Biotech Values

[DewDiligence]

ENTA Valuation Model

Let’s first simplify the analysis by considering only the HCV market in the US and EU. During the next several years, the market for HCV drugs in the US and EU will be limited not so much by the number of patients with chronic HCV infection, but rather by the number of treating physicians and how many prescriptions they can write per year—i.e. the maximum throughput of the HCV medical establishment, which is approximately 350K patients per year. Of these, about 260K patents have genotype 1a or 1b, which is the patient pool ABBV/ENTA are addressing in their initial NDA/MAA.

I estimate that ABBV’s 3-DAA regimen will garner about 100K of the available 260K patients per year in the US and EU, a market share of 38%. (Most of the rest will initially go to GILD since few patients will opt for interferon-based regimens.)

I conservatively model an average selling price for ABBV’s 3-DAA regimen of $30K for a 12-week course of treatment (higher in the US, lower in the EU). This translates into $3B of annual HCV sales booked by ABBV in the US and EU at peak throughput.

ENTA’s share of ABBV’s HCV royalties is tiered according to sales, with the lower tier paying about 4.5% (#msg-91918990). Thus, ENTA’s royalty on $3B of ABBV sales—at the lower royalty tier—is $135M per year. However, at the level of ABBV’s HCV sales I envision, some of ENTA’s ABT-450 royalties will likely be at the higher tier, which is an increase of about 50% relative to the lower tier (#msg-91918990). Since the sales thresholds for triggering the middle and high royalty tiers have not been disclosed, I’ll rather arbitrarily increase the $135M figure above to $150M to account for the multiple-tier effect.

Since ENTA is not responsible for any development or commercialization costs related to ABT-450, the $150M annual royalty calculated above is also ENTA’s annual pre-tax net income from the ABT-450 asset in the US and EU.

To be conservative, I’ll assume that ENTA pays the full statutory tax rate on its ABT-450 royalty income even though we know that some of it will be offset by NOL’s. This reduces the $150M annual haul to about $93M.

Although there’s a bolus of HCV patients who can be expected to seek treatment with an all-oral regimen as soon as one is approved, I don’t expect the all-oral HCV market to exhibit a parabolic boom and bust the way VRTX’s Incvek did because the number of patients treated per year is constrained by the throughput bottleneck described above. Thus, it’s likely that the all-oral HCV market will peak during the 2017-2018 period and then begin a gradual decline with a robust market continuing until late in the 2020’s decade.

Given such a sales trajectory, what P/E multiple is appropriate for ENTA $93M figure calculated above? I think a multiple of 10x can be justified; however, to be conservative, I’ll use a multiple of 8x.

Applying a multiple of 8x to $93M of (fully taxed) annual net income from ABT-450 gives a fair value of $744M for ENTA’s ABT-450 royalties in the US and EU.

I’ll arbitrarily add another $100M of value for ENTA’s ABT-450 asset in Japan and all other countries aside from the US and EU. (Note that ENTA’s royalty rate will be higher in Japan than in the US and EU because ABBV is testing a 2-DAA rather than a 3-DAA regimen there [#msg-91870291].)

If ABBV’s HCV regimen is merely approved for marketing in major jurisdictions, ENTA will earn $195M in milestone payments from ABBV (#msg-91918990), so let’s add that in.

Again arbitrarily, I’ll add $100M for the value of ENTA’s EDP-239 partnership with Novartis, which has recently shown some life (#msg-89752221). I think $100M is a conservative figure in light of the valuations of such competing HCV companies as ACHN and IDIX, especially when one considers the lucrative milestone payments ENTA could receive from NVS (#msg-89280314).

Finally, I’ll arbitrarily add another $50M for ENTA’s second-generation HCV program with ABBV (#msg-89280030) and $25M for ENTA’s antibiotic program partnered with NIAID (#msg-91629594).

All told, that comes to about $1.2B of fair value for ENTA’s non-monetary assets. Adding in the approximately $100M of cash on the balance sheet gives $1.3B as the bottom-line figure. (As noted above, I’m ignoring the value of ENTA’s NOL’s.)

ENTA has approximately 19.7M fully-diluted shares (including about 1.8M in the-money options). Dividing $1.3B by 19.7M shares gives a target price of $66/sh.