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Jun 15, 2007 (Vol. 27, No. 12)

OSI Pharma Needs to Expand Pipeline

Even though the Company Is Profitable, Analysts Hold a Mixed Valuation

  • Tarceva, OSI Pharmaceutical’s (www.osip.com) oncology drug, certainly has been the prize stallion leading the company’s success. Some, however, like Zacks senior drug industry analyst Jason Napodano, are wondering whether the company is simply a one-trick pony.

    OSI has a single marketed product backed by a mostly early-stage pipeline. Currently, Tarceva is sanctioned in the U.S. and Europe for second- and third-line treatment of non-small-cell-lung cancer (NSCLC) and locally advanced and metastatic pancreatic cancer. OSI also earns revenues on its patent estate related to using dipeptidyl peptidase IV (DPIV) inhibitors. Yet, Napodano states that, “OSI must prove to the Street there is more to the name than just Tarceva and DPIV royalties.”

    This year already, Tarceva mustered up over 75% of the company’s first quarter revenues, which totaled $77 million, a 30.5% increase over the previous year’s opening quarter. OSI pocketed $39 million of the $102 million in U.S. sales from its co-promotion deal with Genentech (www.gene.com). It also earned $19 million in royalties through its collaboration with Roche (www.roche.com), its international partner. OSI received license, milestone, and other revenues of $19 million.

    In spite of such a profitable first quarter, Napodano is retaining his Sell recommendation on shares of OSI, and Gene Mack, an HSBC biotech analyst, recently changed his rating from overweight to Neutral.

    A considerable black mark on OSI’s valuation has been its unsuccessful acquisition of Eyetech to gain control of Macugen, a wet age-related macular degeneration drug. In November, 2006, the company said that it would divest Eyetech. Total U.S. sales of Macugen in 2006 were impacted by Genentech’s launch of Lucentis and declined from $50.6 million in the first quarter of 2006 to $5 million in the initial quarter of 2007.

    “We are looking at completely divesting Eyetech by June or July of this year,” says Colin Goddard, Ph.D., CEO of OSI. “We would like to have a deal by which we will be compensated on any future success of Macugen should things turn around for it, and we strongly believe that it could.”

    “The impetus of the Eyetech acquisition was diversification,” Napodano explains. “Now, with Eyetech gone, OSI is back to where it was in 2005: a one-trick pony with a small pipeline. We see little reason to own the stock. Our target is $30.”

    “Its recent track record in acquiring assets hasn’t given people confidence that the company can find good value,” Mack adds. “Management has done a good job of correcting the mistake but it did lose time and about $600 million in the process.

    “Now it’s about whether or not Colin Goddard and his team find the right assets,” Mack suggests. While the company’s three Phase I trials and one Phase II study are with novel candidates, its later-stage development programs are based on Tarceva and assessing additional indications.

    OSI is conducting Phase III evaluations of Tarceva as first-line therapy for NSCLC and as adjuvant NSCLC as well for treating ovarian and colorectal cancer. Following the “ASCO” meeting last year, Mack upgraded the stock to overweight. However, broader use of Tarceva in an earlier setting in NSCLC hasn’t materialized yet. Hence, Mack says, it’s important to be conservative with our valuation.

    Dr. Goddard, though, is confident that as the company’s pipeline progresses, he will see good top-line and bottom-line results within the next 18 or so months. But Mack stresses the importance of converting the early-stage pipeline to at least a mid-stage pipeline in a timely manner. “It is difficult to get investors to notice and appreciate an early-stage pipeline. You can’t promise results in 18 months. For investors you have to deliver quarterly results.”



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