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December 11, 2006
Research Associate: Abhishek Mishra, M.Fin.
Editor: Nelson Bishop, CFA
Zacks Research Digest
Sr. Ed.: Ian Madsen, CFA; [email protected]; 1-800-767-3771, x417
155 North Wacker Drive  Chicago, IL 60606
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CoTherix Inc.
(CTRX- NASDAQ)
$13.40
Note to Reader: All new or revised material since the last report is highlighted.
Reason for Report: Actelion announces commencement
of cash tender offer
Prev. Ed.: November 7, 2006
Overview
Headquartered in San Francisco, California, CoTherix, Inc. (CTRX) is a biopharmaceutical company
focused on licensing, developing and commercializing therapeutic products for the potential treatment
of cardiopulmonary and other chronic diseases. The company offers Ventavis inhalation solution for
the treatment of pulmonary arterial hypertension (PAH) in patients with New York Heart Association
(NYHA) Class III or IV symptoms. Ventavis is the only approved inhaled therapy for PAH. CoTherix
markets its products primarily in the United States, Europe and Australia. Additional information on the
company can be found at its website: www.cotherix.com.
Analysts have identified the following factors for evaluating investment merits of CTRX:
Key Positive Arguments
Use in Combination Therapy: Ventavis is the only
inhaled therapy approved for PAH and analysts
generally believe it is well positioned for combination
therapy with currently approved oral therapeutics.
Improving Competitive Landscape: Slower than
anticipated enrollment in United Therapeutics
Corporation’s (UTHR) Remodulin trial has delayed the
potential threat to Ventavis until the 2009 timeframe.
Key Negative Arguments
Competition risk: The pulmonary arterial hypertension
space is highly competitive. Tracleer and Sildenafil are
currently the benchmark therapies.
Reimbursement risk: The high cost of Ventavis
(~$70,000 per one year’s treatment) requires the
product to be covered through reimbursement from
public and private insurers. Without adequately
secured reimbursements, the company’s revenue may
fail to achieve analysts’ expectations.
Analysts are exceedingly positive on CoTherix’s outlook. In fact, they estimate revenue from Ventavis,
to cross the double to triple digit range, going forward, given the company’s attempts to improve
delivery and expand indications of the drug. Based on this expectation, most analysts anticipate
CoTherix reaching profitability by 2008. On the downside, Ventavis is the company’s sole product, and
thus, exposed to competitive risk.
Note: The company’s fiscal year ends on December 31; fiscal references coincide with the calendar
year.
Recent News
On November 20, 2006, Actelion Ltd announced that it has entered into a definitive agreement to
acquire CTRX for a total acquisition price of approximately $420 million (CHF 525 million).
© Copyright 2006, Zacks Investment Research. All Rights Reserved.
CoTherix reported its 3Q06 results on November 1, 2006. The company reported revenue of $18.4
million and GAAP loss of $0.10 per diluted share.
Revenue
Ventavis
Indication: Pulmonary arterial hypertension (PAH)
Product Life Cycle Status: The company began selling Ventavis (iloprost) in March 2005 after
receiving the FDA approval on December 29, 2004 for the treatment of pulmonary arterial hypertension
in patients with NYHA Class III or IV symptoms.
Importance: Ventavis is an aerosolized prostacyclin analogue for treatment of PAH, which affects up
to 50,000 Americans each year. One analyst (CIBC) indicates the advantage of Ventavis is that
complications associated with marketed infused prostacyclin therapies, such as pain, infection, and
thrombosis are often avoided with this drug. Ventavis is delivered via inhalation, and hence is far more
patient-friendly.
Sales: According to the company and the Zacks Digest Report, 3Q06 sales were $18.4 million, up
13.3% sequentially. One firm (Piper Jaffray) believes the higher-than-expected 3Q sales may be due to
continued underlying demand for Ventavis and a possible improvement in Ventavis’s attrition rates.
Ventavis sales continued to show solid growth in Q3 despite potential competition from ongoing clinical
trials for PAH patients. CTRX expects that new patient starts and reduced attrition will accelerate
Ventavis sales going forward. For 2007, Ventavis net product sales are expected to be between
$100.0 million and $105.0 million; gross margin is expected to be between 71% and 73% of net product
sales.
CTRX reported that enrollment in the VISION trial had slowed in 3Q, but is accelerating following
protocol amendments. The phase III VISION trial, initiated in March, is evaluating Ventavis in
combination with sildenafil. In the view of one firm (CIBC), improved delivery and formulations of
Ventavis are critical for the long-term growth of the company. CTRX is working on several approaches
to improve the dosing convenience of Ventavis.
Regulatory issues: On October 31, 2006, CTRX filed a label supplement with the U.S. Food and Drug
Administration regarding the commercial use of a new program chip for the I-Neb Adaptive Aerosol
Delivery device that provides for more rapid dose delivery. The FDA is expected to respond to the filing
within a six-month period.
CTRX is also working on a second adjustment to the I-neb, which could shorten administration time to
4-5 minutes. Based on the outcome of CoTherix’s discussions with the FDA regarding the first
alteration of the I-neb, analysts believe it is unlikely that additional clinical trials will be necessary to
support approval of second alteration of the device. Additionally, CoTherix is about to select a rapidrelease dry powder formulation of Ventavis, which has the potential to reduce substantially the length of
time required for each dose. The company intends to begin phase I testing of this formulation in 1H07.
Currently, a typical patient takes an average of 5.7 administrations of Ventavis per day at the 5 mcg
dose, each lasting about 8-10 minutes.
Safety issues: Ventavis has typical prostacyclin side effects such as flushing and headache. A
unique side effect of inhaling Ventavis is an increase in coughing.
Competition: Enrollment in the TRIUMPH trial of inhaled Remodulin, a potential competitor, increased
substantially in 3Q06. One firm (CIBC) believes inhaled Remodulin could potentially be launched in
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2H08 or early 2009. Although this formulation of Remodulin remains a substantial threat to Ventavis,
the firm believes CoTherix is taking active steps to improve Ventavis’s dosing convenience. Although
there is a reasonably high probability that inhaled Remodulin will eventually be approved, this is not
guaranteed.
Partners: In 2005, Schering AG licensed CTRX’s exclusive marketing rights for Ventavis in the US.
Under the license agreement, CTRX must pay Schering AG $4.0 million and $10.0 million when annual
sales of Ventavis crest $25.0 million and $100.0 million, respectively. The company will also pay
Schering AG royalties based on the net sales of Ventavis. In April 2005, CTRX entered into an
agreement with Quadrant Drug Delivery Limited, to develop an extended release formulation to reduce
the frequency and duration of Ventavis dosage. Subsequently, on June 1, 2006, CoTherix determined
that its own internal development efforts were more productive than the Quadrant collaboration, and
therefore terminated the collaboration. CoTherix will continue its own extended release development
efforts.
CTRX is collaborating with Accredo and Cardinal Health for the commercial supply of Ventavis. It sells
directly to the specialty pharma distributors, which provide reimbursement assistance, patient
education, compliance, and a customer call service. The company pays Accredo an undisclosed fee
for service to receive call center and reimbursement data. In March 2005, CoTherix signed an initial
three-year agreement with Cardinal Health to distribute Ventavis and provide storage, distribution, and
customer support.
Additional Studies: On March 8, 2006, CoTherix announced the initiation of a Phase III trial of
Ventavis in combination with Sildenafil citrate (Revatio). The clinical trial, called ‘Ventavis Inhalation
with Sildenafil to Improve and Optimize Pulmonary Arterial HypertensioN’ (VISION), is a double blind,
placebo-controlled trial, in which approximately 180 PAH patients treated with a stable dose of oral
Sildenafil (a PDE-5 inhibitor), will be randomized to one of three treatment groups for 16 weeks. The
primary clinical endpoint of the trial would be an increase in the distance walked in six minutes.
Improvement in NYHA functional class, delay in clinical deterioration, hemodynamics and safety would
also be evaluated in the trial. The company may update patient enrollment information toward end2006. One firm (Rodman & Renshaw) expects the trial to have difficulty enrolling patients given the
strong competition for these patients.
Ventavis is at present being investigated in a Phase II study (ACTIVE study) in patients with PAH
associated with idiopathic pulmonary fibrosis (IPF). CoTherix reported that the phase II ACTIVE study
in Idiopathic Pulmonary Fibrosis (IPF) did not reach its efficacy endpoint. As a result, CoTherix will no
longer pursue the IPF indication. The brokerage firms believe that this is disappointing, as approval in
IPF would have added an additional 10,000 patients to the addressable market for the drug.
Fasudil
Indication: Pulmonary arterial hypertension (PAH) and Stable Angina
Product life Cycle Position: Fasudil has been approved in Japan since 1995 as a therapy to prevent
cerebral vasospasm in cases of subarachnoid hemorrhage (hemorrhage in the brain), and it reportedly
has a strong safety profile. The composition of matter patent for Fasudil expires in 2016, and the
patent on the extended-release oral formulation expires in 2019.
Partners: On June 28, 2006, CoTherix and Asahi Kasei Pharma Corporation entered into a
development and commercialization agreement granting CoTherix exclusive rights in North America
and Europe for the oral and inhaled formulations of Fasudil. In addition, CoTherix has an option to
develop Fasudil in North America and Europe for other potential indications using the licensed
formulations with the exception of stroke and eye diseases. CoTherix will make an upfront payment of
$8.75 million to Asahi Kasei Pharma, in addition to development and revenue milestone payments, and
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undisclosed royalties on future products. One firm (Needham) believes that the deal signals that
CoTherix is building a pipeline but expects development to take some time.
Additional Studies: CoTherix plans to complete a PK study of twice-daily extended-release (ER)
Fasudil by the end of 2006. Following this, the company plans to initiate an open-label phase IIa doseranging trial of Fasudil ER monotherapy in treatment-naïve PAH patients in 1H07, examining
hemodynamics and six-minute walk distance. This trial will be conducted in Europe, as trials evaluating
new PAH candidates without concurrent therapy are essentially impossible to enroll efficiently in the
U.S., given the number of available treatments. A phase II study of an inhaled formulation of Fasudil
for PAH is planned for 2H07. CoTherix will also initiate a phase II dose-ranging trial of oral Fasudil ER
in stable angina in 1H07.
One firm (Pacific Growth) expects the extended release version of the drug to be launched in mid-2011
in PAH and in mid-2012 in stable angina in the US, and the inhaled formulation of Fasudil to be
launched in mid 2012 for the treatment of PAH in the U.S. It also stated that CTRX could receive
approximately $1 billion in total revenues from the North American and European sales of Fasudil for
use in PAH and stable angina.
Firms in the Digest group feel that Fasudil could be a compelling addition to CoTherix's drug pipeline.
Some firms (C.E. Unterberg, Rodman & Renshaw) in the Digest Group feel that if CTRX is successful
in developing an inhaled formulation of Fasudil, there is a significant amount of potential for it to be
used in combination therapies.
$ in million
Revenue
2005A
$23.9
2006E
$69.0
2007E
$104.3
2008E
$136.8
2009E
$166.6
Margins
Cost of product sales for the third quarter of 2006 were $4.9 million, or 27% of net product sales, for a
gross margin of 73%. This compares to a gross margin of 52% in the third quarter of 2005. The gross
margin was lower in the third quarter of 2005 due to a $1.6 million write-down of certain Ventavis
inventory related to the transition to a smaller size in connection with the approval of the I-neb device.
Research and development expenses were $5.2 million for the third quarter of 2006, compared to
$2.4million in the same period of 2005. This increase was principally due to clinical trial activities and
other development costs, as well as an increase in personnel costs in 2006. Selling, general and
administrative expenses were $12.1 million for the third quarter of 2006, compared to $7.6 million in the
same period of 2005. The increase from 2005 to 2006 was primarily attributable to higher costs
associated with the commercialization of Ventavis, the REVEAL Registry and general corporate
infrastructure growth. In addition, non-cash stock-based compensation expenses included therein
increased to $1.3 million from $613,000 in the same period of 2005. R&D expenses excluding stock
option expenses were $4.7 million and SG&A expenses excluding stock options were $10.8 million.
Higher SG&A was a result of sales and marketing activities related to the ongoing launch of Ventavis
and the REVEAL Registry. Although one firm (Needham) anticipates increased R&D costs in the near
term, it believes the investment in improved Ventavis delivery and Fasudil development will pay off in
the long-term.
2006E Estimates
Digest Average
Zacks Investment Research
Gross Margin
73.5%
Page 4
SG&A Expenses
$40.5M↑
R&D Expenses
$30.4M ↑
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Earnings per Share
On a GAAP basis, the company reported a net loss of $2.8 million, or $0.10 per share, in the third
quarter of 2006, as compared to a net loss of $6.2 million, or $0.26 per share, for the same period in
2005. On January 1, 2006, the company began reporting employee stock-based compensation
expense in its GAAP results pursuant to SFAS123. Excluding the non-cash impact of stock- based
compensation expenses recorded in the third quarter of 2006, the company reported a non-GAAP net
loss of $1.1 million, or $0.04 per share, in the third quarter of 2006. The company believes this nonGAAP financial information is useful in providing a better understanding of its operating performance.
Street Consensus
Company Guidance
Low Estimate
High Estimate
FY-2006E
($0.96) ↑
($1.11)
($0.83)
FY-2007E
($0.71)↑
($1.40)
($0.26)
For 2006, CTRX continues to expect Ventavis sales of $65-70 million. Gross margin in 4Q06 is
expected to be 71-72%. The company believes full-year 2006 operating expenses (including non-stock
based compensation) will be lower than previous guidance of $91-98 million, due to changes in the
timing of R&D expenses. CTRX expects R&D costs to increase substantially in 4Q06 and in 2007. The
company expects to end 2006 with cash and equivalents of $70-75 million, higher than previous
guidance of $55-65 million. For 2007, the company expects net Ventavis sales of $100-105 million,
with gross margins of 71-73%.
Target Price/Valuation
The Digest average target price of $13.33 (↑ from the previous report) ranges between $12 (Rodman &
Renshaw) and $15 (Needham). Most analysts have derived the target price by applying a P/E multiple
to forward EPS estimates. Of the nine analysts currently reporting on the stock, eight have provided
positive ratings and one analyst has provided a neutral rating. Significantly, none of the analysts
provided a negative rating.
Rating Distribution
Positive
71.0 %↓
Neutral
29.0%↑
Negative
0.0%
Average Target Price
$13.33↑
Risks to the target price include potential competition beyond 2007 from United Therapeutics’s inhaled
Remodulin, which has the potential to offer a favorable dosing regimen compared to Ventavis. Other
risks include CTRX’s inability to commercialize a longer-acting formulation of Ventavis, or its ability to
successfully in-license an additional pipeline product. Also, increased competition and number of
participants in the PAH space, including Actelion, Encysive, United Therapeutics, Myogen, and Pfizer
could pose as a major risk for the company.
Potentially Severe Problems
There are none other than those discussed in other sections of this report.
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Long-Term Growth
Beyond initial approval and launch, CoTherix has formulated a multi-factorial strategy for maximizing
Ventavis’s value. In the short term, the strategy involves leveraging data on combination therapy with
Tracleer, and completing a clinical trial evaluating combination therapy with Sildenafil. Also in the short
term, the strategy entails exploiting the upgraded battery powered inhalation device (the nebulizer)
used to deliver the drug. In the intermediate term, CoTherix plans to expand the Ventavis market by
securing approval as a therapy for PAH associated with idiopathic pulmonary fibrosis (IPF). In the long
term, the strategy entails developing a longer lasting product by reformulating Ventavis, in order to
increase patient convenience and decrease the duration and frequency of inhalations per day.
Additional long-term strategy involves developing Fasudil as a therapy for PAH and stable angina.
Long-term growth prospects for CoTherix Inc. are highly contingent on Ventavis’s market penetration.
Most analysts expect Ventavis to drive CoTherix to profitability in 2008. They also believe Ventavis has
a multi hundred million dollar potential with total sales of approximately $148 million in 2008. For
2009/2010, however, most analysts expect slightly lower revenue growth due to competitive threats
from Remodulin. To establish Ventavis as a viable franchise, the company must seek to develop the
next generation of PAH drugs. The only risk to long-term growth is the fact that CoTherix has no
pipeline beyond Ventavis.
Management reiterated its commitment to in-license a product to beef up its pipeline. One firm (C.E.
Utherberg) expects the company to in-license a product that makes sound strategic sense. It also
believes that current CTRX valuation does not reflect the potential for a sound strategic product
acquisition and any news on this side could be a potential positive catalyst.
Capital Structure/Solvency/Cash Flow/Governance/Other
On November 20, 2006, Actelion Ltd announced that it has entered into a definitive agreement to
purchase CTRX for a price of approximately $420 million (CHF 525 million) or $13.50 per share. This
represents an approximate premium of 72% over the closing price one month prior. The transaction is
expected to be completed in 1Q07. One firm (UnionBankSwitz) is of the opinion that Actelion will be
able to acquire CTRX without a competitive bid. On December 8, 2006, Actelion launched the cash
tender offer for CTRX at $13.50 per share
CTRX finished the third quarter with $83.6 million of cash and equivalents.
On June 6, 2006, CTRX announced that it has filed a universal shelf registration statement on Form S3 with the Securities and Exchange Commission (SEC). Upon approval by the SEC, the shelf
registration statement would permit the company, from time to time, to issue various securities for
proceeds of up to $80 million. The terms of such future offerings and the type of securities to be issued
would be determined at the time of the offering.
Upcoming Events
EVENT
Data from ACTIVE trial
Study report from REVEAL registry
Completion of pharmacokinetic studies for Fasudil in PAH
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DATE
4Q06
2006
2006
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Individual Analyst Opinions
POSITIVE RATINGS
C.E. Unterberg – Buy ($13): November 14, 2006. The firm has increased the target price from
$11.50 to $13. INVESTMENT SUMMARY: The firm believes that irrespective of the successful
commercialization of United Therapeutics’s inhaled Remodulin, the current valuation marks an
attractive entry point for long-term investors.
Needham – Buy ($15): November 2, 2006. INVESTMENT SUMMARY: The firm believes CTRX
stock is underappreciated and remains an attractive investment opportunity.
Pacific Growth – Buy: November 2, 2006. INVESTMENT SUMMARY: CTRX is an attractive
investment based on the reduced long-term potential competition for Ventavis and potential of Fasudil
in PAH and stable angina.
NEUTRAL
Zacks Investment Research – Hold ($13.50): November 22, 2006. INVESTMENT SUMMARY: The
firm has downgraded the stock from Buy to Hold, and lowered the target price from $15 to $13.50
based on Actelion’s decision to acquire CRTX. The firm believes that patient long-term investors have
been greatly rewarded.
RATING SUSPENDED:
CIBC – Restricted: November 20, 2006. The firm has Restricted rating of the stock because it is
acting as a financial advisor to CTRX.
Leerink Swann – Rating Suspended November 20, 2006. The firm has suspended rating of the
stock based on CTRX’s announcement that it has agreed to be acquired by Actelion. The firm believes
that the stock is currently in an arbitrage situation, not driven by fundamentals
Copy Editor: Uttara G.
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