Serono may progress while Tysabri slows, Merrill bio/pharma earnings preview says

By Jennifer Chiou

New York, July 13 - Safety risks associated with Tysabri will open the doors for competitors in the multiple sclerosis franchise, particularly Serono's Rebif, which is expected to meet its $89 million quarterly earnings forecast, according to Merrill Lynch & Co. biotechnology research analysts Erica Whittaker and Peter Welford in their second quarter preview of European bio/pharma financial results.

The analysts added that they now expect global Rebif sales to exceed $2 billion by 2010.

Whittaker and Welford said they continue to believe that if Tysabri returns to the market, sales will be limited to patients with no other therapy options, resulting in peak Tysabri sales of no more than $500 million in their view.

Merrill also reported that it expects Actelion's Tracleer sales growth to continue in the second quarter of 2005, with annual sales growth at 36%.

However, the analysts noted that Tracleer's sales growth in the second half of the year may be slowed and also cited slow Japan sales as a good possibility.

Acambis may continue drop

The analysts said they forecast Acambis to continue its losses in the second quarter of 2005 as revenues during the year are likely to be back-end loaded.

Revenues from MVA RFP-2 production, ACAM2000 BLA filing and potential payments for a warm base smallpox vaccine contract are not likely until the second half of 2005, Merrill added.

Two substantial unknowns continue to exist for Acambis: a potential warm-base manufacturing contract for the long-term supply of ACAM2000 doses to the U.S. government and a large government contract to supply a stockpile of third generation MVA smallpox vaccine, for which Acambis is competing with Bavarian Nordic, they noted.

Whittaker and Welford expect the CDC to award Acambis a warm-base maintenance contract of 10 million doses per year and their valuation assumes a $415 million MVA contract for 20 million doses is split 50:50 between Acambis and Bavarian Nordic.

Actelion's Tracleer growth strong

Sales growth for Actelion's Tracleer was exceptionally strong in the first quarter at 13%, and the analysts expect this trend to continue in the second quarter of 2005, with annual sales growth at 36%.

However, the analysts suspect that Tracleer's sales growth in the second half of the year may be slowed due to the June approval of Revatio (Pfizer's sildenafil/Viagra), with a much broader label and a potentially much lower price.

Although Actelion recently launched Tracleer in Japan, the analysts expect sales to grow slowly in this territory, where an unmet medical need for the therapy does not exist.

Whittaker and Welford remain skeptical regarding Actelion's outlook for Tracleer PAH sales of CHF 950 million by 2009, 25% above their forecast of CHF 750 million, and part of the difference may be their conservative Japan sales of CHF 35 million.

The analysts said they believe that emerging competition will erode Tracleer's market share.

Alizyme may have upside

Whittaker and Welford do not expect Alizyme to book any revenues during the first half of the year and forecast a greater loss than the prior year due to increasing research and development spending.

The Phase IIb obesity study with ATL-962 began in the third quarter 2004 and is ongoing, in addition to the Phase IIa ATL-104 trial for treatment of mucositis, they noted.

There may be potential upside to their estimates from delayed research and development spending, as the Colal-Pred Phase III trial in ulcerative colitis did not begin until March.

Whittaker and Welford retain their buy recommendation and price objective of 170 pence per share based on a sum-of-parts valuation. Merrill Lynch's positive stance is based on bullish expectations for ATL-962, one of the few late-stage obesity drugs in development and a potential blockbuster.

Berna moving towards profitability

Whittaker and Welford expect focus on Berna's first-half results to be on the margins and signs of improvement towards profitability.

In their view, first-half sales could decline year on year due to lower contract manufacturing and Vietnam project revenues. However, the analysts forecast gross margin improvements, based on product mix, to compensate for the answer top line, resulting in a smaller net loss.

Whittaker and Welford do not anticipate Berna to return to full year profitability until 2007, driven by sales from hepatitis B combination vaccines.

Whittaker and Welford retain their neutral recommendation. Despite their discounted cash flow valuation of CHF 11 to 12 per share, the analysts said there are too many enduring uncertainties to justify a buy rating.

CAT may rebound

Whittaker and Welford expect CAT to report a lower loss per share than last year due mainly to lower clinical trial expenses following the completion of Trabio phase III studies.

The analysts noted CAT does not book revenues from Abbott on Humira in the third quarter as royalties are only received in the second and fourth quarters.

Whittaker and Welford expect CAT will not see higher royalties or compensation from Abbott until the appeal process is completed.

Merrill Lynch's buy rating is based on their view that the market is not fully factoring in CAT's London High Court win against Abbott in December 2004, which awarded CAT 5% instead of 2% gross royalties on arthritis drug Humira sales.

Merrill Lynch's 890 pence per share price objective is based on a sum-of-parts valuation, which includes royalties on Humira and ABT-874 from Abbott and net cash estimated for fiscal 2005.

Elan poses risks

Whittaker and Welford expect interest in Elan Corp. plc's second quarter of 2005 to focus on the expected regulatory outcome for Tysabri and further restructuring/cost-cutting and debt repayment potential, in the event that Tysabri is never re-launched or re-enters the market with limited sales potential.

Merrill Lynch's view remains that there is still a chance that Tysabri returns to the market, but peak annual sales are not likely to exceed $500 million.

Many questions remain unanswered, so the analysts said they also believe there is a risk that Tysabri is never re-launched.

Merrill Lynch's view has been shaped by the published PML case reports for the Tysabri patients that indicated that although JC virus - the cause of PML - may be detected prior to onset of symptoms, it is not clear whether the effects of Tysabri on the immune system can be halted soon enough to stop development of PML.

Whittaker and Welford also acknowledge that Tysabri has a dramatic positive impact on multiple sclerosis, but note that Tysabri's Crohn's data are nowhere near as impressive as the MS data and the risk/benefit is not favorable enough to warrant market re-introduction, in their view.

In the second quarter of 2005, Elan retired $243 million of convertible debt and Athena notes due in 2008, leaving it with gross debt of about $2 billion, Merrill noted.

Genmab may slim its losses

Whittaker and Welford expect Genmab's second quarter loss to narrow compared to last year based on revenues of about DKK11.5 million from an upfront milestone paid to Genmab by Serono in May for worldwide rights to HuMax-TAC and significantly higher financial income in the second quarter of 2005 compared to last year.

In their view, these factors are likely to more than compensate for their estimated 15% growth in operating expenses year on year.

Merrill Lynch's buy recommendation is based on Genmab's attractive product pipeline and positive news flow catalysts over the next 12 months, including HuMax-CD4 successfully progressing into the Phase III CTCL study after the bridging trial in the early part of the third quarter and further Phase II RA results from AMG 714 in the second half of 2005.

Merrill Lynch's DKK 150 share price objective is based on a sum-of-parts valuation.

Qiagen may stay flat

Whittaker and Welford expect Qiagen's sales for the second quarter of 2005 to be flat on last year, with 7.5% local currency growth ex-Oligos and margin improvements lifting net profitability by about 8%.

Two small acquisitions announced in the second quarter of 2005 - artus and Nextal - should result in about $3 million of exceptional charges for the quarter.

Qiagen's organic sales growth has declined or been flat since the third quarter of 2003, they said.

Whittaker and Welford said they remain concerned that continued the weakness of demand for life sciences research tools in Europe could put Qiagen's earnings performance at risk.

Merrill Lynch's discounted cash flow valuation is $8.90 per share, using a 11% weighted average cost of capital, which suggests significant downside risk to the current share price.

Serono may improve

Following a very disappointing first quarter for Serono, the analysts are expecting better second quarter results, with almost a 50% quarter-on-quarter increase in adjusted net income.

Some of the second quarter improvements should be driven by better product sales, Merrill said.

A price increase for Akzo's Follistim should result in improved U.S. sales for Serono's Gonal-f, which was affected last quarter by competitor discounting.

Whittaker and Welford expect Rebif sales to show good growth. Now that Biogen Idec/Elan's Tysabri has been withdrawn from the market for a few months, Rebif market share in the United States has rebounded strongly.

If there is additional inventory re-build among wholesalers post-Tysabri withdrawal, then the analysts would expect Rebif to comfortably meet their $89 million forecast, up 15% quarter on quarter.

Serono's Mylinax is now the most advanced oral multiple sclerosis therapy in clinical development. Phase III studies commenced in the first quarter and clinical data will be available in 2008, with potential approval in 2009. However, the analysts said they are concerned that Serono has chosen a risky development path for Mylinax.

Serono moved Mylinax straight into pivotal phase III studies without phase II dose-ranging studies, relying on pharmacokinetic data from a single center clinical trial of the intravenous formulation to determine the optimal oral doses to be tested.

Whittaker and Welford expect Serono's fundamentals to continue to improve, and their discounted cash flow valuation is CHF 930 per share, which is the basis for their price objective.

UCB's Keppra growing

This will be UCB's first set of financial results following the IFRS restatement in March, Merrill noted.

The sale of UCB's Surface Specialties division did not close until March 1 and the analysts expect this disposal to result in a one-time gain through the first-half P&L of about €350 million.

In addition, the analysts said they expect UCB to book about €19.5 million of net income from discontinued operations in the first half.

Whittaker and Welford expect that UCB's early year results could provide an indication of the possible level of synergies that UCB can extract from operating expenditure following the integration of the Celltech acquisition.

UCB's epilepsy drug Keppra appears to be growing more strongly than the analysts forecast in the United States, according to IMS prescription data, which shows 27% total prescriptions growth for January to June compared to the same period in 2004.

Whittaker and Welford forecast 26% U.S. Keppra sales growth and 24% for the global franchise in the first half of the year.

Merrill Lynch's €42 per share price objective is based on a discounted cash flow valuation.

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