Biotech Values

[DewDiligence]

Re: ENTA Valuation Model (updated)

…when you look back at your late 2013 ENTA valuation model, is there anything that has changed in terms of pricing, potential market share, future competition, or anything else that would cause you to change your investment thesis today?

Based on ABBV’s guidance (#msg-110484812), I remain comfortable with my model’s projection of $4.1B peak annualized sales of V-Pak (excluding Japan), which generates approximately $205M of peak annualized pre-tax royalty income and $127M of peak royalty income on a fully-taxed basis (#msg-94993406).

V-Pak’s blended average selling price in the US/EU will probably be a little lower than my old model’s projection of $41K (derived from $60K US and $25K EU), but the lower ASP is offset by higher patient volume than I presumed in the old model owing to the treatment access for early-stage patients that certain US payers have granted in exchange for price discounts (e.g. #msg-109286130).

Applying my model’s multiplier of 8x to the $127M figure above gives a value of $1.02B or about $52/sh for this asset. Although the 8x multiplier might seem a little high, it’s justified, IMO, by applying it to fully-taxed royalty income, which clearly understates the actual cash flow to be derived from the royalties.

I’m still comfortable with the old model’s $100M figure for the value of the HCV program in Japan—especially after the release of the phase-3 data from the GIFT-1 study (#msg-110425636). The ABT-493/ABT-530 next-generation HCV program (which I valued at $50M in Dec 2013) is now worth $100M, IMO, insofar as the program has advanced to phase-2b with no known hitches. Thus, these two assets add $200M of value or about $10/sh.

At this point, I’m ascribing no value to EDP-239, the preclinical HCV compounds, or the preclinical NASH program.

What’s left to be added is ENTA’s cash and expected milestone payments. (I haven’t applied taxes to the milestone payments because they will be covered by ENTA’s net loss carryforwards.) At 9/30/14, ENTA had $132M of cash; $125M was earned in December/January for V-Pak approval in the US and EU; and $30M is coming for approval of the 2-DAA HCV regimen in Japan. Adding in these milestone payments and deducting estimated cash operating expenses of $10M for 4Q14 and 2015 to date gives a pro forma cash balance of $277M or about $14/sh.

Adding the value components above gives $52+10+14 = $76/sh. Although this is slightly lower than the $81/sh figure in the old valuation model, ENTA is arguably worth more now than it was then because the risk of FDA or EMA delay has been eliminated and the royalty stream has already started (instead of being one year away).