From Another Board......Versant Partners 10-24-07
EVENT
Transition has experienced considerable share price
decline in recent days. We believe investors may be
cautious about the economic prospects of
Transition’s islet cell neogenesis (INT) platform
since partner Novo Nordisk has not yet exercised
its option to license INT, despite positive Phase II
data for one INT form (EGF-gastrin) being
reported in Jun/07.
BOTTOM LINE
All data reported this year on Transition’s core
technologies, including INT, have been uniformly
positive so we see sustained weakness as a buying
opportunity. Maintaining BUY rating and
$26.00 target on TTH.
FOCUS POINTS
, Timelines to officially partner INT have
extended beyond our expectations, particularly
since we believe Novo had only two months to
make a decision on INT once Phase II EGF/
gastrin data was available, probably in Aug/07.
, We do not believe extended timelines reflect
negatively on INT’s medical potential – Phase II
data from a 50-patient diabetes trial reported in
Jun/07 were highly positive, demonstrating
excellent blood glucose stabilization with 4-week
dosing without insulin supplementation for up to
six months.
, Furthermore, we believe the EGF-gastrin data
are equally positive for GLP-1-gastrin as well,
and a Phase I GLP-1-gastrin trial, partnered with
JDRF, is on track to commence by Q4/07.
, Valuation is still based on NPV and 30x multiple
of F2013 EPS forecast of $2.83, both discounted
at 40% to reflect clinical status of lead programs
(both in Phase I but soon to be Phase II).
...
Transition Therapeutics October 24, 2007
Douglas W. Loe, Ph. D., MBA, (416) 849-5005 2 of 4
Maintaining positive view on INT, with or without Novo’s ongoing
participation in INT development
We believe INT (gastrin plus either EGF or GLP-1) merits further
development. While diabetes giant Novo would normally be seen by us as an
attractive partner, TTH’s long-standing relationship with Novo has left us
uninspired and has probably set back INT development by at least two years.
Accordingly, we are agnostic on Novo’s ongoing interest in INT and believe
other diabetes-focused firms are equally attractive partners, including those
without a GLP-1 formulation in development like Pfizer, Novartis, or Merck.
Virtually no financial risk to fund INT or AZD-103 to next Phase
II/III milestone
Transition remains well-capitalized to fund not only its Phase I GLP-1-gastrin
development (probably using Amylin’s already-approved Byetta as GLP-1), but
also Phase II/III EGF-gastrin testing without partnership capital if required.
Furthermore, TTH’s Phase II AZD-103 Alzheimer’s trial requires limited
capital because Elan is responsible for 70% of development costs as the deal is
currently structured. Adding net proceeds of about $24 million to F2006 cash
balance of $34.4 million less assumed burn to date of $5 million gives us current
cash balance of around $53 million – sufficient to fund all clinical programs into
calendar 2010.
We expect a 250-300 patient Phase II Alzheimer’s trial with AZD-103 to start
by late Q4/07 (but probably not enroll patients until Q1/08) with partner Elan.
If the trial completes enrollment by mid-2008 and evaluates cognitive function
at six-months, data could be available by H1/09, with pivotal testing starting in
H2/09.
...Transition
Therapeutics
C$ TTH 22.8 9.55 21.42 7.38 $217 $217 $156 $156 0.7 Alzheimer's drug AZD-103 entering Phase II by Q4/07, INT diabetes
programs advance into Phase I/II by Q4/07
Transition's implied value per share $23.03
...Transition Therapeutics October 24, 2007
Douglas W. Loe, Ph. D., MBA, (416) 849-5005 3 of 4
Transition’s pipeline focused on new technologies like AZD-103 &
less on legacy technologies that once formed basis of valuation
Clearly Transition is behind on advancing technologies that exclusively
contributed to market value until Alzheimer’s drug AZD-103 was partnered
with Elan in Q3/06. These include Transition’s IET platform (interferon plus
cobalamin) for which a Phase II MS trial was discontinued and a Phase II
hepatitis C trial generated positive data last year but is as-yet unpartnered, and
INT for which timelines to commencing pivotal Phase III trials have been
extended since an alternative INT form (GLP-1 plus gastrin) was identified and
deemed to be more attractive (and we agree). We still ascribe value to INT, but
Transition’s main value driver is the Elan-partnered small molecule Alzheimer’s
drug AZD-103 (syllo-inositol) for which abundant preclinical data shows
disease-reversing potential with oral dosing. The drug is safe at gram quantities
per day, levels far below those predicted to be effective from extrapolating
preclinical data. AZD-103 contributes about 59% of total product revenue in
our model by F2016. That said, many long-standing TTH shareholders may see
lack of advancement of INT or even IET as negative to Transition’s prospects
and this could be influencing recent share price trends.
SUMMARY & RECOMMENDATION
Our TTH valuation is derived from three methods – NPV determination, a 30x
multiple of our F2013 EPS forecast of $2.83 – both discounted at 40%, a rate
we expect to revisit once core programs are well-advanced into Phase II – and
comparables. We use F2013, the first full year of AZD-103 and GLP-1 (Byetta)-
gastrin sales forecasted in our model, as the reference year for our discounted
earnings valuation. We see considerable upside in TTH at current levels once
development risk is resolved on INT, either with Novo stepping forward to
fund development or with another equally attractive partner being identified,
and we expect INT partnering to be resolved within the next quarter or two.
Additionally, we expect two key programs to enter more advanced human
testing by year-end – Elan should move AZD-103 into Phase II and
Transition/JDRF should move GLP-1-gastrin into Phase I/II testing. We are
maintaining our BUY rating and $26.00 target on Transition (though modest
share strength of comparables does lift our calculated target above that value).
Our target corresponds to a one-year rate of return of 172%.
Exhibit 2. Matrix valuation for Transition
NPV, discount rate 15% 20% 30% 40% 50% 60%
Implied value per share $101.72 $70.24 $42.63 $29.73 $22.27 $17.45
Price/earnings multiple, F2013
Implied share price 1 P/E 15% 20% 30% 40% 50% 60%
20 $37.18 $32.73 $25.74 $20.61 $16.76 $13.81
30 $55.77 $49.10 $38.61 $30.91 $25.14 $20.72
40 $74.36 $65.46 $51.48 $41.22 $33.52 $27.62
Comparables $23.03
One-year Transition target price $27.89
1 Based on F2013 EPS (fd) forecast of $2.83; EBITDA of $102.5 million; product & milestone revenue of $118.5 million
Discounted share price year-end 2008
Source: Versant Partners
Transition Therapeutics October 24, 2007
Douglas W. Loe, Ph. D., MBA, (416) 849-5005 4 of 4
DISCLAIMERS AND DISCLOSURES
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The opinions, estimates and projections contained in this report are those of Versant
Partners Inc. (“Versant”) as of the date hereof and are subject to change without notice.
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Although Versant makes every effort possible to avoid conflicts of interest, readers
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Disclosures as of October 24, 2007
Versant has provided investment banking services or received investment banking
related compensation from Transition Therapeutics within the past 24 months.
The analyst responsible for this research report does not have, either directly or indirectly,
a long or short position in the shares or options of Transition Therapeutics.
The analyst responsible for this report has visited the material operations of Transition
Therapeutics. No payment or reimbursement was received for the related travel costs.
Analyst certification
The research analyst whose name appears on this report hereby certifies that the
opinions and recommendations expressed herein accurately reflect his personal views
about the securities, issuers or industries discussed herein.
Definitions of recommendations
Strong Buy: The stock has substantial upside potential and a catalyst is expected to
drive the price higher in the near term. One of the analyst’s top picks.
Buy: The stock is attractively priced relative to the company’s fundamentals and we
expect it to appreciate significantly from the current price over the next 12 months.
Speculative Buy: The stock is attractively priced relative to the company’s
fundamentals but carries an above-average level of risk.
Hold: The stock is fairly valued and we expect it to trade within a narrow range of the
current price in the next 12 months.
Sell: The stock is overpriced relative to the company’s fundamentals, and we expect it
to decline from the current price over the next 12 months.
Tender: We believe the offer price by the acquirer is fair and thus recommend
investors tender their shares to the offer.
Under Review: We are temporarily placing our recommendation under review until
further information is disclosed.