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Biotech / Medical : Agouron Pharmaceuticals (AGPH) -- Ignore unavailable to you. Want to Upgrade?

To: Will Fancher who wrote (3084)	12/3/1997 12:21:00 AM
From: JOHN W.	Respond to of 6136

Analyst report dated December 2, 1997 from PaineWebber AGOURON: REACQUIRES CANCER PRODUCTS FROM ROCHE Rating = 1 Current FY EPS EST = $0.96 (was $1.00) Next FY EPS EST = $1.92 (was $2.31) FY End = June REACQUIRES CANCER PRODUCT FROM ROCHE--MAINTAIN BUY RATING KEY POINTS 1. Agouron/Roche cancer collaboration terminated - AGPH reacquires all cancer product rights. This morning, Agouron announced that it has reacquired rights to all cancer products being co-developed under a collaboration with Hoffman- La Roche. These products include Thymitaq, the MMP inhibitor (AG3340) for solid tumors, and anti-cancer products targeting mechanisms of cell cycle control. Although this announcement was not expected, we believe that Roche's decision to discontinue the program reflects a longer-term, strategic assessment based upon Roche's intended acquisition of Boehringer Mannheim/Corange and does NOT materially impact the long-term valuation of Agouron. In some respects, this is not dissimilar to when Agouron reacquired rights to Viracept from Eli Lilly which chose to discontinue its involvement in this program in 1993. Consequently, Agouron intends to pursue development of the MMP inhibitor and other cancer products (e.g., the GART inhibitor) aggressively and has the opportunity to potentially reap significant upside from these cnacer products in teh future. The marketing collaboration with Roche for Viracept in Europe and certain Asian contries remains intact with European approval of Viracept expected in early 1998. THYMITAQ PROGRAM DISCONTINUED; MINIMAL IMPACT UPON VALUATION Apart from the termination of the Roche collaboration, based on an interim evaluation of Thymitaq's Phase II/III data, Agouron has decided to discontinue development of Thymitaq. The interim results of Thymitaq in head and neck cancer did not demonstrate superior efficacy to currently available therapies. Our prior valuation did not anticipate a significant contribution from Thymitaq in FY2000 or over the long term. We had estimated that Thymitaq would generate only $17.5 million in revenues representing less than 3% of total product revenues in FY2000. Note we have NOT changed our revenue estimates for Viracept. IMPLICATIONS FOR AGOURON NEAR TERM NEGATIVE; LONG TERM POTENTIAL FOR SIGNIFICANT UPSIDE --Nominal financial impact in FY 1998. Slight reduction in contract revenues by $2.0 million reducing FY 1998 EPS from $10.. to $0.96 per share. --Significant reduction in contract revenues expected in FY 1999 and FY 2000 (by approximately 40%). Consequently, we are reducing our estimates for FY 1999 EPS form $2.31 to $1.92 and FY 2000 EPS from $4.00 to $3.46. We may further refine these estimates after additional discussions with the company. --Reacquiring the commercial rights to these cancer products provides Agouron with the opportunity to recognize over the long term significant upside and strategic benefits in building a franchise in cancer. Agouron intends to aggressively pursue development of its lead cancer products (MMP and GART inhibitors) and expects to be in pivotal studies for at least one of these products by 1999. In the near term, Agouron is exploring licensing opportunities for later stage products for cancer and HIV infection to augment its pipeline. --Revising 12-month price target to $65-70 form $75 based on applying a PE range of 40-45x (comparable to other biotech companies with high growth earnings) to calendar 1998 EPS estimate of $1.56. The stock is currently trading at a PE of only 24x our calendar 1998 EPS estimate. We arrive at the same price target by discounting fiscal 2000 EPS estimate of $3.56 at a 20-25% rate using a 25-30 multiple. MAINTAINING BUY (1) RATING Although the stock is likely to be under pressure today, we are maintaining our buy rating given near term positive prospects for Agouron's lead product, Viracept. We expect a series of new clinical data, including more on the Viracept BID regimen, combinations of Viracept with other protease inhibitors (including Crixivan, Fortovase (saquinavir-SGC), Glaxo's 141W94 (Vertex's PI inhibitor), and Norvir), Viracept in combination with DMP 266 and other data to be released at the 5th Annual Retrovirus conference in February that will support market demand for Viracept. With key trends including support form thought leaders to utilize earlier and aggressive treatment with triple combination therapy (with a protease inhibitor) reinforcing strong growth, we continue to expect the market for protease inhibitors to expand rapidly with Viracept capturing a significant portion of the market growth over time. Our 12-month price target of $65-70 represents potential appreciation of 65-80% to current stock levels. UPCOMING MILESTONES Earnings release for fiscal Q2 98: Second week of January Additional clinical data on Viracept (5th Annual Retrovirus meeting): Q1 1998 European approval for Viracept (Roche - European marketing partner): Q1 1998 Selection of lead compound (rhinovirus 3C protease inhibitor) for clinical dev.: Q4 1997/Q1 1998 Initiation of Phase II clinical studies for MMP inhibitor: H1 1998 Announcement of corporated collaborations: H1 1998 RISKS: Stock volatility and speculative nature of biotechnology investment. Competition in the HIV protease inhibitor market. Potential for resistance and cross resistance among HIV protease inhibitors. Potential for manufacturing shortfalls. Loss of major corporate collaborators.