Theratechnologies Inc T.TH

Philippa strikes back!

[Mugen1996]

Company update Oct 23rd Theratechnologies Inc. (TSX: TH) Physician survey highlights importance of product reimbursement. Underperform Speculative Risk Price: 11.91 Shares O/S (MM): 54.5 Dividend: 0.00 Float (MM): 46.8 Debt to Cap: 0.0% Price Target: 11.00 Implied All-In Return: (7.6%) Market Cap (MM): 649 Yield: 0.0% Avg. Daily Volume (MM): 0.27 Strategic Ownership: Institution 1 - 14.1% Event Results of proprietary physician survey on HIV-associated lipodystrophy. Investment Opinion • Our propietary physican survey reveals differences in how and when HIV/AIDS patients are treated for symptoms of HIV-associated lipodystrophy. We had 95 physicians respond to our proprietary survey, and include results from the 65 physicians who reported treating HIV/AIDS patients. Key findings are as follows: • Majority of respondents estimated incidence of HIV-associated lipodystrophy as under 30%. • Over 40% of respondents do not treat symptoms of HIV-associated lipodystrophy. About one-third use growth hormone if a patient has health insurance coverage. • Respondents do not expect to change the frequency with which they prescribe growth hormone based on the latest labelling change to the Serostim prescribing information. • 33% of respondents not likely to prescribe tesamorelin if it is approved. • 54% are likely to prescribe tesamorelin only if a patient has health insurance coverage for it. • Conclusion: We believe market penetration of tesamorelin, assuming it receives FDA approval, will be limited by third party payer coverage and convincing physicians of the need to treat HIV-associated lipodystrophy symptoms. In our view, it will be important for TH to document beneficial effects on cholesterol levels and cardiovascular risk factors over the long-term as an 18% improvement in visceral adipose tissue may not be clinically relevant for all physicians. • Valuation - We value Theratechnologies on discounted fully-diluted F2012E EPS of $0.56. We apply a 35x multiple and 20% discount rate over three years to arrive at a price target of $11.00. Priced as of prior trading day's market close, EST (unless otherwise noted). 125 WEEKS 10JUN05 - 22OCT07 2.00 4.00 6.00 8.00 10.00 J J A S O N 2005 D J F M A M J J A S O N 2006 D J F M A M J J A S O 2007 HI-08JUN07 13.12 LO/HI DIFF1281.05% CLOSE 11.91 LO-25NOV05 0.95 2000 6000 10000 14000 PEAK VOL. 14923.8 VOLUME 161.8 100.00 200.00 300.00 500.00 Rel. S&P/TSX COMPOSITE INDEX HI-01JUN07 541.78 LO/HI DIFF 900.31% CLOSE 515.70 LO-25NOV05 54.16 RBC Dominion Securities Inc. Philippa Flint (Analyst) [phone]; [e-mail] Bernadine Leung, Ph.D., CFA (Associate) [phone]; [e-mail] FY Nov 2006A 2007E 2008E 2009E EPS (Op) - Basic (0.60) (0.70) (0.68) (0.59) P/E NM NM NM NM CFPS - Basic (0.55) (0.66) (0.70) (0.62) P/CFPS NM NM NM NM Revenue (MM) 1.6 2.6 2.8 4.0 EPS (Op) - Basic Q1 Q2 Q3 Q4 2006 (0.15)A (0.14)A (0.16)A (0.15)A 2007 (0.20)A (0.15)A (0.18)A (0.17)E 2008 (0.18)E (0.18)E (0.18)E (0.14)E 2009 (0.14)E (0.15)E (0.15)E (0.15)E CFPS - Basic 2006 (0.13)A (0.13)A (0.15)A (0.14)A 2007 (0.16)A (0.14)A (0.18)A (0.18)E 2008 (0.18)E (0.19)E (0.18)E (0.15)E 2009 (0.15)E (0.15)E (0.16)E (0.16)E Revenue (MM) 2006 0.5A 0.4A 0.4A 0.4A 2007 0.3A 0.8A 0.7A 0.7E 2008 0.6E 0.5E 0.4E 1.4E 2009 1.0E 0.9E 0.8E 1.2E All values in CAD unless otherwise noted. For Required Disclosures, please see Page 6. 2 Details – HIV-Associated Lipodystrophy Survey Results We conducted a proprietary survey of physicians questioning them on their current treatment of HIV-associated lipodystrophy. The aim of our survey was to find out how physicians currently treat the disorder and how they would prescribe tesamorelin if it was FDA approved for the treatment of HIV-associated lipodystrophy. Of 95 respondents, 65 treated patients for HIV/AIDS. Respondents were physicians from many medical specialties including infectious disease, internal medicine, family medicine, pediatrics, etc. We present the answers for only those 65 physicians (68% of total respondents) who treat the disease. We acknowledge that the applicability of the data is somewhat limited by the small sample size. Incidence of HIV-associated lipodystrophy. There was a wide discrepancy in the estimate of the percentage of patients suffering from HIV-associated lipodystrophy, which did not surprise us as literature estimates of the condition range from 2% to 60%. The majority of respondents estimated the condition occurs in either 10% to 30% or less than 10% of patients. Exhibit 1: Estimated Percentage of HIV/AIDS patients with HIV-associated lipodystrophy 32% 40% 23% 3% 2% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Less than 10% 10% to 30% 30% to 50% 50% to 70% More than 70% Response Rate (%) Question: Of the number of patients you treat for HIV/AIDS, what percentage do you estimate suffer from HIV-associated lipodystrophy? Source: RBC Capital Markets proprietary research Current Treatment of HIV-Associated Lipodystrophy Of the 65 physicians who reported treating HIV/AIDS patients, 43% of them do not treat the symptoms of HIV-associated lipodystrophy. Thirty-one percent of them would give growth hormone if a patient has health insurance coverage for it, and 14% would give growth hormone regardless of health insurance coverage. October 23, 2007 Theratechnologies Inc. 3 Exhibit 2: Treatment of Patients with HIV-associated Lipodystrophy 43% 31% 14% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% I don't treat the symptoms of HIV lipody strophy . Grow th hormone only if patient has health insurance cov erage. Grow th hormone regardless of patient's health insurance cov erage. Other Response Rate (%) Question: How do you usually treat patients who suffer from HIV-associated lipodystrophy? Source: RBC Capital Markets proprietary research Use of Serostim for HIV-associated lipodystrophy. We also asked physicians about their use of Serostim®, which although not indicated for HIV-associated lipodystrophy, the label now includes results from the clinical trials performed in this indication. Interestingly, an overwhelming 70% of respondents stated they would not change the frequency with which they prescribe Serostim based on the new label information. This is consistent with reported revenues for Serostim which have not significantly increased since the phase III data were released showing the beneficial effect. Exhibit 3: Expected use of Serostim with FDA-approved label including data from clinical trials for adipose redistribution syndrome. 70% 16% 6% 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% No change Increase Decrease Other Change in frequency of prescribing Serostim. Response Rate (%) Question: A new label for Serostim (rHGH) was recently approved by the FDA. It provides results on clinical studies that tested Serostim in adipose redistribution syndrome (i.e., HIV-associated lipodystrophy), but the FDA-approved indications have not changed to include this use. Are you more likely to? Source: RBC Capital Markets proprietary research October 23, 2007 Theratechnologies Inc. 4 Likelihood of prescribing tesamorelin for HIV-associated lipodystrophy. Finally, we asked physicians whether they would use tesamorelin if it was FDA-approved, and if so, at what point. Thirty-three percent of physicians would not prescribe it. However, 59% would prescribe it, but predominantly only if a patient had health insurance coverage. Specifically, 31% of respondents would prescribe tesamorelin first-line only if a patient had health insurance coverage, 23% would prescribe it second-line for patients with health insurance coverage and 5% would prescribe it regardless of coverage. Exhibit 4: Planned use of tesamorelin if FDA-approved for HIV-associated lipodystrophy. 33% 31% 23% 5% 0% 8% 0% 5% 10% 15% 20% 25% 30% 35% Not likely to prescribe it. Prescribe it firstline for patients with health insurance. Prescribe it second-line for patients w ith health insurance. Prescribe it firstline regardless of patient's health insurance. Prescribe it second-line regardless of patient's health insurance. Other Response Rate (%) Question: The phase III data show an 18% reduction in visceral adipose tissue after 52-weeks of daily injections of tesamorelin. The safety appears more favourable than Serostim with no significant changes to blood glucose levels. If the drug receives FDA approval, would you? Source: RBC Capital Markets proprietary research Conclusion – Health insurance coverage and metabolic changes likely to be important factors to determine tesamorelin use. Overall, the data are consistent with our views that the HIV-associated lipodsytrophy market is not well understood. Physicians who treat HIV/AIDS patients vary in their views on if and how to treat the disorder. We quote two physicians’ comments: “If they [Serostim and tesamorelin] can prevent HIV-treatment related lipodystrophy then they will definitely have a use in such a population….what will be the short/long term safety data and the cost?” “would love to see the metabolic parameters….hard to make a case for a daily injection to reduce visceral adipose tissue by 18% -- not sure that would be clinically apparent to the patient.” Theratechnologies has not yet disclosed 52-week changes in triglycerides, total cholesterol/HDL and SAT/limb fat analyses, but we expect more data to be presented at the European AIDS conference on October 26, 2007. However, from 26-week data, we know there were statistically significant decreases in both the total cholesterol/HDL ratio and level of triglycerides versus placebo (p<0.001 in both cases). We believe it will be important for metabolic changes to remain attractive at 52-weeks to support the changes in visceral adipose tissue as it is hypothesized (but yet to be documented) that increased levels of visceral adipose tissue are a potential contributor to future cardiovascular disease. Otherwise, in our view, it might be easier to give oral drugs to treat cardiovascular complications such as cholesterol inhibitors, rather than daily injections to reduce visceral adipose tissue. The overall data indicate, albeit from a limited number of physicians, that over 40% of physicians do not treat the symptoms of HIVassociated lipodystrophy. For those that do, the use of tesamorelin is likely to be significantly influenced by health insurance coverage, which is likely to be dependent on price, and the price of tesamorelin has yet to be determined. Thus, although we cannot accurately predict the future revenues of tesamorelin for HIV-associated lipodystrophy, we believe the data support our view that health insurance coverage will be a critical aspect of market penetration. In addition, if tesamorelin reaches the market, we believe Theratechnologies will have to focus on beneficial changes in cholesterol levels and cardiovascular risk factors in order to convince physicians to treat HIV-associated lipodystrophy and prescribe tesamorelin. October 23, 2007 Theratechnologies Inc. 5 Valuation We value Theratechnologies on discounted fully-diluted F2012E EPS of $0.56. We apply a 35x multiple and 20% discount rate over three years to arrive at a price target of $11.00. We use 2012 as it is two years after our estimated launch of tesamorelin (TH9507). We use a 20% discount rate as the company has established efficacy in the first phase III trial and now needs to replicate this in a second trial plus obtain marketing approval. Price Target Impediment Impediments to reaching our forecast share price include an inability to complete a commercialization partnership, inability to obtain regulatory marketing approval, and lack of positive clinical trial results with tesamorelin. Company Description Theratechnologies is a biopharmaceutical company developing therapeutic peptides for endocrine and metabolic disorders. Theratechnologies has one main product: tesamorelin (previously TH9507, growth hormone-releasing factor) in phase III trials for HIV lipodystrophy.