Aspreva
Help me figure out what is wrong with Aspreva? From the digging I’ve done this week it looks like a compelling value.
For those not familiar with it, ASPV is a small (approx $US 735 Million market cap) Canadian company with one source of revenue, royalties from Cell-Cept, a drug commonly used worldwide for transplant (kidney, liver, heart) rejection. However, the company estimates that 11% of its revenue derives from off label use in other auto-immune conditions, notably lupus nephritis. Roche actually markets and produces the drug worldwide, except Japan where negotiations are underway with another company.
The royalty revenue is rolling in. At end of 2006 ASPV had $260 M in cash, with guidance for 2007 royalties to exceed $245M! Based on 35 million shares outstanding at end of 2006 (although the effective float is reportedly more like 23M), earning should exceed $3.50 per share, the figure for 2006.
Looking at enterprise value, I figure it is about $475M ($735M-$260M cash), or $13.60 per share. Current share price is about $21. So, the ratio of EV to net income is under 4!
That seems like an unvelievable value to me, and tells me that deeper digging is needed.
The main risks I can find are:
1) This is a one trick pony;
2) Composition of matter patents will start to expire in May 2009 in US and several years later in Europe.
3) There is some competition, the most noteworthy I can find being a Novartis product called Myofortic for prevention of transplant rejection. Undoubtedly other competition exists.
On the other hand, attractive attributes (to me) and potential ways for the company to increase its value in the next few years include:
1) Currency play----a large part of the expenses and revenues are transacted in Swiss francs, Canadian dollars, and Euros;
2) International diversification. Not only is the company Canadian, but about half of current revenues come from outside the US, a portion that seems likely to increase based on patent expiration and likelihood of a Japan deal.
3) Expansion of indications for Cell-Cept. Other auto-immune diseases are reasonable potential markets for Cell-Cept and the main focus of the current business strategy. Phase III study of the drug in lupus nephritis is enrolled, data due to be locked in May 2007. If positive, additional regulatory filing in US is expected late this year. Pemphigus vulgaris is also being studied. Recently ASPV terminated development of Cell-Cept for myasthenia gravis after a study showed it didn’t work.
4) The company is structured in a way (the Roche partnership and a Swiss subsidiary) that its effective tax rate is under 10%, far less than the typical 34% Canadian rate. Who knows if this is sustainable or open to challenge, but it sure looks sweet on the balance sheet now.
So, what am I missing here? Is this a compelling value or am I missing something?
AI
