Tercica report form Baird---Chris Raymond
he mentions the delay in their trial enrollment and the bad lot is buried in here. Also no mention that Insmed sales were higher than Tercica's.
Uneventful Q206, Increlex Uptake Measured
Price: (08/08/06) 5.19 Rating: Outperform
52WK H-L: 13 - 3
Market Cap (mil): 195 Suitability: Speculative Risk
Shares Out (mil): 37.5
Float (mil): 29.5
Avg. Daily Vol (mil): 0.24
Price Target: 11
Dividend: 0.00
Yield: 0.00
FY: Dec 2005A 2006E 2007E
Q1 (0.32)A (0.40)A
Q2 (0.40)A (0.39)A
Q3 (0.37)A (0.47)E
Q4 (0.46)A (0.37)E
Total (1.55)A (1.63)E (1.23)E
Previous (1.68)E (1.12)E
FY P/E NM NM NM
EPS (Net): GAAP estimates prior to 2006 exclude the impact of options expense under SFAS 123R. Refer to
published model for impact of options expense.
Please refer to Appendix - Important Disclosures and Analyst
Certification.
Christopher J. Raymond
craymond@rwbaird.com
312.609.5437
David M. Nierengarten, Ph.D.
dnierengarten@rwbaird.com
312.609.5436
Action
Reiterate Outperform rating, $11 price target. Increlex's measured uptake continued
during Q206 with TRCA recording $166,000 in sales. Additionally, we note that the
Phase IIIb trials for once-daily dosing and less-severe patients will take longer than we
expected, completing in early 2007 and mid-2007, respectively. As such, we are
lowering our estimates, but remain optimistic about Increlex's long-term prospects.
Summary
• TRCA reported Q206 EPS of ($0.39), ahead of our ($0.45) estimate.
• However, Increlex revenues of $0.166M fell short of our $0.399M estimate, reflecting
continued measured uptake.
• We were also somewhat disappointed in the guidance for the completion of two
Phase IIIb trials for Increlex—in less-severe patients and for once-daily dosing.
• The study of once-daily Increlex dosing (MS 308) is now expected to complete in
early 2007, and the trial in less-severe IGF-1 deficient patients (MS 301) will now
likely complete in mid-2007.
• In that these completions are occurring later than our prior expectations, we are
lowering our revenue and EPS estimates.
• Our new EPS estimates for 2006-2010 are ($1.63), ($1.23), ($0.74), $0.15 and
$0.88, respectively, based on our new Increlex revenue estimates of $0.998M,
$9.3M, $33.9M, $86.1M and $159.9M.
• While we remain optimistic about Increlex's longer-term prospects, we note that
uptake remains measured and will likely stay that way in the near term.
• Reiterate Outperform rating, $11 price target.
August 9, 2006 Health Care / Life Sciences
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Details
Investment Conclusion. Reiterate Outperform rating, $11 price target. Increlex market
penetration continued to be measured in Q206, with TRCA recording $0.166M in sales.
While this number was lower than we expected, we continue to expect that Increlex's
revenues will ramp in the out-years as TRCA captures patients (and these patients are on
drug for a significant amount of time). However, we do note that updated clinical trial
guidance has pushed out the enrollment completion dates (compared to our previous
expectations) for Increlex's Phase IIIb trials in less-severe patients and for once-daily
dosing. The MS 308 trial of once-daily dosing (which would put Increlex injection number
on par with competitor iPlex) will likely complete in early 2007, and the MS 301 trial of
Increlex in less-severe IGF-1 deficient patients could complete in mid-2007. These dates
are later than we had estimated previously, and are causing us to alter our Increlex
revenue estimates, and consequently, TRCA's EPS estimates. Our EPS estimates are
now ($1.63), ($1.23), ($0.74), $0.15 and $0.88 for 2006-2010, respectively, based on our
new Increlex revenue estimates of $0.998M, $9.3M, $33.9M, $86.1M and $159.9M.
Increlex Uptake Remains Measured... TRCA's Q206 EPS was marked by Increlex
sales of $0.166M, lower than our $0.399M estimate. Cost of goods was higher than
expected, with a failed manufacturing run contributing significantly ($0.364M) to it (Figure
1).
Figure 1. TRCA Q206 EPS and Our Estimates
(in $M, except EPS)
Actual Baird Est.
Net income (14.7) (16.9)
EPS ($0.39) ($0.45)
Total revenue 0.166 0.399
Costs and expenses
COGS 0.557 0.108
R&D 4.6 8.3
G&A 10.6 9.2
Total costs and expenses 15.7 17.9
Source: Company Reports, Robert W. Baird & Co. Estimates
While this quarter's revenues were lower than estimated, we still view Increlex as growing
steadily in the out-years.
...And the 301/308 Trials Are Enrolling Slower than We Had Expected... Of note in the
TRCA press release was that the MS 301/308 Phase IIIb trials for once-daily dosing and
for less-severe IGF-1 deficiency would likely complete enrollment in Q107 (for MS
308—once-daily dosing) and mid-2007 for MS 301 (Figure 2).
August 9, 2006 Tercica, Inc.
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Figure 2. Near-Term Catalysts for TRCA
Product News Anticipated Timing
Increlex (rhIGF-1) Severe Pediatric IGFD:
EU Launch with Ipsen 1H07
Less Severe Pediatric IGFD:
Enroll Last Patient in Phase IIIb Trial (MS 301, n=135) Mid-07
Final Dose for Final Patient in Phase IIIb Trial 2008
Data in Phase IIIb Trial 2008
File sNDA in Less Severe Pediatric IGFD 2008
Complete Enrollment in Phase IIIb Once-Daily Dosing Trial (MS 308, n=45) Q107
File for Once-Daily Dosing 2008
Products Where TRCA Has Right of First Negotiation
Somatulin Autogel Acromegaly:
US Approval and Launch 2007
Somatulin (lanreotide) Phase III trial with Somavert in Refractory Acromegaly 2007
Phase III trial in Neuroendocrine Tumors 2007
Dopastatin Currently in Preclinical Development for Pituitary tumors
Ghrelin agonist Currently in Preclinical Development for Wasting Disease
Melanocortin Program Currently in Preclinical Development for Wasting Disease (Antagonist) and Metabolic Syndrome/Obesity (Agonist)
Source: Company Reports, Robert W. Baird & Co. Estimates
We had previously expected enrollment to complete around this time this year.
...Causing Us to Lower Estimates. In that we cannot expect significant market
expansion for Increlex now until 2008 and beyond, we are changing our estimates for
Increlex revenues to $0.998M, $9.3M, $33.9M, $86.1M and $159.9M for 2006-2010. Our
new estimates begin to model uptake in non-severe patients and other currently off-label
uses in 2008, building up through 2010 (Figure 3).
Figure 3. New Increlex Revenue Build-up
2006E 2007E 2008E 2009E 2010E
US Market
Severe Pediatric IGFD - US
Tercica Severe Pediatric IGFD Revenue ue (000's) 998 7,740 19,050 46,200 67,520
Non-Severe Pediatric IGFD - US
Tercica non-Severe Pediatric IGFD Revenue (000's) - - 6,476 14,007 22,723
ISS (non-GH, non IGF deficient) (off label)
Tercica non-Severe Pediatric IGFD Revenue (000's) - - - 9,419 30,561
Other off label use
Tercica non-Severe Pediatric IGFD Revenue (000's) - - - - 10,178
US IGF-1 Pediatric Growth Revenue $998 $7,740 $25,526 $69,626 $130,982
Growth Y-Y 675% 230% 173% 88%
EU Market
Severe Pediatric IGFD - EU
Tercica Severe Pediatric IGFD Revenue (000's) - 4,336 14,886 28,334 35,534
Non-Severe Pediatric IGFD - EU
Tercica non-Severe Pediatric IGFD Revenue (000's) - - 9,025 17,043 25,534
ISS (non-GH, non IGF deficient) (off label)
Tercica non-Severe Pediatric IGFD Revenue (000's) - - - 1,667 17,170
Other off label use
Tercica non-Severe Pediatric IGFD Revenue (000's) - - - - 4,289
EU IGF-1 Pediatric Growth Revenue $0 $4,336 $23,912 $47,044 $82,527
Growth Y-Y 451% 97% 75%
Total WW Pediatric Growth Revenue $998 $9,257 $33,895 $86,091 $159,866
Growth Y-Y 827% 266% 154% 86%
Source: Robert W. Baird & Co. Estimates
Note: The total estimated Increlex revenue takes into account the revenue sharing
agreement with Ipsen
August 9, 2006 Tercica, Inc.
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These new Increlex revenue estimates lead us to our new EPS estimates of ($1.63),
($1.23), ($0.74), $0.15 and $0.88 for 2006-2010, respectively. We are changing our
valuation methodology somewhat, now valuing TRCA on 2010 earnings—applying a 40
multiple to 2010 EPS, discounted by 25% annually. We continue to view Increlex as a
viable commercial product, but note that patience will be needed as the revenue build-up
is quite gradual. We remain Outperform, with an $11 price target.
Investment Thesis
Recent FDA Approval of Lead Drug Increlex. Tercica has gained FDA approval for its
lead drug Increlex (rhIGF-1) for the treatment of pediatric IGFD.
Recent Increlex Launch. Following FDA approval of Increlex, Tercica launched Increlex
on January 3.
Well-Defined Market with Clear Unmet Medical Need. Tercica's Increlex targets
children with IGFD who are insensitive to currently marketed growth hormone products,
a combined US and European population of approximately 60k patients.
Leading IP Position and Orphan Drug Designation. While the rhIGF-1 protein was
never patented, Tercica has licensed Genentech's entire patent estate (outside of CNS
applications) with regard to rhIGF-1, including US patent No. 6,331,414, which covers
the expression of rhIGF-1 in E. coli.
Benefit of Long History Through Partner Genentech. While Tercica licensed the
rhIGF-1 technology from Genentech in 2002, Tercica's history with the prominent biotech
name goes back much further, given founder Ross Clark's position as senior scientist at
Genentech in the growth hormone field for many years.
Management Team Very Strong with Applicable Experience Base. In addition to Dr.
Clark's leading position in endocrinology, Tercica's management team includes a broad
scope of strong experience in biotechnology and pharmaceutical development and
commercialization, including alumni of InterMune, Elan, Novo Nordisk, and Pharmacia.
Valuation. We place an Outperform rating on TRCA shares. We also place a
Speculative Risk suitability rating on TRCA shares, as our valuation is heavily dependent
upon Increlex. In that big-cap commercial biotechnology companies are currently trading
at an average multiple of 40X 2006 consensus EPS estimates, we apply a 40 multiple to
our 2010 EPS estimate of $0.88, discounted back by 25% per year, to derive our
12-month price target of $11.
Risks & Caveats
Incumbent GH Players (ex-DNA) Could View Tercica as a Threat. While Tercica has
positioned Increlex as a therapy for IGFD patients as opposed to GHD patients, current
leaders in the GH arena - including Eli Lilly, Serono, Novo Nordisk, and Pfizer - could
step up marketing efforts to compete against Increlex.
Potential Competitor INSM Has Gained Approval for iPlex. Insmed (INSM) has also
gained FDA approval for its IGF-1/IGFBP-3 product iPlex, which will compete with
Increlex in the IGFD market.
No Prior Commercial Experience. Increlex will be the first commercial launch for the
company. In that incumbent, large-pharma companies currently in the growth hormone
space may see Tercica as competition, we believe the launch could be challenging.
August 9, 2006 Tercica, Inc.
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Company Description
South San Francisco-based Tercica, Inc. is a newly public biopharmaceutical company
focused on endocrinology and growth disorders. It was founded in New Zealand in
October 2000 by a group of leading endocrinologists and former Genentech executives.
The company has since gained exclusive rights to Genentech's recombinant human
IGF-1 (rhIGF-1) clinical program - including intellectual property, pivotal clinical data, and
manufacturing processes. FDA approved Increlex in August 2005, and Tercica launched
the drug commercially in early 2006. Tercica has the potential to fill a key, untapped
niche in the approximately $1B pediatric growth hormone (GH) market.
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