Biotech Values

[DewDiligence]

What is the upside for MNTA’s share price?

After following your MNTA posts, I've decided to start building up my shares in MNTA. I've got my fingers crossed that theirs is the only generic Lovenox approved. I believe MNTA has some of the smartest guys in the industry on their senior management team. All Ivy League schooled.

So far, so good. Please continue…

Not expecting a VNDA-like spike, even under best-case scenario as [MNTA’s] market cap is already close to $400 million.

Let’s talk about that best-case scenario. The best case is the one where: i) the FDA approves the Lovenox ANDA from NVS/MNTA; ii) the FDA does not approve the Lovenox ANDA’s from Teva and Amphastar; and iii) SNY, the maker of branded Lovenox, does not launch an “authorized generic.”

How likely is this best case? That’s a tough one to answer when you consider that, even on the narrow question of whether SNY will launch an authorized generic, the views of posters on this board are all over the map. Therefore, I think the simplest way for us to address the best-case upside in MNTA’s share price is to let each reader decide for himself how likely the best case is to occur.

Hence, the following discussion will not concern itself with the likelihood of MNTA’s best case, but rather with the upside potential if the best case does indeed come to pass. When we’re done, you may have to reconsider your statement above that a VNDA-like pop in the share price is not in the cards. Here’s why:

1. Lovenox sells $2.5B per year in the US (#msg-37390328).

2. If the FDA approves only the Lovenox ANDA from NVS/MNTA and SNY does not launch an “authorized generic,” I think NVS will price its Lovenox generic at roughly a 25% discount to the price SNY charges in the US for branded Lovenox.

3. With automatic substitutability of generic Lovenox for the branded product from SNY (unless a physician explicitly specifies “No substitutions” on the prescription pad), purchasing decisions by standalone and hospital-based pharmacies will be based on price. Therefore, I think the generic product priced at a 25% discount to the branded product can capture an 80% market share almost immediately.

4. Based on paragraph #2 and paragraph #3 above, annual sales of the generic product will be $2.5B(0.75)(0.80) = $1.5B. [Digression: Under the above assumptions, sales of branded Lovenox shrink to $0.5B, and hence total branded + generic Lovenox sales drop to $2.0B. This represents an annual saving to the US healthcare system of $2.5B-$1.5B-$0.5B = $500M.]

5. If the FDA approves only the generic Lovenox from NVS/MNTA and SNY does not launch an “authorized generic,” the terms of the Lovenox partnership between NVS and MNTA call for MNTA to receive approximately 45% of the pre-tax net profits. MNTA does not have to incur any costs whatsoever to receive this share of the net profits.

6. Since generic Lovenox will be automatically substitutable for the branded product, NVS will spend no money on product marketing. The only costs incurred by NVS are for manufacturing and shipping, which I estimate to be 12% of sales. The annual pre-tax profit of generic Lovenox is thus $1.5B(0.88) = $1.32B. 45% of this—MNTA’s profit share—comes to approximately $600M per year.

7. With $600M per year of cash flow from generic Lovenox, MNTA will quickly exhaust its US tax loss carryforward. Hence, to be conservative, I apply the full US corporate income-tax rate to this income stream, which reduces it from $600M per year to roughly $400M per year.

8. To ascertain how much value to ascribe to the $400M/year income stream from generic Lovenox, let’s separate this asset from the rest of MNTA’s financial and intellectual assets. (We will add back these other assets later.)

9. Inasmuch as generic drugs do not have patent expirations, MNTA’s $400M/year income stream from generic Lovenox will continue until: i) another generic Lovenox product enters the US market, lowering sales of the generic from NVS/MNTA and adversely affecting the contractual terms of MNTA’s profit sharing; or ii) newer and better anticoagulants chip away at Lovenox’s market dominance to a material degree.

10. Either or both of the scenarios described in paragraph #9 could happen, but no one knows when. Therefore, logic dictates that MNTA’s income stream from generic Lovenox ought to be afforded a higher P/E multiple than the income stream from a branded drug that goes off-patent on a date certain. I consider a P/E of 10 to be prudent and reasonable. (Remember: we’re talking about a P/E ratio, not a P/S ratio!)

11. Applying a P/E of 10 to the $400M annual income stream gives a valuation for this asset of $4B.

12. MNTA has about 43M shares outstanding, fully-diluted. $4B/43M = $93/sh.

13 Now let’s add in the value of MNTA’s other assets. These consist of the following:

• The M118 proprietary anticoagulant program in phase-2 (#msg-26900300).

• The generic Copaxone program partnered with NVS (#msg-30621490).

• The FoB program partnered with Novartis (#msg-12222305).

• The M402 proprietary cancer program in preclinical development (#msg-37152092).

• The extensive intellectual property dealing with characterization and reverse engineering of drugs comprised of complex mixtures (#msg-25473104).

• Approximately $75M in cash, net of liabilities.

I think I’m being very conservative to value the sum of these bulleted items at $200M, which comes to roughly $5/sh.

14. Adding the $5/sh from paragraph #13 to the $93/sh from paragraph #12 gives $98/sh.

15. In other words, under the best-case scenario, the FDA’s approval of generic Lovenox could propel MNTA’s share price in a VNDA-like fashion and then some.