Citi: NPSP: NPS Announces Restructuring; Preos Outlook Remains in Limbo
HOLD (2)
Speculative (S)
Mkt Cap: $218 mil.
June 13, 2006 SUMMARY
* Monday, NPS Pharmaceuticals announced an aggressive restructuring plan to reduce its cash burn rate, which should allow the company to avoid a return to the capital markets for funding over the next year. In our opinion, such a restructuring was not unexpected in light of the co's challenges.
* NPS has halted all U.S. commercialization efforts for Preos, and will await further clarification from the FDA regarding additional regulatory steps for a refiling. NPS indicated it is assessing various options, including either pursuing a corporate partner or abandoning Preos if the FDA mandates an addt'l study.
* We have adjusted our financial model to reflect potential cost savings from the restructuring and the elimination of any U.S. Preos revs given the uncertain outlook for Preos. Our EPS ests are revised to ($2.93) from ($3.60) for FY06, to ($1.94) from ($3.31) for FY07 & to ($1.10) from ($1.72) for FY08. We maintain our Hold rating and reduce our target price to $6.00 from $8.50.
FUNDAMENTALS
P/E (12/06E) NA
P/E (12/07E) NA
TEV/EBITDA (12/06E) NA
TEV/EBITDA (12/07E) NA
Book Value/Share (12/06E) ($4.08)
Price/Book Value (1.2x)
Revenue (12/06E) $34.2 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) NA
Long-Term Debt to Capital(a) 195.1%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (6/12/06) $4.73
Rating (Cur/Prev) 2S/2S
52-Week Range $15.35-$4.54
Target Price (Cur/Prev) $6.00/$8.50
Shares Outstanding(a) 46.1 mil.
Expected Share Price Return 26.9%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 26.9%
OPINION
Monday, NPS Pharmaceuticals announced an aggressive restructuring plan to
reduce its cash burn rate and avoid having to seek financing during the next
year. In our opinion, this action is not unexpected in light of the challenges
facing the company with the recent FDA regulatory setback for Preos. As a
reminder, the company received an approvable letter from the FDA in March for
Preos and indicated in a follow-up meeting with the FDA that additional
clinical data was necessary to address concerns raised regarding the incidence
of hypercalcemia with the use of Preos and the reliability and accuracy of the
injection device. In the meantime, Preos or Preotact was approved by European
regulatory authorities and partner Nycomed launched the product last week. NPS
will receive royalty payments on sales of Preotact from Nycomed.
Under the restructuring plan, NPS announced that it will reduce its staff by
53% to approximately 230 employees from 480 employees, and will discontinue all
commercialization activities for the U.S. launch of Preos for the treatment of
post-menopausal osteoporosis. The company estimates that severance costs
associated with this cut in headcount represents approximately $7-$8 million.
The company expects to save approximately $30 million per year with the
reduction in headcount. With this restructuring, NPS indicated that its net
cash burn will be reduced to approximately $135-$145 million for fiscal 2006.
For the first quarter, the company indicated that its cash burn was
approximately $43 million. NPS also indicated that it expects to end fiscal
2006 with a cash balance of approximately $114-$124 million, which the company
indicated would cover approximately two years of operations. In our opinion,
with these initiatives, it is probable that NPS will be able to avoid having to
return to the capital markets in the next 12 months. Other actions included
closing a facility in Mississauga, Ontario, subleasing 50% of the Salt Lake
City facility, and eliminating commercial sales and related field operations.
The company will also stop promoting Allergan's Restasis Ophthalmic Emulsion to
rheumatologists and other specialists. NPS indicated that there will be no
financial penalty associated with the termination of this agreement.
In light of the delay in FDA approval of Preos and the uncertainty regarding
the time and expense needed to obtain U.S. approval, NPS indicated that it is
assessing various options for the U.S. commercialization strategy for Preos,
but the company is discontinuing all current commercialization activities for
the U.S. launch of the drug. NPS indicated that if the FDA mandates a new
clinical trial for the potential approval of Preos, it will either seek a
corporate partner to fund that effort, or abandon development of Preos. The
company indicated that it would wait for further clarification from the FDA
about any additional regulatory requirements in advance of seeking a potential
U.S. corporate partner. In our opinion, clarification on the regulatory
process may be necessary before the company is able to capture optimal terms
for a potential collaboration. NPS remains optimistic that it can provide the
agency with the requested documentation from additional analysis of existing
trial data as well as from follow-up safety data from existing studies. We
believe that it is imperative for the company to receive feedback from the FDA
as soon as possible to guide its next steps in regards to Preos. In our
opinion, obtaining a corporate partner for the U.S. market may still represent
a more viable approach even if an additional clinical trial is unnecessary in
light of the company's limited financial resources and lack of a commercial
infrastructure.
In the meantime, NPS indicated that it will focus its clinical development
activities on teduglutide for gastrointestinal disorders, with an effort to
accelerate its plans for the development in short bowel syndrome (SBS) and
Crohn's disease. The company indicated that the current Phase III study for
SBS is slightly more than 50% enrolled and that it plans to target a New Drug
Application for this indication in 2008. This represents a delay from our
expectations of a filing in 2007 and is reflective of the slow enrollment for
the study. Additionally, the company highlighted that earlier stage compounds
partnered with major corporate partners, including the calcilytics program for
osteoporosis with GlaxoSmithKline, the metabotropic glutamate receptors (mGluR)
modulators for central nervous system disorders with AstraZeneca, and the
glycine transport inhibitors for neuropsychiatric disorders with Janssen
(subsidiary of Johnson & Johnson) are advancing in development. The company
provided a summary of key milestones for 2006 as follows:
2006 milestones
1) Advance Teduglutide in clinical development for Crohn's Disease
2) Advance one or more partnered compounds into later stages of development
3) Announce the U.S. regulatory strategy for Preos
4) Identify a lead compound for preclinical development as a potential
treatment for epilepsy and other neuropsychiatric conditions (Q4)
5) End the year with $114-$124 million in cash representing 2 years of cash
Financial Adjustments to our Model: Based on the company's cash burn guidance
for fiscal 2006, we have revised our financial model. In addition, we have
eliminated any U.S. Preos revenues due to the uncertainty surrounding Preos'
outlook. The following table summarizes our changes to our financial model for
fiscal 2007 and 2008.
FY 06 CIR FY 06 CIR FY 07 CIR FY 07 CIR
Estimates Estimates Estimates Estimates
(previous) (revised) (previous) (revised)
Preos Sales $0 million $0 million $19 million $0 million
Teduglutide Sales -- -- -- --
Sensipar Royalty $26 million $26 million $39 million $39 million
Revenues
Preotact Royalty $2 million $2 million $9 million $9 million
Revenues
Total Revenues $32 million $34 million $72 million $53 million
COGS $2 million $2 million $14 million $4 million
R&D Expense $100 million $84 million $112 million $76 million
SG&A Expense $81 million $66 million $110 million $43 million
Net Loss $167 million $136 million $180 million $92 million
Excluding Stock Option Expenses
EPS ($3.60) ($2.93) ($3.31) ($1.94)
Including Stock Option Expenses
EPS ($3.94) ($3.28) ($3.53) ($2.19)
Shares outstanding 46.5 million 46.5 million 54.3 million (*) 47.3 million
*Prior estimate assumed the issuance of approximately 7 million shares
associated with an equity financing.
Source: Company reports and Citigroup Investment Research estimates.
For fiscal 2008, we have revised our total revenue estimate to $107 million
from $205 million, our total operating expense estimate to $147 million from
$290 million and our EPS estimate to a loss of $1.10 per share from a loss of
$1.72 per share (excluding stock option expenses). For fiscal 2009, we have
revised our total revenue estimate to $227 million from $407 million, our total
operating expense estimate to $185 million from $356 million and our EPS
estimate to a net profit of $0.50 from $0.72 (excluding stock option expenses).
Maintaining Hold Rating; Reducing Target Price to $6.00 from $8.50 per share.
With the uncertain outlook regarding the strategy for Preos in the U.S., we
maintain our Hold rating on the stock. As indicated, we have revised our
financial model to reflect the cost savings associated with the restructuring
plans and the elimination of any U.S. Preos revenues. With these adjustments,
we now estimate that the company's first year of profitability will be $0.50
per share versus $0.72 per share for fiscal 2009. Our approach to assessing
the value of the company is based on a discounted earnings analysis using an
applied discount rate and P/E multiple that we believe are representative of a
high-growth biotechnology company with a late-stage product, to a projected EPS
estimate for the company in its first full year of profitability. As a result,
our target price is reduced to $6.00 per share from $8.50 per share based on
applying a P/E multiple of 25x and a discount rate of 30%-35% to our revised
fiscal 2009 EPS forecast of $0.50 (previously $0.72). We believe this multiple
is appropriate when one examines historically what investors have been willing
to apply on biotechnology companies with a lead compound under regulatory
review. Such companies typically trade at a multiple in the range of 24x-40x,
by our estimates, with a mean of approximately low 30s. In the case of NPS, we
believe a multiple towards the lower end of this range and a discount rate of
30%-35% is appropriate in light of the uncertainty associated with the
regulatory process for Preos and the relatively early stage of the remaining
pipeline products.
INVESTMENT THESIS
We rate the shares of NPS Pharmaceuticals (NPSP) Hold / Speculative Risk (2S)
with a target price of $6.00 per share. Although NPS is pursuing a tactic of
reanalyzing existing clinical data and collecting additional data from ongoing
studies to address the FDA's concerns regarding the incidence of hypercalcemia
with Preos, we believe risk remains that an additional study may ultimately be
necessary. Consequently, we believe the uncertainty surrounding Preos' outlook
will continue to weigh on the stock. On a positive note, as mentioned
previously, Preotact (brand name of Preos in Europe) was approved for marketing
in the EU with partner Nycomed launching the product in June 2006. We estimate
that NPS will receive royalty payments of approximately 15% on ex-U.S. sales of
Preotact from Nycomed. Furthermore, NPS announced that partner GlaxoSmithKline
(GSK) is advancing the calcilytic program into additional clinical studies
following the successful completion of a proof-of-concept trial. The
collaboration with GSK is focused on the development of oral, small molecule
compounds for the treatment of bone and mineral disorders, such as
osteoporosis. NPS retains a co-promotion option in North America and will
receive royalties on global products sales.
VALUATION
In order to value the company, we have utilized a discounted earnings analysis
and applied a discount rate and P/E multiple that we believe are representative
of a high-growth biotechnology company with a late-stage product, to a
projected EPS estimate for the company in its first full year of profitability.
Our target price of $6.00 per share (reduced from $8.50) is based on applying a
P/E multiple of 25x and a discount rate of 30%-35% to our revised fiscal 2009
EPS forecast of $0.50 (previously, $0.72). We believe this multiple is
appropriate when one examines historically what multiple investors have been
willing to apply on biotechnology companies with a lead compound under
regulatory review. Such companies typically trade at a multiple in the range
of 24x-40x, by our estimates, with a mean of approximately low 30s. In the
case of NPS, we believe a multiple towards the lower end of this range and a
discount rate of 30%-35% is appropriate in light of the uncertainty associated
with the regulatory process for Preos and the relatively early stage of the
remaining pipeline products.
We have also assessed NPS Pharmaceuticals' valuation using a discounted cash
flow (DCF) analysis. Our DCF analysis assumes a time horizon of 10 years, with
2015 serving as our year for assessing a terminal value. Our estimate for a
weighted average cost of capital (WACC) is 9%. Our cost of equity assumes a
five-year beta of 1.15, a market risk premium of 3.56%, and a risk free rate of
approximately 4.57%. We have also applied a terminal growth rate of 2.5%
(previously 4.0%). Using this approach, and based on our revised estimates, we
arrive at a target price of approximately $6.00 per share.
RISKS
We believe a Speculative risk rating is warranted for NPS given the material
impact clinical results and regulatory process for Preos as well as clinical
results for other pipeline products are likely to have on the shares and the
high volatility of its shares. Risks we see to NPS achieving our price target
include the following: The company's current revenues are derived from
collaborative partnerships, as it has no marketed products. We anticipate the
company to continue to incur losses in the foreseeable future with
profitability not projected until fiscal 2009. Any further delays or failure
to gain regulatory approval of the company's most advanced product candidates,
Preos (ALX1-11) or Teduglutide (ALX-0600), will likely have a negative impact
on the shares of NPS. In addition, delays in the clinical development or lack
of efficacy of other product candidates will likely negatively impact the
shares. The company is highly dependent upon its corporate partners to support
the development of certain programs, such as Sensipar (Cinacalcet/Mimpara) with
Amgen, the calcilytics for osteoporosis with GlaxoSmithKline, the metabotropic
glutamate receptors (mGluR) modulators for central nervous system disorders
with AstraZeneca, and the glycine transport inhibitors for neuropsychiatric
disorders with Janssen (subsidiary of Johnson & Johnson). We note that a
faster-than-expected favorable regulatory decision with Preos could represent
opportunities for the stock price to appreciate and materially surpass our
target price.
I, Elise Wang, research analyst and the author of this report, hereby certify.... |
