10-12-07 lehman, j.birchenough, et alia
83 pages - - anyone who wants it, please pm your email.
We recently assumed coverage of small-cap biotech, where we advise stock
selectivity for a high-beta group that trades primarily on product news flow.
! Overall, 2007 has been a difficult year for the small-cap biotech group, with
challenging capital market conditions and a risk-averse FDA causing investors to
steer away from development-stage companies and into mid- and large-cap
biotech companies with strong earnings growth stories and stable cash flows.
! While we do not foresee a sustained recovery in the near term for the small-cap
biotech group in the absence of improved capital markets, a consistently friendlier
FDA, or pickup in M&A, we do expect higher-quality names to ultimately lead the
way out of the current downturn.
! We favor companies with strong drug discovery platforms and deep product
pipelines that diversify risk and fund product development (e.g., ISIS), along with
companies that are expected to generate proof-of-concept data that could provide
significant value inflection with limited binary downside risk (e.g., ARRY).
! We also like companies that have drugs with demonstrated significant proof-ofconcept
data in Phase II but that, in our view, remain underappreciated by
investors going into Phase III (e.g., ACAD and SNTA).
! We recently assumed coverage of 16 companies with 10 price target changes
and initiated coverage of two companies. Our favorite names going into 2008
include ACAD, ARRY, NBIX, and SNTA. Key upcoming events include an FDA
panel meeting for CRME on December 11–12, a PDUFA date for NBIX on
December 12, Phase II data for RIGL in rheumatoid arthritis in December, a
PDUFA date for ADLR on February 10, and a Phase III interim safety assessment
for ARNA in 1Q08.
Table of Contents
Introduction....................................................................................................... 3
Lehman Brothers U.S. Small-Cap Biotech: Valuation Comparison ................................ 5
Highlighted Key Near-Term Events ........................................................................ 6
Company Snapshots and Outlooks: 1-Overweights .................................................. 7
Company Snapshots and Outlooks: 1-Overweights (cont’d) ....................................... 8
Company Snapshots and Outlooks: 2-Equal weights ................................................ 9
Company Snapshots and Outlooks: 2-Equal weights (cont’d).................................... 10
Company Snapshots and Outlooks: 3-Underweights............................................... 11
Lehman Brothers U.S. Small-Cap Biotech: Valuation Methodologies........................... 12
Sector Overview.............................................................................................. 13
Company Updates........................................................................................... 17
Acadia Pharmaceuticals (ACAD, 1-Overweight)................................................. 18
Adolor (ADLR, 3-Underweight) ........................................................................ 22
Atherogenics (AGIX, 3-Underweight) ................................................................ 24
Ariad Pharmaceuticals (ARIA, 1-Overweight) ..................................................... 26
Arena Pharmaceuticals (ARNA, 2-Equal weight) ................................................. 29
Array Biopharma (ARRY, 1-Overweight)............................................................ 33
Cardiome Pharma (CRME, 2-Equal weight) ....................................................... 35
Cell Genesys (CEGE, 2-Equal weight).............................................................. 37
Genomic Health (GHDX, 2-Equal weight) ......................................................... 39
ISIS Pharmaceuticals (ISIS, 1-Overweight) ......................................................... 42
Neurocrine Biosciences (NBIX, 1-Overweight) ................................................... 45
NPS Pharmaceuticals (NPSP, 2-Equal weight) .................................................... 50
Nuvelo (NUVO, 2-Equal weight)..................................................................... 53
Rigel Pharmaceuticals (RIGL, 1-Overweight)....................................................... 56
Sunesis (SNSS, 1-Overweight) ........................................................................ 59
Synta Pharmaceuticals (SNTA, 1-Overweight) .................................................... 62
Telik (TELK, 3-Underweight) ............................................................................ 66
Tercica (TRCA, 1-Overweight) ........................................................................ 75
Appendix: Lehman Brothers Biotech Index............................................................. 78
NORTH AMERICA
ARRY: We recently initiated coverage of ARRY with a 1-Overweight rating and $16 price
target. The basis of our rating is what we believe is an undervalued best-in-class drug
discovery platform and deep pipeline, with 10 proprietary small-molecule compounds that
will be in the clinic by year-end 2008, eight of which are wholly owned by ARRY. We see
three candidates in Phase II by year-end 2007 that will generate proof-of-concept data
over the coming year. The best comp we can think of is Exelixis, with a market cap of
$1.05 billion, more than double that of ARRY.
ACAD: We recently raised our price target for ACAD (1-Overweight) to $28 from $18,
supported by our product NPV analysis. Positive Phase II results for pimavanserin in
schizophrenia have defined a new treatment paradigm as add-on therapy for
antipsychotics, following which we expect a partnership in the near term in a $15 billionplus
market where extending the life of existing franchises is critical for major pharma.
We expect NBIX (1-Overweight) to receive indiplon capsule approval on December 12
and believe that the company will partner the drug prior to an early 2008 launch, with
upside to our $18 price target following both events. Following the recent announcement
on October 10th of SNTA’s (1-Overweight) recent partnership with GSK for STA-4783,
we believe that positive Phase III data by year-end 2008 is realistic. We maintain our 1-
Overweight ratings on ARIA, ISIS, SNSS, and TRCA, for which we continue to expect
long term-upside on anticipated positive product news flow and partnering activity.
CRME: We recently initiated coverage of CRME with a 2-Equal weight rating and $10
price target. Lead product vernakalant for atrial fibrillation (abnormal heart rhythm) is under
review by the FDA for an IV formulation, and an oral formulation is in Phase IIb
development. We believe that success with the IV at an FDA panel review meeting in
December is more than fully valued in the stock. We anticipate subsequent risk and
extended timelines for oral vernakalant, with significant additional long-term data on safety
and efficacy that will need to be amassed.
ARNA: We recently lowered our price target for ARNA (2-Equal weight) to $10 from $14
and expect the stock to continue to come under pressure heading into an interim 12-month
safety assessment for obesity drug lorcaserin in 1Q08, where we expect no upside and
see significant downside risk.
We remain cautious with 2-Equal weight ratings ahead of potentially binary data points for
CEGE, GHDX, NPSP, NUVO, and RIGL, where outcomes are difficult to assess at this
time. We highlight that for RIGL we foresee significant upside potential, albeit with a low
probability of success, and limited downside at current levels on positive data for lead drug
R788 in rheumatoid arthritis (RA) in December.
We maintain 3-Underweight ratings on ADLR, AGIX, and TELK following failures in Phase
III trials over the last year, where success continues to rely on single lead product
opportunities that we believe cannot be salvaged.
Our favorite names going into 2008 include Acadia Pharmaceuticals, Array Biopharma,
Neurocrine Biosciences, and Synta Pharmaceuticals. We also maintain 1-Overweight
ratings on Ariad Pharmaceuticals, ISIS Pharmaceuticals, Sunesis, and Tercica, where we
continue to expect long-term upside on anticipated positive product news flow and
partnering activity.
We remain cautious with 2-Equal weight ratings ahead of binary data points for Arena
Pharmaceuticals, Cell Genesys, Genomic Health, NPS Pharma, Nuvelo, and Rigel, where
outcomes are difficult to assess at this time. We are cautiously optimistic on prospects for
NPSP, NUVO and RIGL and less so for ARNA, CEGE and GHDX based on our perception
of risk/reward at these levels.
Lastly, we are maintaining Underweight ratings on Adolor, AtheroGenics, and Telik
following failures in Phase III trials over the last year, where success continues to rely on
single lead product opportunities that we believe cannot be salvaged. |
