Wednesday, April 15, 2009

Cougar Biotech Initiated at Hold

Cougar Biotechnology, Inc. - Initiating with Hold Recommendation

Cougar Biotechnology, Inc. (CGRB) will generate no revenue in 2009, and operating expenses will significantly increase during the year as the second phase III trial for CB7630 commences. We model operating expenses to increase to $83.0 million in 2009, up from $63.1 million in 2008. We forecast EPS of ($3.94) in 2009.

Cougar had $91 million in cash and securities investments at the end of 2008. Cash used in operations was $44.7 million in 2008 and $15.4 million in the fourth quarter 2008.

At the most recent quarter cash-burn rate, the company can operate for no longer than 18 months without an additional capital injection. However, we expect the cash-burn rate to materially increase throughout 2009 as the company funds its two large phase III trials for CB7630.

We estimate the company will need additional capital by the first quarter of 2010 and expect the company to look for additional financing or a development/commercialization partner on CB7630 or CB3304 to address their funding needs.

Timeline for CB7630

Interim data from the CB7630 '302 trial may be available later this year. We expect to see the full data from the this trial in the first half of 2010 and, depending on the results, we believe Cougar could file for approval shortly afterwards. Assuming the application is granted Priority Review with a six-month review time, we believe CB7630 could launch in late 2010 and generate $50 million in revenue for that year.

Based on the encouraging trial data to-date and the significant unmet need that CB7630 is being developed to address, we would expect sales to ramp rapidly upon FDA approval and model sales of $125 million and $200 million in 2011 and 2012, respectively. Operating expenses will remain elevated over the next three years but should significantly decrease as a percent of revenue beginning in 2011.

We do not expect the company to generate positive net income until 2012, when we model EPS of $0.67. Risk to our forecast is a longer than anticipated enrollment period for the '302 trial, resulting in regulatory filing timelines being delayed relative to our current expectations.

Upside could materialize with a partnering arrangement on CB7630 or CB3340. We also believe Cougar is potentially an attractive acquisition target for larger companies with significant interest in oncology including Pfizer Inc. (PFE), Bristol-Myers Squibb Inc. (BMY), AstraZeneca plc (AZN) and Eli Lilly & Co. (LLY).

Cougar Biotech shares currently trade at $33.16. We recommend that investors hold at the current price and forecast an EPS loss of $3.94 in 2009. Our price target is $37.

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