomatic while
on at least one other anti-anginal agent, our physician consultants believe
that Ranexa will be principally used in practice as an add-on therapy after
most other therapies have been tried. In their view, Ranexa will likely have a
gradual launch into the market as physicians slowly gain experience and comfort
with this drug. Since Ranexa has only shown symptomatic relief but no outcomes
improvement, it is unlikely to trump usage of the older and cheaper generic
versions of the other classes of drugs that are well-entrenched in the American
College of Cardiology angina treatment guidelines.
REFRACTORY ANGINA IS A SMALL BUT LUCRATIVE MARKET
While the overall angina market is large with an estimated 6.7 million patients
suffering from this condition, our physician consultants note that only 5-10%
of patients are currently symptomatic despite maximal therapy. Importantly,
over 97% of the ERICA trial subjects came from sites outside the United States,
which confirms our consultants' impressions that there are relatively few
symptomatic patients in the U.S. as a percentage of the overall market.
Due to aggressive medical therapy and vastly improved interventional options
including drug-coated stents that offer long patency, >80% of treated patients
are free of symptoms and 20-40% are able to stop anti-anginal medication
completely following angioplasty (Surrys, NEJM 2001). New interventional
technology has been so successful at controlling angina symptoms that we do not
expect the refractory angina population to grow faster than the general
population, despite the well-documented aging trend in the US.
A recent article by Yang estimates that the number of refractory patients in
the U.S. is between 300,000-900,000 (Mayo Clin Proc. 2004 Oct;79(10):1284-92),
and based on our physician checks, we feel that 600,000 is a reasonable
estimate.
Assuming an annual cost of $1,000, the U.S. refractory angina market amounts to
$600 million. We expect approval of Ranexa by the FDA during the first quarter
of 2006 and project that sales could commence in the second quarter.
Penetration of Ranexa into the refractory population will increase from 6% in
2006 to 49% by 2010, and yield U.S. sales of $37 million, $152 million, $232
million, $322 million, and $376 million in 2006-10, respectively. Overall, our
sales estimates are mostly in line with consensus.
In Europe and Japan, approximately 930,000 patients are afflicted with chronic
stable angina, translating into an additional $930 million opportunity. CV
Therapeutics pulled back its marketing application in Europe in October after
the EMEA requested additional pharmacokinetic studies to support approval. The
company has not communicated its re-filing plans and guided the Street to view
the ex-U.S. opportunity as a potential upside since it is not currently a high
priority area for the company.
OFF-LABEL SALES IN EARLIER STAGE PATIENTS COULD DRIVE UPSIDE
As with any drug that is launching into a large market but will only be
indicated for a small subpopulation, questions remain as to whether or not
Ranexa will be used off-label by physicians in early stage patients. In support
of off-label usage, Ranexa offers physicians a novel mechanism of action
without causing a decrease in blood pressure or heart rate that plagued several
of the competing classes of drug (i.e. beta blockers, ACE inhibitors and
calcium channel blockers).
However, on the other hand, Ranexa only offers symptomatic relief, and its
ability to improve the natural history of the disease is unproven. Our
physician consultants state that since certain agents such as beta blockers and
angiotensin converting enzyme (ACE) inhibitors have reduced cardiac mortality
by 11%-23%, it will difficult to unseat any of the well-entrenched classes that
have dominated the treatment of angina over the past several decades.
Thus, Ranexa will not be widely used in early stage patients during the first
stages of its launch. Our physician consultants expect that Ranexa will be off
to a slow launch as the community is educated about the features of this new
drug. In our model, we do not currently include any off-label sales in first-
line settings and view this as upside to our expectations.
MERLIN TRIAL IS TAKING AIM AT THE FIRST LINE POPULATION
CV Therapeutics, in coordination with the prestigious TIMI Study group, have
initiated a large double-blind, placebo-controlled study in patients with non-
ST elevation acute coronary syndromes (ACS) treated with standard therapy. The
primary endpoint is first occurrence of any element of the composite endpoint
of cardiovascular death, myocardial infarction or recurrent ischemia.
MERLIN was originally designed to enroll 5,500 patients, but due to a low event
rate will now enroll 6,500 patients and will not report final results until
late 2006 or early 2007. An interim look is planned in Q2 2006, but since the
statistical bar for success is high (p<0.001 in cardiovascular mortality), the
company has been moderating expectations.
In the study, patients will receive Ranexa intravenously first in the acute
setting and then followed after discharge with chronic oral dosing. The
complexity of the trial, and the relative paucity of details released about its
design, makes handicapping success difficult.
Since many of the patients in the study will be new angina patients, the
company hopes to accumulate enough experience in this trial to support an
application for front line use. A critical factor necessary to support a
broader label is that MERLIN shows no increased trend to arrhythmia or death,
thereby putting to rest any remaining concerns about QTc prolongation.
EXPECTATIONS ARE LOW, BUT THE BAR IS HIGH
While we believe that investor expectations have been kept at bay, the bar for
success in meeting the primary endpoint in this trial is high. First, there has
only been limited experience with intravenous use of Ranexa in randomized
studies. More so, there is no clinical evidence that Ranexa will be successful
in treating or preventing acute coronary syndromes, as the benefits
demonstrated thus far are limited to improvements in symptoms and exercise
tolerance.
Nevertheless, if Ranexa shows an improvement in the composite endpoint, the
drug will inevitably find a broader audience and surpass investor expectations.
More so, it is reasonable to expect that Ranexa will be found to be safe and
thus garner label expansion into the first-line angina market.
ACEON IS A STRATEGIC COMPLEMENT TO RANEXA...
In December 2004, CV Therapeutics entered into a co-promotion deal with Solvay
Pharmaceuticals' for ACEON, an angiotensin-converting enzyme (ACE) inhibitor.
The deal will last at least until 2010, since ACEON is expected to lose patent
exclusivity in November 2009.
This transaction was designed to provide CV Therapeutics with another
cardiology product to increase the leverage of its new 250-person cardiology
sales force. This sales force, in combination with an additional 21 district
managers and 4 regional managers, is now fully deployed, detailing Aceon since
October of 2005.
As part of the deal, CV Therapeutics did not provide any cash upfront and will
receive a 50-60% royalty (we estimate 55%) on annual sales above a pre-
specified threshold (we estimate at $30 million). In line with the agreement,
Solvay will continue to record sales of ACEON and employ its primary care sales
force to detail the product.
In August 2005, the FDA approved ACEON's label expansion to include the
treatment of stable coronary artery disease on the basis of the EUROPA trial.
Previously, ACEON was only indicated for the treatment of hypertension. The
EUROPA (EUropean trial on Reduction Of cardiac events with Perindopril in
stable coronary Artery disease) study enrolled 12,218 patients with stable
coronary artery disease. Results showed that ACEON (perindopril) reduced by 20%
the combined primary endpoint of cardiovascular mortality, non-fatal myocardial
infarction, and cardiac arrest compared with placebo (p=0.0003).
BUT ACEON IS FACING SIGNIFICANT COMPETITION IN AN UNDIFFERENTIATED MARKET
The ACE inhibitor market is highly competitive, with many poorly differentiated
products. Most of our physician consultants maintain that cardiovascular
benefits are a class effect, and are not proven to have widely different
effects from one another. However, not all physicians share this view.
Contributing to the challenges of this market segment is the availability of
many cheap generic versions.
Recently, physician experts have argued that certain ACE inhibitor have better
tissue penetration (tissue ACE inhibitors) and thus have shown better clinical
outcomes. However, since the actual level of tissue activity necessary to be
included in this category is not standardized, and experts differ on what
constitutes ample tissue penetration to cause the outstanding clinical benefit,
this view remains highly controversial. Furthermore, since not all tissue ACE
inhibitors have shown improved clinical benefits, this has called into question
whether this feature is important.
The most notable tissue ACE inhibitor is King/Wyeth's Altace (ramipril) that
has become the best selling drug in the market on the heels of robust results
in the HOPE study. Recently, CVT's ACEON, an additional tissue ACE inhibitor,
has also showed strong clinical results in the EUROPA study, thereby bolstering
the argument that high tissue penetration is important to improve outcomes.
However, the failure of Abbott's Mavik (trandolapirl) to show an outstanding
clinical benefit in the PEACE study, provides a counterargument against the
merits of high tissue penetration.
Figure 2: Selected Branded ACE Inhibitor U.S. Sales ($MM)
Source: IMS Health
...AND THE BEST KNOWN TISSUE ACE INHIBITOR, ALTACE, MAY GO GENERIC
Altace, the highest selling ACE inhibitors with best improvement in clinical
outcomes, is slated to go off patents in 2008. However, Cobalt, a Canadian
generic maker, has successfully contested the patent estate, and been granted
180-day market exclusivity by the FDA in October 2005. While Cobalt is now free
to launch at risk, the firm has chosen to await the outcome of its litigation
against the sole remaining patent that is set to expire in 2008.
GENERIC ALTACE COULD CAP ACEON SALES
While the outcome of this litigation is too close to call, it appears that
generic versions of Altace will become available by 2008 at the latest. Our
physician consultants have noted that a generic version of Altace will likely
capture an outstanding portion of the market and make it exceedingly difficult
for ACEON to get favorable formulary status over the long-term. This is because
Altace offers equivalent, if not better, cardiovascular benefits than ACEON.
Figure 3: HOPE versus EUROPA Study Results
Source: HOPE study investigators, NEJM, 2000 and EUROPA study investigators,
Lancet, 2003
STREET EXPECTATIONS FOR ACEON ARE APPROPRIATELY MODEST
While ACEON is a major player in Europe, selling >$500 million annually, due to
a late launch into a crowded hypertensive market in the U.S., ACEON sold only
$36 million in 2004.
Because of the relative lack of differentiation and increasing generic
competition, we have modest expectations for ACEON, forecasting slowly growing
sales starting at $43 million in 2006 and peaking at $99 million in 2009.
However, we believe that the Street has similarly modest expectations for the
drug. Thus, any upside surprise, albeit not an easy task to achieve, could lead
to price appreciation.
REGADENOSON IS ADVANCING IN PHASE III STUDIES
Regadenoson, an adenosine A2A agonist, is a cardiac stimulating agent that is
being developed with partner, Astellas, for use in myocardial perfusion imaging
studies in patients who cannot undergo cardiac stress testing. Regadenoson is
an improvement over the current standard of care, Astellas's Adenoscan that is
currently selling >$300 million annually and growing at low double digits.
Since Adenoscan is expected to lose patent exclusivity in 2007, Regadenoson is
being developed as a more convenient and better-tolerated alternative.
In the first of two pivotal trials Regadenoson demonstrated better tolerability
than Adenoscan, with approximately half of the episodes of flushing and
dyspnea, and equivalent image quality. Regadenoson is given by an intravenous
bolus versus a 6 minute infusion for Adenoscan, thereby reducing the cost
associated with the infusion pump. One of the potential benefits of Regadenoson
could be lower rates of heart block vs. Adenoscan, although the first trial was
underpowered to detect a significant difference (there was a trend of 1 case in
the Regadenoson arm vs. 3 in the Adenoscan arm).
Data from the second pivotal study is expected in mid-'06 and NDA filing is
expected by year-end. That should place Regadenoson on the path for approval in
late '07. While Adenoscan is not expected to lost patent exclusivity until May
2009, Teva Pharmaceuticals's Sicor subsidiary is challenging the patent and
could launch as early as October 2007.
Two competing agents are in development from Bristol-Myers Squibb (phase III)
and King Pharmaceuticals (phase II) that are 1-3 years behind Regadenoson in
the race to the market.
Due to generic availability and encroaching branded competition we forecast
that Regadenoson will sell $20 million, $60 million, $100 million, and $140
million in 2007-10. In line with a 20% royalty to CVT on regadenososn and an
estimated 3% royalty on residual sales of Adenoscan, we expect that this
royalty stream will be highly accretive to earnings. In line with the
agreement, Astellas has been reimbursing CVT for 75% of development costs and
CVT will not fund any of the commercialization expenses.
REMAINDER OF THE PIPELINE INTERESTING BUT EARLY
Tecadenoson, a drug for the conversion of rapid heart rate during atrial
arrhythmias, is an adenosine A1 receptor agonist. This novel agent was
successful in an 181 patient phase III trial where most patients converted
after one or two iv doses, and suffered from fewer episodes of hypotension than
conventional agents. A second pivotal trial is planned in the future, but
developmental progress on this agent has not been proceeding at a rapid pace.
CVT 6883 is an adenosine A2B antagonist for the treatment of asthma in phase I
clinical trials. This agent is orally available, and may be administered once
or twice a day, which differentiates it from the inhaled medications dominating
this market. As blockade of this adenosine receptor prevents mast cell
degranulation, CVT 6883 has the potential to block the release of many
inflammatory cytokines simultaneously.
While these programs compose an interesting pipeline, we consider them upside
to our forecasts, and expect that Ranexa's success or failure will drive CVT's
valuation for the next several years.
Figure 4: CV Therapeutics' Clinical Pipeline
Source: Company reports
FINANCIALS
We expect that CVT will become a commercial company in 2006 with two marketed
products -- Ranexa and ACEON. Due to the expected launch of Ranexa commencing
in March 2006 and large development costs continuing through 2007, we do not
expect that CVT will turn a profit until 2009. As of June 30th, 2005, CVT had
total $682.6 million in operating loss carry forwards, and we predict that this
number will increase to $1,262 million by the time CVT attains profitability.
On the heels of sales from Ranexa and royalties from ACEON and Regadenoson, we
project that total revenues will increase from $69 million in 2006 to $439
million in 2010 (59% CAGR). At the same time, total expenses (excluding stock
option expensing) will grow from $311 million in 2006 to $358 million in 2010
(4% CAGR). The reason for this modest growth is due to the fact that CVT
commercial operations will be functioning at full scale by the end of 2006,
thereby requiring relatively modest further annual increases. At the same time,
R&D expenses are expected to decrease once the expensive MERLIN study concluded
in 2007. Since we do not factor in any future revenues from pipeline projects,
we are also not factoring in for significant acceleration in spending.
We forecast that CVT will post pro-forma EPS of $0.77 (fully tax adjusted of
$0.72) in the first year of profitability growing to $1.04 by 2010 (fully taxed
adjusted of $0.93). Our pro forma EPS excludes the effect of stock option
expensing from GAAP EPS.
Our model suggests that while CV Therapeutics' free cash flow will gradually
improve in concert with top-line growth, the company will not generate positive
free cash flow until 2009 posting $13 million during the year and increasing to
$41 million by 2010.
CV Therapeutics has $399.5 million in convertible debt, of which $150 million
is "in the money". We expect that the company will opt to call this note after
the May 20, 2009 date and reflect the 8.48M converted shares in our fully
diluted shares outstanding count starting in 2009.
It should be noted that the 2023 convertible bond has a put option in 2010.
However, since it is substantially "out of the money", we have not included
conversion in our fully diluted shares outstanding count.
Figure 5: CV Therapeutics' Convertible Debt
Source: Company reports
We anticipate that the company will need to pursue additional financing in
2006, and have modeled $210 million in additional equity offered in Q4, that
should be sufficient to drive the company to profitability.
Figure 6: CV Therapeutics Quarterly P&L ($MMs)
Source: Citigroup Investment Research
Figure 7: CV Therapeutics Annual P&L ($MMs)
Source: Citigroup Investment Research
Figure 8: CV Therapeutics Balance Sheet ($MMs)
Source: Citigroup Investment Research
Figure 9: CV Therapeutics Statement of Cash Flows ($MMs)
Source: Citigroup Investment Research
VALUATION
Our $30 target price is based on an average of two different valuation metrics:
1) 45x our discounted fully taxed 2010 EPS estimate of $0.93; and 2) 8x our
discounted EV-to-projected 2010 revenues estimate of $439 million. We use an
average of these two diverging valuation techniques to neutralize the effects
on any single parameter and obtain a more balanced view of the underlying value
of the business.
In our valuation analysis, we compare CV Therapeutics to a group of mid-cap,
emerging biotech companies. We use this particular group of comparables as
these stocks approximately reflect the range of multiples that the market has
been willing to attribute mid-stage companies in the period around their
product launch and preceding profitability.
Figure 10: Mid-Cap, Emerging Biotechnology Comparable Stock Group
Source: Citigroup Investment Research, First Call, FactSet
Our analysis suggests that investors typically attribute a 46x trailing P/E
multiple to the earnings during the second year of profitability (first year of
profitability by which we can comfortably value the company) to is group of
mid-cap biotech companies. In our valuation analysis, we use a 45x multiple to
our 2010 EPS estimate for CVT (second year of profitability) as we believe that
CVT should be allocated a similar multiple to its peer group. This valuation
technique suggests a $20/share price target.
We used a 25% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We apply a 25% discount rate to
unapproved products that have successfully completed clinical development with
solid data as outlined in a first call note titled "Visiting Valuation"
published on May 26, 2004.
We also employ an enterprise value-to-revenue multiple approach in valuating
mid-cap, emerging biotech companies since this technique allows the valuation
of stocks that have not yet achieved profitability. Once again, we argue that
CVT should receive an equivalent multiple to its peer group since we expect
that Ranexa will largely perform in line with expectations and do not see a
reason to apply a multiple that either exceeds or lags this of the group.
We thus assign an 8x EV-to-2010 revenue multiple (again, the second year of
profitability), in line with its peer group multiple. We also used a 25%
discount rate in this analysis. This valuation methodology represents a target
price of $40/share.
We used a 25% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We apply a 25% discount rate to
unapproved products that are in mid-clinical development with solid data as
outlined in a first call note titled "Visiting Valuation" published on May 26,
2004.
Figure 11: Valuation Metrics
Source: Citigroup Investment Research
RISKS
We rate CV Therapeutics shares Speculative risk since the company's future
growth prospects are mainly dependent upon the successful development and
commercialization of Ranexa in stable angina and ACEON for hypertension and
stable coronary artery disease. Since these markets are highly competitive, CV
Therapeutics must successfully compete to establish these drugs in their
indications. Failure to do so could prevent the company from reaching
profitability.
In the following, we discuss the primary risk factors that could have a
material impact on the potential for the shares to achieve our target price:
Ranexa will likely be approved with a narrow label for use in refractory stable
angina, a relatively small market. Since the angina market is highly
competitive and dominated by well-entrenched, generic drugs, Ranexa might be
off to a slow launch. While we believe that expectations are reasonable, the
launch might be more gradual than expected.
The ongoing MERLIN study is also facing a high bar to show efficacy in acute
coronary syndromes. However, we believe that expectations are reasonable in
this regard.
Ranexa exhibited a small and clinical insignificant QTc prolongation on EKG in
the CARISA and MARISA clinical trials. Theoretically, this may increase the
probability of life threatening arrhythmias in patients taking this drug.
However, it is very reassuring that there were no arrhythmias noted in the
phase III ERICA trial. Nevertheless, angina patients are prone to arrhythmias,
and if any surface in subsequent clinical testing or post marketing experience,
this could detrimentally impact the market potential of Ranexa.
The composition of matter patent on Ranexa expired in 2003, but several patents
have been issued on the sustained release formulation that will be used
commercially. In addition, method of use patents of sustained release Ranexa in
the treatment of angina will offer protection through 2019. There is always a
risk that these patents will be challenged. The two composition of matter
patents on Regadenoson and ACEON expire in 2009 and 2019, respectively.
CV Therapeutics is dependent on partner Astellas Pharma for the marketing of
Regadenoson if approved in 2007. Astellas is currently marketing Adenoscan, the
market leading myocardial perfusion imaging (MPI) agent. Adenoscan could face
generic competition in 2007 at approximately the same time when Regadenoson
could be launch. The entrance of generic competition could disrupt the dynamics
of the market and reduce its commercial value.
CV Therapeutics is dependent on outside contract manufacturers to produce their
products leaving the company exposed to lapses in quality control or
interruptions to the supply if these supply contracts are disrupted.
We project that CV will need to seek funding in late 2006 to finance ongoing
development of their pipeline. If market conditions at that time are not
favorable or CVT's financial outlook disappoints, attaining additional funds
might be difficult.
As our initial rating is a Hold, upside risks are relevant also. As a case in
point, if Ranexa is used off-label, sales might be higher than we predict,
thereby leading the stock to outperform our expectations. In addition, if the
interim analysis of the MERLIN study is positive in Q2, CVT could conceivably
file an sNDA for an expanded indication in 2006 instead of 2007, leading to
significant stock price increases.
If the impact of these risk factors is greater than we anticipate, shares may
have difficulty achieving our target price. Conversely, if these risks have
less of an impact than we envision, the stock may exceed our target price.
MILESTONES
Over the next 12-18 months, CV Therapeutics will have several important
catalysts that will largely outline the future prospects for the stock. In late
January, we expect that the FDA will approve Ranexa, albeit this is already
reflected in the stock, in our view. The most important next trigger will be
quarterly reporting of Ranexa sales that will largely clarify the market
potential of the product.
In mid-'06, data from the second phase III study of Regadenoson will be
released and we expect presentation of the full efficacy and safety data from
the first study at some point during the year. These results should also build
confidence in this program.
Finally, by late 2006/early 2007, results from the MERLIN study testing Ranexa
is ACS will be released. This data could both open another market for Ranexa
and also provide for a label expansion to include first-line angina patients.
Figure 12: Expected CV Therapeutics Milestones
Source: Company reports
COMPANY DESCRIPTION
CV Therapeutics is focused on developing small molecule drugs for
cardiovascular diseases with unmet medical needs. We expect that CV
Therapeutics will receive approval of Ranexa for chronic stable angina by the
January 27th PDUFDA deadline. In addition to Ranexa, the company will also co-
promote Solvay Pharmaceuticals' ACEON for the treatment of hypertension and
stable coronary disease using its 250 person cardiovascular sales force.
Regadenoson, partnered with Astellas, is a selective A2A-adenosine receptor
agonist in phase III development intended for use as a cardiac stimulating
agent in myocardial perfusion imaging studies. Tecadenoson is a selective A1-
adenosine receptor agonist in phase III trials for the conversion of rapid
heart rate during atrial arrhythmias. Rounding up the pipeline is CVT 6883, an
adenosine A2B antagonist, for asthma in phase I.
ANALYST CERTIFICATION APPENDIX A-1
I, Yaron Werber, research analyst and the author of this report, hereby certify
that all of the views expressed in this research report |
