Biotech Values

[DewDiligence]

Notes on IDIX report by Piper Jaffray (corrected):

I’ve read the PJ report dated yesterday that initiated coverage with an underperform rating and a $9 target price. The report is thorough and well-written. It is penned by Rachel McMinn. (Thomas Wei is PJ’s most prominent biotech analyst but McMinn handles the hematology and infectious-disease sectors.)

In the HCV arena, the report covers no new ground beyond the potential competition from VRTX’s VX-950 and the newfound risk posed by the NM283 dose reduction (the action that caused IDIX to drop by 30% on March 24). I’m considerably less worried about VX-950 than PJ is because: a) The VX-950 data are very early; b) VX-950 may not be suitable for once-daily dosing; and c) As a protease inhibitor, VX-950 could eventually complement NM283 in an all-oral (no interferon) cocktail.

The PJ report is more interesting vis-à-vis the HBV market, which is IDIX’s main value component:

1. PJ thinks NVS/IDIX will have to price Telbivudine aggressively to undercut BMY’s Entecavir because the two drugs are similar on efficacy, Entecavir is expected to be slightly better on resistance, and Telbivudine is expected to be slightly better on long-term safety (based on animal data). However, Entecavir is an expensive drug, so it makes perfect sense for NVS/IDIX to want to opt for a somewhat lower price.

2. PJ thinks GILD’s Viread (already a blockbuster in HIV) will eventually be the best drug for HBV. PJ views Viread in HBV as a “new and improved” variant of Hepsera incorporating all of Hepsera’s good features and none of its bad ones. I suppose Viread could turn out to be all that, but GILD has to prove it in phase-3 trials. By the time Viread could come to market for HBV in the U.S. (probably 2009), Telbivudine will presumably have been on the market for a couple of years and be firmly established. Ditto for the Western European markets in which IDIX will enjoy 50% of the Telbivudine profit split with NVS. Off-label use of Viread in HBV will likely be small in the U.S. and close to nil elsewhere due to non-reimbursement.

--
On sales projections for the overall HBV market, PJ is actually quite bullish with a forecast of compounded annual 25% growth for the next five years in the U.S. and probably a higher rate outside the U.S. Thus, PJ’s main bearish thesis is based on Telbivudine’s market share rather than the size of the addressable market.

How did PJ’s analyst come up with a $9 price target? The $9 figure comes from applying a P/E of 30x to the 2012 EPS and discounting it back to the present at a steep 35% discount rate, which lowers the imputed present value substantially. Moreover, PJ’s projects a lower EPS in 2012 than in 2010 and 2011! In short, I don’t put much credence on this part of the PJ report.

Further, PJ seems to ascribe no importance to the financial commitment that NVS made by purchasing $81M of IDIX shares at $20.61/sh in IDIX’s October, 2005 follow-on offering, nor to the fact that NVS elected to opt in to commercialize NM283 for HCV despite the setback from the dose reduction.

I think NVS is perhaps the most capable large pharmaceutical company there is. I suppose NVS could be completely wrong about IDIX, but I’m willing to bet that they know what they are doing.