CS
Playing the ABBV derivative via ENTA
In our view, ENTA is an often overlooked way to play the HCV Revolution and/or ABBV's positioning within it – Increasing ENTA's TP to $36 (from $29). This is the third note in our "The HCV Revolution" series. In our previous notes, we had addressed immediate-term pricing of next-generation combinations (specifically Sofosbuvir) (LINK) and highlighted the potential number of competing all-oral, IFN-free regimens (LINK). In this note, we highlight that ENTA is an interesting derivative play for investors focused on ABBV and/or HCV. Our FY'14, FY'15, and FY'16 EPS estimates are $1.18, $3.78, and $1.94 respectively due to housekeeping model changes.
INCREASE TARGET PRICE
ENTA is the originator of ABT-450, the cornerstone of ABBV's all-oral, IFN-free regimen. ENTA signed a research collaboration with ABT/ABBV to develop HCV protease inhibitors with ABT/ABBV in Dec 2006. Under this agreement, ENTA received an upfront payment of $57M and is eligible for $250M+ pre-commercial milestones ($195M+ remaining) as well as double- digit royalties on sales for the ABT-450 proportion of the regimen. ABBV funds all development, manufacturing, and commercialization costs.
ENTA's current market cap is $500M and could have ~$700M in cash by 2020. ENTA had ~$102M in cash as of Sep 30, 2013 and could receive CSe of $172M ($195M+ potential) by 2015 resulting from FDA/EMA filings (CSe of $34M) in Q2'14 and approvals (CSe of $138M) in early 2015 associated with the ABT-450/r combination. This translates to ~$300M in cash already. In addition, ENTA is set to collect an effective royalty rate of at least 4% (assuming 3 DAAs) on sales of all-oral, IFN regimens, which translates into ~$100M per year in royalties. We estimate that ENTA could collect ~$455M in total royalties by 2020.
Potential upside from next-gen protease inhibitor, ABT-493, as well as NVS-partnered NS5A EDP-239. ABBV/ENTA are planning to combine ABT-493 with ABBV's next-generation NS5A inhibitor, ABT-530. This combination has the potential to be a once-daily (without ritonavir) single- tablet regimen. Dosing of ABT-493 is expected to start by year end. If this combination shows competitive SVR in PII trials, ENTA's royalty economics will improve significantly as the number of DAAs decreases from 3 to 2. In addition, ENTA holds the option in the US to fund 40% of development and commercialization costs associated with ABT-493 in exchange for 40% of related profits. This combination could reach the market in ~2017.
Biggest ENTA pushback is "agency cost". The biggest investor pushback on ENTA is capital allocation of the HCV-related cash inflows. ENTA has modest pipeline (Exhibit 1) R&D spend of CSe $16M in 2013 (spent on pre- clinical antibiotics and HCV programs). Potential future R&D spend includes ABT-493. Even with this R&D spend, ENTA is profitable from 2015 on CS estimates
Valuation. Our DCF-derived TP of $36 is based on royalties from HCV regimen sales until 2025, 10% discount rate, and no terminal value.
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