Lilly Gets Good Price for SGXP
On July 9, Eli Lilly (LLY) announced the decision to acquire all outstanding shares of SGX Pharmaceuticals Inc (SGXP) at $3 per share. SGX shifted its focus to the FAST programs after the discontinuation of its only candidate Troxatyl for third-line acute myelogenous leukemia in 2006. Recent pipeline setbacks had negatively impacted the the company's ability to raise cash from the market to fund its operations.
The FAST-based drug development programs are all in the pre-clinical stage of development and while the technology may provide long-term growth for the company, SGX Pharma remains several years away from getting a product on the market. Therefore, we maintain our Hold rating on the stock.
The company filed an Investigational New Drug (IND) application for SGX393, a potent inhibitor of the T315I mutant, in June while the IND for SGX126, its experimental cancer drug, will be filed in the first quarter, next year. Although the future of the Troxatyl franchise is uncertain, we believe the FAST technology is a viable one and will be the company's long term growth driver.
We are impressed with the definitive merger agreement signed with Eli Lilly. The acquisition will allow the management to leverage Lilly's research and development expertise with SGX Pharma's scientific expertise in utilizing structural biological activities for the development of innovative treatments. We expect the company's share price to trade at or near the acquisition price quoted by Lilly. As such, we maintain our target price of $3.
St. Joe Co. Battens Down Hatches
We are still concerned about the massive slowdown in St. Joe Co.'s (JOE) residential business and JOE's ability to generate operating cash flow in a tough environment for residential developers. JOE continues to reduce head counts and cap ex spending in response to a rapidly deteriorating residential Florida real estate market. There are no signs that the housing situation will get better in the next six months, and we think the worst is yet to come.
The company has paid off most of its debt, a prudent move in a declining economic environment. In addition, JOE has a strong development pipeline with multiple projects that will come on line in the next couple of years. When residential markets rebound, JOE will be well-positioned with a diverse array of projects at various price points.
The company is currently valued at 43x our recently raised 2008 EPS estimates, well above peer group averages. We expect operations for the majority of 2008 to be disappointing, although we rate the shares a long-term Hold due to the company's extensive land holdings in a state that continues to be among the leaders in job and population growth. We are setting our 6 month price target at 45x 2007 projected EBITDA or $36.00 per share.
Pre-Q2, Buy Diamond Offshore
We are maintaining our Buy recommendation and price objective on Diamond Offshore Drilling Inc. (DO) shares ahead of the company's second-quarter results.
