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

To: Peter Singleton who wrote (4973)	7/23/1998 10:08:00 PM
From: schadenfreude	Read Replies (1) \| Respond to of 6136

>>I worry about whether Peter Johnson is focusing too much on the stock price, and the bear raid by the shorts. Unless they need to raise equity capital, the stock price over the next year is much less material to the success of the company than how it executes. << >>What they need to do with the first big product is to take the free cash flow from the rights they've retained and plow those into their pipeline. The pipeline will be their earnings engine. The way to get there is the cash flow they keep from Viracept. That said, by inlicensing the three HIV products, and by continuing the development of their (mostly) early stage but extremely promising other programs, they're putting themselves in a position for tremendous earnings growth in the out years. And they don't need to go to the equity markets to get there. They don't need to sell off rights to corporate partners for cash to fund development ... they can strike deals when and if they make strategic sense. Its an enviable situation to be in.<< Great post! I concur totally. While the oncology spin-off may gain support for AGPH on Wall Street, I don't see it adding to the long-term value of the company. I think Johnson made a hasty decision that he might come to regret.

To: Peter Singleton who wrote (4973)	7/24/1998 9:00:00 AM
From: margie	Respond to of 6136

Perhaps knowing what Peter Johnson actually said in Agouron's conference call about their rational behind the decision to form a new oncology division will provide a little more insight and prevent all this second guessing and judgment based on conjecture. It doesn't sound like this decision was made in haste. But my judgment .... _______________________________________________________________ "When you look at Agouron as a profitable company whose present market capitalization is roughly two times its present VIRACEPT sales-run-rate, or as a company with a P/E on projected 1999 earnings in the 20's, you probably wouldn't guess that it's a company built on research and development--a company that spent over 25% of revenues, over $120 million on R&D last year and will increase its overall investment in R&D by over 40% this year." Missing from the value equation is much, if any credit for a whole series of R&D programs aimed specifically at supporting the growth of their VIRACEPT-led anti-virals business. Missing is much, if any credit for: Remune, aimed at enhancing the immune systems of HIV patients, which they and their partner, Immune Response Corporation, hope to bring to FDA about a year from now. S-1153, a non-nuleoside reverse transcriptase inhibitor active (NNRTI) against HIV that has become resistant to the first generation of NNRTIs such as Sustiva: JE 2147, a protease inhibitor aimed at treating patients who may have become resistant to all the currently approved protease inhibitors. AG7088, a compound that they intend to bring into clinical trial in less than a year for treatment or prevention of rhinovirus infections. Integrase inhibitors: a new class of anti-HIV agents at the research stage: research in collaboration with their Japanese partner on two different classes of drugs intended to fight the growing epidemic of hepatitis C. And even more conspicuously missing from the value equation is any credit for what they have been doing in R&D to set the stage for a future business in oncology. Agouron thinks they have one of the most compelling portfolios of research-stage and development-stage anti-cancer drugs in the industry--some with potential in other indications. Their investment in this oncology portfolio was over $30 million in fiscal 1998 and is expected to approximate $45 million in the current fiscal year, as the first of their anti-angiogenic MMP inhibitors moves through pivotal clinical trials. This is very a large investment and a very large drain on the earnings of their VIRACEPT-led anti-virals business, especially when it is not credited with contributing anything to the perceived value of those earnings. To mitigate this problem, to begin to liberate the value of their oncology R&D pipeline, Agouron will propose to shareholders the adoption of a mechanism employed by many major companies who have felt they had an under-appreciated group within their business. Agouron proposes to create a separate operating division of the company in which their research and development of drugs for oncology will be undertaken, to conduct separate financial accounting for this division vis-a-vis the rest of their company, and to link the performance of this oncology division to a separate class of Agouron common stock (sometimes called a divisional stock or target stock) to be distributed to shareholders. They believe this mechanism will begin to expose and unlock the unappreciated value of this oncology group and at the same time free the anti-virals business to be valued on the basis of its relevant fundamentals--its financial performance supported by the pipeline of anti-virals products that bears directly on its prospects for future growth, but relieved of the drain on its reported earnings imposed by the costs of research and development of products for a different therapeutic area. Agouron is prohibited from going much beyond this rather general statement of their intention until they file materials describing salient details in a couple of weeks. However, Johnson emphasized that what they intend here is not to disguise the amount of R&D undertaken by the company (these amounts will remain clearly visible), but to put in place a direct, fundamental, structural solution to inefficiencies in the ways the financial markets value maturing biotech companies like Agouron. "We all know there are at least two kinds of biotech companies. There are drug discovery organizations that conduct research, and sometimes development, of products in well-defined areas--products that will ultimately be brought to market by commercial organizations who will pay well for them in the form of royalties or, occasionally, a share of profits. And we all know of companies in this category that have achieved valuations of several hundreds of millions of dollars, even as they incur rising net operating losses, based upon the long-term commercial promise of their largely early-stage research and development." "There is a much smaller group of young, integrated pharmaceutical companies that have crossed over the line to profitability from the manufacture and sale of their own first products and that are instantly valued according to the altogether different paradigm of major pharmaceutical companies--that is, on the basis of their near-term earnings coupled to a P/E which reflects the likelihood of future growth from specifiable, near-term, late-stage products.' ' The fact is that Agouron has within it today, and will have for many years to come, both kinds of organizations; but the lines between them are not clearly visible. So the company is held answerable to only one approach to valuation with the result that some important elements of value are going unrecognized. That's what we intend to change, permanently. Our immediate goal is to see that both kinds of organization that comprise Agouron--an integrated, top-line-driven, profitable, research-based, anti-virals business and a state-of-the-art oncology R&D organization--can be clearly seen for what they are and can be valued fully for what they are. We are confident that their shareholders will be the ultimate beneficiaries."