Replies to post #17887 on Biotech Values

[bits_since_1980]

Dew: Has LEO signed this agreement with GTCB yet?

"These payments include a total of $5 million for achieving approval of ATryn® for the hereditary antithrombin deficiency indication in Europe, with $2 million of this total paid upon signing of the agreement. "

If it hasn't been signed, are there conditions that must be met before it is signed?

[Hektor]

Dew, since Japan is now coming more in the picture, are you familiar with what is required to get approval in that market. The CC was a bit vague on this, sometimes FDA or EMEA approval will do but "some" clinical development is usually necessary.
Do you or anyone else here know a bit more about what to expect.
Another question, do you ever sleep?

[DewDiligence]

Further color on GTCB’s ATryn margins:

[From Yahoo]

>>
Re: CC notes:
by: DewDiligence
11/04/05 12:41 am
Msg: 23890 of 23891

>You threw out the 5% COGS giving a 95% gross margin.<

Actually, pass-through royalties to third parties are typically included on the COGS line of companies’ P&L statement, and doing this makes the gross margin my example 92.5% (not 95%).

>Are there any biotechs or any companies for that matter that have 95% gross margins or even 90%.<

Risperdal Consta and Botox are two that I know of in the 90% vicinity, and I’m sure there are many biologics that fit the bill. Please keep in mind that I’m assuming an end-user price for ATryn that is at least as high as—and probably a slight premium to—the end-user price of plasma-derived antithrombin in Europe.

Moreover, I’ve been talking about GTC’s net profit margin on LEO’s ATryn sales after the volume has ramped to a decent sales figure; at launch, COGS will of course be higher as a percentage of end-user sales because the fixed costs will be spread over less volume.

I figured that my 2.5% assumed royalty payable to third parties was conservative (i.e. it could well be less), and hence I figured that I had some slack on the 5% COGS. E.g., if the pass-through royalties are only 1% instead of 2.5%, then COGS could be 6.5% (instead of 5%) while still allowing a 10% (pre-tax) bottom line.

I would like to be able to pin this down further, but I’m not sure we’ll be able to.

[Posted as a reply to: Msg 23886 by wswc123]
<<

[DewDiligence]

Mea culpa re net income from LEO:

I just heard from Tom Newberry on the royalty/transfer-price terms of the LEO partnership: ‘wswc123’ on Yahoo was right and I was wrong. The mid-to-high teens-percentage royalty/transfer price is *net* of GTC’s production costs as ‘wswc123’ thought it was.

Since COGS are covered by LEO, in constructing a valuation model the only adjustment one needs to make to this mid-to-high-teens income stream from LEO to GTC is a deduction for royalty payments that GTC must pay to third parties. The rate on these payments has not been disclosed, but I’ve assumed 2.5% to be conservative. If one uses this 2.5% figure, then the net (pre-tax) income GTC realizes on LEO’s sales is in the vicinity of 15% of end-user sales.

In other words, based on the likely range of LEO’s ATryn sales, GTC will realize about $3-4M more per year in net (pre-tax) income than I previously thought.

[DewDiligence]

GTCB CC notes (corrected):

[This post incorporates the correction described in #18472.]


1. The milestone payments due from LEO are as follows:

$2M up front (non-refundable)
$3M for ATryn approval in pending HD indication
$38M for clinical/regulatory milestones in an acquired-deficiency indication
$30M for sales-based milestones
-------
$73M Total


2. The combined royalty and transfer payment payable by LEO to GTC is in the mid-to-high teens as a percentage of end-user sale, and this figure is net of GTC’s production costs. If we assume to be conservative that a 2.5% royalty is payable by GTC to third parties for IP licenses (the size of these payments has not been disclosed), then the net (pre-tax) income to GTC comes out to about 15% of LEO’s end-user sales.


3. LEO will fund 100% of the phase-2 development in the first acquired-deficiency indication. The selection of this indication will be made in 2006. (Burns is probably the frontrunner, IMO.) When this program enters phase-3, GTC will have the option—but not the obligation—to fund half of the clinical-trial expenses. If GTC exercises this option, it will have access to all of LEO’s phase-3 data for use in the U.S. and Japan—territories not covered by the LEO partnership; if GTC declines to exercise the option, it will have access to only the phase-2 data. (GTC’s decision to exercise or not exercise this option will presumably depend on how important the European data will be to the FDA and the Japanese regulators. In any event, this decision is a long way off.)


4. GTC will begin serious discussions with prospective Japanese partners for ATryn in 2006. Japan is a large market for existing plasma-derived AT, so Japanese royalties could end up being a highly material component to the overall ATryn program by the end of the decade.


5. The U.S. phase-3 ATryn trial is proceeding according to plan and enrollment of the 17 new patients is expected to be completed during 3Q06. The analysis of the 35 historical cases in the control arm are expected to be completed by the same time. (Please see #msg-5609005 for an explanation of how the control arm will work.)


6. The EMEA review and inspections continue according to plan, with a decision expected in February. The remaining EMEA questions focus on the assays used to verify ATryn’s product-release specifications, and GTC does not anticipate any problems in this regard.


The CC replay can be accessed at:
http://biz.yahoo.com/cc/7/62157.html