December 13, 2007
Research Associate: Madhu Goyal, MBA (Fin.)
Editor: Kinjel Shah, CA
Sr. Ed: Ian Madsen, CFA : 1-800-767-3771, x9417
111 N. Canal Street, Suite 1101 Chicago, IL 60606
MGI Pharma, Inc. / (MOGN – NSDQ) / $40.34Note: All new material since the last update is highlighted.
Reason for Report: Data released of Dacogen
Prev. Ed.: November 28, 2007,sNDA submitted for Aloxi (R) capsules.
Brokers’ Recommendations: Neutral: 58.0% (7 firms);Positive: 33.0% (4);Negative: 8.0% (1); Prev. Ed.: 3; 8; 1
Brokers’ Target Price: $37.00 (↑$2.80 from the last edition; 8 firms) Brokers’ Avg. Expected Return: -8.3%
Recent Events
On December 10, 2007, MOGN agreed to be acquired by Eisai Co., the Japanese health-care company, for $41 per share cash, or $3.9 billion. The acquisition is expected to complete by 1Q08.
On December 10, 2007, MOGN presented the Dacogen data from two trailsat the American Society of Hematology (ASH) 49th Annual Meeting and Exposition.
Overview
MGI Pharma, Inc. (MOGN) is a biopharmaceutical company focused in oncology and acute care, which acquires, researches, develops, and commercializes proprietary products that address the unmet needs of patients. MGI Pharma markets Aloxi (palonosetron hydrochloride) Injection, Dacogen (decitabine) for Injection, and Gliadel Wafer (policeperson 20 with carmustine implant) in the United States. The company directly markets its products in the U.S. and collaborates with partners to reach the international market.
Key Positive Arguments / Key Negative Arguments- The company has above-average growth prospects (in the specialty pharma space)
- MOGN’s experienced management team has a proven track record in large pharma business
- Accelerating earnings growth and significant positive news flow in near term,are expected to provide upside to the stock
- Firms believe Dacogen’s market share trends should accelerate in the near term
- Aloxi is only the first major commercial launch for MOGN, whereas its major competitors are well seasoned pharmaceutical veterans
- Expanded clinical opportunity adds clinical risk
- Aloxi faces stiff competition from generic Zofran
- Competitive market in MDS and crowded development path in AML, may hinder uptake of Dacogen
Analysts have identified the following issues in evaluating the investment merits of MOGN:
MGI Pharma has alliances with Helsinn Healthcare SA; Cilag GmbH, a Johnson & Johnson subsidiary; Kissei Pharmaceutical Co. Ltd., Dainippon Pharmaceutical Co.Ltd, Pfizer, Inc., and Novartis Pharma AG. The company is headquartered in Bloomington, Minnesota. For more information about the company, visit its website:
NOTE: The company’s fiscal year coincides with the calendar year. October 23, 2007
Revenue
According to the company, 3Q07 total revenue was $112.5 million. According to Zacks Digest report total revenue in 3Q07 was $112.8 million versus $97.0 million in 3Q06, an increase of 16.0 % y/y.
The company reported net product sales of $110.8 millionin 3Q07,up 16.1% YoY versus $95.5 million in 3Q06.
Revenue($ in million) / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009EDigest Average / $342.8 / $83.2 / $93.0 / $112.5 / $121.6 ↓ / $410.3 ↓ / $539.9 ↓ / $693.5 ↑
Digest High / $342.8 / $83.2 / $93.0 / $112.8 / $126.8 ↑ / $415.9 ↑ / $644.2 ↑ / $829.5 ↑
Digest Low / $342.8 / $83.2 / $92.8 / $112.5 / $115.9 ↓ / $404.7 ↓ / $433.6 ↓ / $602.7
YoY growth / 22.7% / 6.4% / 6.7% / 16.0% / 51.2%↓ / 19.7%↓ / 31.6%↓ / 28.5%↑
The pie chart analysis of revenue segments is given below:
Specific Products
Note: Recent significant developments are noted for those products marked with an asterisk (*)
Aloxi
Indication: The drug is indicated forPost-operative nausea and vomiting (PONV) and chemotherapy induced nausea and vomiting (CINV).
Stage of Development: Marketable and sold in the US.
Regulatory Issues: MOGN and partner Helsinn Healthcare, a privately owned Swiss pharmaceutical group, submitted a supplemental New Drug Application (sNDA) to the FDA for Aloxi Capsules for oral administration. The sNDA submission included results from a multicenter, double-blind, dose ranging trial in 651 patients receiving moderately emetogenic chemotherapy (MEC).
MOGN announced the approval of a supplemental New Drug Application (sNDA) for Aloxi (palonosetron hydrochloride) Injection by the FDA. The FDA approved Aloxi use in CINV administered multiple times throughout a seven-day course of chemotherapyversus its previous label that allowed dosing once per seven-day course of therapy. The company submitted the sNDA for Aloxi Injection in May 2007.
Sales: The company and Zacks digest both reported total Aloxi sales of $66.3 million in 3Q07, down 5.8% YoY versus $70.4million (highest quarterly sales) in 3Q06. The company has provided Aloxi guidance of 10% sequential growth for 4Q07, implying sales of $73 million. With CMS reimbursement improving and significant label expansions ahead, one firm (Lazard) forecasts a significant opportunity for Aloxi sales growth and projects 2010 Aloxi sales of $532 million.
Competitors: MOGN faces competition from GlaxoSmithKline’sZofran. Generic Ondansetron is also providing stiff competition to Aloxi.
Patent: The U.S. Patent and Trademark Office granted a five year Hatch-Waxman patent term extension for the patent covering Aloxi injection. The patent will now expire in April 2015.
New Data: On October 15, 2007, MOGN and its partner Helsinn announced that Aloxi met its primary endpoint in a Phase III clinical trial. Data of this study were presented at the Annual Meeting of the American Society of Anesthesiologists (ASA). The trial involved patients who underwent elective inpatient gynecologic or breast surgery and the most common side effects were headache and constipation.
($ in million) / FY06A / FY07E / FY08E / FY09E / Est. GrowthAloxi Sales / $250.7 / $236.3↑ / $323.0↓ / $387.5↓ / 9.1%↓
Dacogen
Indication: The drug is indicated for Myelodysplastic Syndrome (MDS), Acute Myeloid Leukemia (AML), and Chronic MyeloMonocytic Leukemia (CMML).
Stage of Development: MOGN received approval of Dacogen from the FDA inMay, 2006.
Decogen in MDS-MOGNexpects to see data from the EORTC trial in early 2008.
Decogen in AML- MOGN’s Phase III trial of Daogen in acute myelogenous leukemia (AML) is currently accruing patients. This trial is examining Dacogen for the treatment of front-line AML in elderly patients ineligible for stem cell transplant or standard induction therapy. The study is a multi-site, worldwide trial expected to enroll 480 patients; completion of enrollment is expected by YE08.
Regulatory Issues: EMEA and the FDA granted orphan designation to Dacogen (decitabine) Injection for the indication of acute myeloid leukemia (AML). Dacogen was previously designated as an orphan drug in the US and EU for the MDS indication.
Sales: MOGN reported total Dacogen sales of $34.6 million in 3Q07 representing 15.3% growth versus 2Q07. The company increased FY07 Dacogen sales guidance to $115 million, despite the emergence of strong data for competitive agent Vidaza.
Competitors: Firms fear potential generic competition over the longerterm, once patent expiration occurs. Dacogen faces direct competition from Pharmion’s Vidaza drug. Dacogen also faces off-label competition from Revlimid and Thalomid.
Partners: In 2006 MOGN out-licensed its ex-US rights for Dacogen to Cilag GmbH, a Johnson & Johnson subsidiary. Total payments from Cilag GmbH to MOGN as part of this license agreement, including an upfront payment, potential milestone payments, and R&D support, may exceed $80 million. Moreover, as per the agreement, MOGN will receive royalty in double digits from Cliag on net sales of Dacogen in each of the countries, covered by this agreement.
New Data: On December 10, 2007, MOGN a provided a summary of Dacogen for Injection presentations made during the American Society of Hematology (ASH) 49th Annual Meeting and Exposition. A survival analysis of the five-day outpatient regimen of Dacogen in patients with MDS and preliminary results from a multicenter, Phase II study were among the data presented. The primary study endpoint was a clinical response. Secondary endpoints included evaluation of hematologic improvement, cytogenetic response, overall survival, time to acute myeloid leukemia progression or death, transfusion requirements, and toxicity.
Data from a Phase II trial evaluating Dacogen in older patients with acute myelogenous leukemia (AML) were also presented at the conference. The primary endpoint of the trial was overall response rate, defined as complete remission (CR), partial remission (PR), or an antileukeumic effect (ALE), defined as greater than 25% bone marrow blast reduction. Secondary endpoints included overall survival (OS) and toxicity.
Reimbursement Issues: In October, 2006, MGI announced that the Centers for Medicare and Medicaid Services (CMS) assigned a specific J-code for Dacogen, effective from January 1, 2007. This code will allow health care providers to file claims electronically, thereby allowing them to receive reimbursement more quickly and promoting increased use of Dacogen.
($ in million) / FY06A / FY07E / FY08E / FY09E / Est. GrowthDacogen Sales / $36.1 / $122.6↓ / $146.7↓ / $171.7↓ / -
Saforis
Indication: Oral Mucositis
Stage of Development: Completed Phase III study for Saforis in breast cancer patients with oral mucositis, a common side effect of chemotherapy.
Regulatory Issues: The FDA issued an approvable letter for Saforis Powder in UpTec for oral suspension in October, 2006, in which it requested an additional pivotal trial to evaluate the efficacy of Saforis in the proposed indication.
Aquavan
Indication: Patients undergoing colonoscopy, Bronchoscopy.
Importance: Aquavan represents a better, safer Propofol with a rapid onset of action and recovery from sedation.
Stage of Development: Currently in Phase III.
Regulatory Issues: On September 27, 2007, MOGN announced the submission of New Drug Application (NDA) to FDA for Aquavan. The drug is expected to be launched in mid 2008.
New Data: On October 24, 2007, MOGN announced results of a successful randomized, double-blind, multi-center, pivotal Phase III trial of Aquavan (fospropofol disodium) Injection in patients undergoing flexible bronchoscopy. Primary and secondary efficacy endpoint results, as well as safety data, were presented at CHEST 2007.
Competitors: Aquavan’s quick onset of action, fast recovery period, and ease of administration (no anesthesiologist needed to monitor) provides a competitive advantage over current generic options Propofol and Midazolam. The FDA is deliberating on whether to allow Propofol, a generic drug closely related to Aquavan, to be used without anesthesiologists.
Other: MOGN indicated it would be well positioned to market Aquavan as it plans to employ the same sales-force that will be used to launch Aloxi in PONV.
Other Drugs
On October 17, 2007 MOGN announced that that their previously announced Development and License Agreement has become effective. The Agreement provides MGI PHARMA with the exclusive rights to develop AKR-501, a novel, small molecule thrombopoietin mimetic being developed for the treatment of thrombocytopenia and an option to acquire AkaRx at MGI PHARMA's sole discretion at any time up to January 8, 2010. AKR-501 is an orally-available, full agonist that targets the c-Mpl receptor on platelet producing cells to stimulate platelet production. In accordance with the terms of the transaction, MGI PHARMA has made payments of $45 million, in the aggregate, to AkaRx and its shareholders to acquire certain license rights and the right to acquire all of AkaRx's capital stock from AkaRx shareholders at any time prior to January 8, 2010.
The Phase II trial evaluating AKR-501 in the treatment of ITP is currently underway and based on positive results from the Phase II trial, MGI expects to begin a pivotal Phase III trial in ITP within the next 18 months.
Margins
According to the Zacks Digest report, gross margin in3Q07 was 66.7%, up 250 bps YoY versus64.2% in 3Q06.
As per the Zacks Digest report, R&D expense in3Q07 was $23.0 million, up9.0% YoY versus $21.1 million in 3Q06. As per thecompany,total R&D expense in3Q07 was $22.8 million.
According to the Zacks Digest report, SG&A expense in3Q07 was $37.2 million, down2.6% YoY versus $38.1 million in 3Q06. As per the company, total SG&A expense in3Q07 was $38.7 million.
Margins / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009EGross / 64.4% / 67.1% / 68.5% / 66.6% / 66.8%↓ / 67.4%↓ / 67.5%↓ / 68.3%↓
Operating / -7.9% / 2.2% / 3.5% / 13.9% / 12.6%↓ / 9.6%↓ / 15.8%↓ / 22.9%↓
Pre Tax / -9.6% / 2.3% / 2.6% / 10.2% / 12.7%↓ / 9.8%↓ / 16.1%↓ / 23.7%↓
Net Income / -11.7% / 10.8% / 11.9% / 20.4% / 12.2%↑ / 11.0%↑ / 14.7%↓ / 17.9%↑
The company reiterates the following expense guidance for 2007:
SG&A expense (excluding non-cash stock-based compensation expense) in the range of $140 to $145 million.
R&D expenseof approximately $73 million and provided 2008 R&D expense guidance of $85 million.
The company expects operating income (excluding amortization of intangible assets and restructuring costs) to be positive in YE07.
Earnings per Share
According to the Zacks Digest Report, pro forma EPS in 3Q07 was $0.27, representing 134.0% growth versus $0.12 in 2Q07. The company reported pro forma EPS of $0.30 (excl. option expense) in 3Q07.
As per Zacks Digest Report, GAAP EPS in 3Q07 was $0.14, up 371.6% quarterly growthversus$0.03 in 2Q07. The company reported GAAP EPS of $0.13 (incl. stock option expense, asset impairment, restructuring expenses and amortization of intangible assets).
EPS / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009EDigest Average / ($0.13) / $0.09 / $0.12 / $0.27 ↑ / $0.25 / $0.71↑ / $1.05 ↓ / $1.47 ↑
Digest High / ($0.07) / $0.11 / $0.13 / $0.30 / $0.33 / $0.87↑ / $1.47 ↑ / $2.25
Digest Low / ($0.39) / $0.01 / $0.02 / $0.13 / $0.20 / $0.38 / $0.69 / $0.93
YoY growth / -134.1% / -984.6% / -239.0% / 462.5%↓ / -288.4%↓ / -661.5%↓ / 48.6%↓ / 39.5%↑
One firm (B.of America) believes that the key risks factor includes regulatory uncertainties associated with Aloxi (PONV) and Aquavan; sales projections for Aloxi, Dacogen, and Aquavan failing to meet expectations; and failure or delay of drugs in clinical development. This makes MOGN shares best suited for sophisticated investors with diversified portfolios and a high tolerance for risk.
Target Price/Valuation
The average Zacks Digest price target provided by the analysts is $37.00(↑ $2.80from the previous report). The price targets range from $28 (American technology)to $45.00 (B. of America). Most of the firms in the Digest group have used forward earnings estimates to derive the target price.
Of the fourteenfirmscurrently reporting on the stock, four have assigned Positive ratings, seven have rated the stock Neutral and only one firm (SIG) has assigned a Negative rating to the stock. Two firms have not assigned any rating to the stock.
Rating DistributionPositive / 33%↓
Neutral / 58%↑
Negative / 8%
Avg. Target Price / $37.00↑
Digest High / $45.00
Digest Low / $28.00
No. of Analysts with Target price/Total / 8/15
One firm (Leerink Swann) is of the opinion that with the emergence of Dacogen, increasing visibility of Aquavan, and negligible clinical risks,MOGN shares can become long term buy candidates.
Capital Structure/Solvency/Cash Flow/Governance/Other
On December 10, 2007, MOGN announced that they have entered into a definitive merger agreement with Eisai Co. Ltd, a research-based human health care (hhc) company that focuses on neurology, gastrointestinal disorders, oncology and critical care.Under the terms of the agreement Eisai would acquire all of the outstanding shares of MOGN for US$41.00 per share in an all cash transaction, for a total consideration of approximately $3.9 billion. The merger agreement has been unanimously approved by the MGI PHARMA Board of Directors. The acquisition is expected to occur by means of a tender offer followed by a cash merger, is subject to customary closing conditions and regulatory approvals, and is expected to be completed during the first quarter of 2008.
The company ended 3Q07 with cash, cash equivalents, and marketable debt investments of $166.5 million. Dec13, 2007
Potentially Severe Problems
There are none other than those discussed in the other sections of thei report.
October 23, 2007
Long-Term Growth
The average long-term growth rate is 40.9% (sameas the previous report).
Most of the firms in digest group,believe that the company’s growth is contingent upon successful market share gains of its lead drug Aloxi. Additionally, the company’s growth will come from several studies being conducted on alternate uses of Aloxi and Dacogen; specifically, an oral formulation of Aloxi used for the treatment of PONV and CINV in patients, and further cancer-related (CML and tumors) studies using Dacogen. They also believe there are sufficient catalysts to support the company’s growth targets and generate revenue growth, given a robust product and the potential expanded use of Aloxi.
ber 23, 2007
Upcoming Events
Date / EventFebruary 6, 2008 / Expected 4Q07 and FY07 financial results
4Q07 / Dacogen’s ADOPT trial results
1Q08 / Aloxi PONV PDUFA
Individual Analyst Opinions
POSITIVE RATINGS
BMO Capital – Outperform ($38): November 30, 2007. INVESTMENT SUMMARY: The firm maintained its Outperform rating and increased the target price from $33 to $38. The firm believes that the positive sentiments around Aloxi will continue to carry the stock through the next two quarters. However, long-term investors would be rewarded for patience because the company has good growth opportunities in the future.
Lazard – Buy ($42): December 10, 2007. INVESTMENT SUMMARY: The firm maintained a Buy rating and a target price of $42.
J.P. Morgan – Overweight: November 29, 2007. INVESTMENT SUMMARY: The firm feels that MOGN has a strong portfolio of commercial products in either growth mode or ready to launch. As a stand-alone company this growth would have driven operating leverage which when compounded with acquisition synergies an acquirer would have a strong boost to its own top and bottomline growth.
NEUTRAL RATINGS
American Technology – Neutral ($28): October 18, 2007. INVESTMENT SUMMARY: The firm maintained a Neutral rating and a target price of $28. The firm believes that MOGN shares are fully valued at current levels, even though the company continues to advance its pipeline and long-term disruption to its core product line Aloxi.
Brean Murray – Hold: December 10, 2007. The firm has upgraded the rating to Hold from Sell. INVESTMENT SUMMARY: Though the firm continues to believe that some of MOGN’s lead development and recently launched programs face difficulties ahead, it feels that that MOGN represents an attractive acquisition target for an ex-U.S. company seeking accelerated access to the U.S. market.
Bear Stearns – Peer perform ($34): December 10, 2007. The firm downgraded its rating to Peer perform from Outperform. INVESTMENT SUMMARY: The firm sees few competitive bidders, given the all-cash nature of the transaction and acquisition premium. Therefore, the firm expects the stock to stay in a tight trading range until deal closing.
Friedman Billings– Market Perform ($37): November 30, 2007. The firm downgraded the rating to Market Perform from Outperform but maintains a target price of $37.
R W. Baird – Neutral ($41):December 10, 2007. The firm increased the target price to $41 from $30. INVESTMENT SUMMARY: The firm is impressed with the price MOGN was able to fetch for itself, in light of Aloxi's rather finite patent life, an increasingly competitive environment for Dacogen, and higher-risk Aquavan approval potential.
Thomas Weisel – Market Weight ($31): December 10, 2007. INVESTMENT SUMMARY: The firm maintains its market weight rating.
Wachovia – Market Weight ($34): December 10, 2007. The firm initiated coverage on the stock with a Market Weight rating and a target price of $34. INVESTMENT SUMMARY: Although the firm views MGI as possessing solid products, it remains cautious on the stock as the announcement to seek strategic alternatives brings into question the long-term outlook. The firm assigns a lower multiple torevenue generated by the company, given the relatively high royalty rates MGI bears on Aloxi and Dacogen sales, balanced by a take-out scenario.