Risk-reward suggests limited upside given current visibility
Momenta (MNTA) is a specialty pharmaceutical company that uses proprietary
analytical technology to characterize and engineer complex drugs. In our view,
MNTA’s first approval for generic Lovenox was an important step in the evolution
of its technology as a potential drug development platform. But, with the stock up
30% YTD, our Underperform investment thesis is based on: 1) risk of competition
on generic Lovenox, which could enter at any time; 2) regulatory/legal uncertainty
on generic Copaxone; and 3) limited visibility on future product partnerships.
Complex products – big opportunities, limited competition
MNTA’s generic Lovenox (anti-clotting, $2.8bn brand sales in 2009) is the only
generic currently, although others are working on their generic versions. Generic
Copaxone (for MS, $2.3bn brand sales in 2010) is farthest along in MNTA’s
pipeline; Mylan is also working on its generic. Both products have very complex
chemical structures, which makes generic approvals difficult to obtain.
Base model, DCF analysis support $19 price objective
Our base model and $19 discounted cash flow-based PO assume no competition
on Lovenox until 2013 and a generic Copaxone launch in mid-2014 (Teva’s patent
expiry), with MNTA alone through 2016, which we believe is reasonable.
Duration of limited competition, launch timing are key
MNTA has been volatile on regulatory, legal or competitive events, and lends itself
well to scenario analysis. We note three key scenarios: 1) if generic Copaxone is
never approved, our DCF goes to $11; 2) if generic Copaxone is launched in early
2012, our DCF goes to $26; and 3) if generic Copaxone is never approved and
Lovenox competition enters immediately, our DCF goes to $5 (all else equal).
Risks to our thesis
Events that remove the overhang from potential generic Lovenox competition,
early Copaxone launch (via approval/settlement), partnerships with favorable
economics, or acquisition of MNTA for its technology are risks to our thesis/PO.
