Wednesday, October 29, 2014 2:27:54 PM
Clearly, the generics are not valueless. The questions would be of what value and to whom? If it were Teva, Actavis or Novartis, then both generics and pain meds fit their product portfolios. If the potential acquirers were Purdue or Pfizer, the ART/ADT tech is what they would want to acquire and the generics would likely be sold to another company. In either case, the clear value is in the technology that we know industry analysts say will be the basis for future entry into the global opioid pain med market.
However, because of its unique nature, that technology would be a competitive advantage to whatever company is able to leverage it. To be clear, very few actions of a firm produce a competitive advantage, despite the many claims. With ART/ADT, the tech offers a very real competitive advantage – that is, it would be VRIN, as they said in the world of strategy. VRIN means – valuable, rare, inimitable, and non-substitutable. A competitive advantage enables a firm to capture a larger market share in the early days of introduction. Still, competitive advantage is not a forever condition. Competitors will develop their own tech and products; which will shift the basis for competition to means that differentiate on other aspects than VRIN. For Elite, one way is through the nature of their products born of the technology. Rather than drugs that are novel or unique in some way, Elite would have generic pain meds with ART/ADT. It is likely they would continue to gain market share because of the lower cost structure and given the demographic shift to consumers that are older, many on fixed income and Medicare, so they would be price conscious. Herein lies part of the logic of Elite being acquired, as the purchase of Elite would synergistically enable the acquirer to employ their current organizational capabilities to generate sales while most likely eliminating the entire Elite workforce. So, not only would the acquirer gain the market potential of the ART/ADT tech, but the ability to manufacture, market, and sell the products would be rolled into their existing operating cost structure. If Elite’s tech is what it seems and the FDA welcomes the NDA filing, all subsequent filings would be pro forma and one approval would be tantamount to an approval for all; which further enhances the interest of an acquirer for Elite.
All the above raises the obvious question as to what an acquirer might pay for Elite. We have seen many on this board offer their perspective, me included. But, most are back of the envelope calculations. For example, we have seen the speculation about $4-5 p/s for one ART/ADT drug approval; others suggest it will be based on the high end or midpoint of the valuation done by the company; and still others suggest it would be consistent with the price Pfizer paid for King Pharma to acquire Embeda. In truth, while all offer good points to consider, what matters to an acquirer are the forecasted annual sales of the firm to be acquired.
As I stated previously, the acquisition would be based on forecasted annual sales over more than one year. How many more? Typically, a firm is happy when an acquisition can show a positive return within four years. In some cases we see firms willing to wait longer. For example, Pfizer’s bid for AstraZeneca was based on roughly 6 years. My point is that senior executives believe that anything less than four years is an investment they would make any time, every time. Here is why I make the point.
Let’s assume a conservative set of numbers and start with a very reasonable 10% capture of the global opioid pain med market; which exceeds $20 Billion annually (of which the US accounts for 60%) and is collectively growing at more than 4% annually. A 10% capture amounts to about $2.1 billion per year. Now, let us assume Elite is able to negotiate a selling price based on a 42-month forecast of sales. I am certain everyone can do the math. But, because there is a certain satisfaction garnered with showing what the numbers might look like, allow me to be the first to do it.
The forecasted sales for the 42-month period of time would amount to $7.88 Billion. Even if we factor in a share count inflated to the “full Monty” – the 950 million authorized shares, the return for shareholders would be $8.29 p/s. Of course, better yet would be to not have the share count inflated beyond 700 million, negotiate on revenues over 48 months, and/or secure a higher estimated capture of the opioid pain med market. But those are matters outside our control. All we shareholders can do is root-root-root for the home team.
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