Ablynx: Novo Offer Undervalues The Company
Jan. 22, 2018 10:00 AM ET|
Summary
Novo’s current offer undervalues Ablynx.
We expect Novo to increase the cash portion of the offer by 20%.
20% increase would reflect the fair value of caplacizumab and the pipeline.
This idea was discussed in more depth with members of my private investing community, The Total Pharma Tracker.
We first covered Ablynx (OTCPK:ABLYF) in September 2017, ahead of an important catalyst for the company. The note was published ahead of the data readout from the phase 3 HERCULES study. We had noted that ABLYF was a buy ahead of the event. The event played out as expected and ABLYF shares saw a sharp rise after the positive catalyst. Ablynx shares have doubled since that spike in October last year. Most gains though have come this year after Novo Nordisk (NVO) went public with its takeover offer for the company. We believe that Novo offer undervalues the company and a higher offer is likely in the coming days.
Novo Offer
Novo went public with its takeover offer for Ablynx on January 8th. The Danish biopharma, looking to boost its rare blood disorders, offered Ablynx 30.50 euros per share or 2.6 billion euros ($3.1 billion). Novo would pay 28 euros per share in cash and an additional 2.5 euros in contingent value right (CVR). The CVR can be exercised if certain conditions related to Ablynx’s pipeline were met.
Now a CVR does not guarantee future payments. In fact, CVRs are a neat way to put some or all of the risk associated with the pipeline on shareholders of the target company. In the case of Novo offer, we believe all pipeline risk is being transferred to Ablynx shareholders. The 28 euro per share that Novo is offering is quite clearly for caplacizumab, Ablynx’s lead product candidate that is likely to reach the market in 2018 itself. The risk of Ablynx’s pipeline development has been put on Ablynx’s shareholders and the payout based on the pipeline is not significant.
Offer Reflects Only Caplacizumab Value
Caplacizumab is expected to reach the market in 2018 itself (in Europe). Ablynx plans to commercialize the drug on its own in the U.S. and in the EU. We projected the sales in both regions, assuming a 2018 launch in the EU and a 2019 launch in the U.S.
Thrombotic Thrombocytopenic Purpura (TTP) is a rare bleeding disorder. The prevalence is estimated at between 1.2 and 11 per million. We assumed the mid-point of this estimate; 6 per million, in our sales forecast model. Around 95% of TTP cases are acquired TTP or aTTP, the indication Caplacizumab is targeting. Based on these estimates, we calculated the addressable market in the U.S. and EU. We assumed a treatment rate of 70% (those seeking treatment) and peak market share for Caplacizumab of 50%. Based on these estimates, caplacizumab reaches peak sales of nearly 320 million euros (non-risk adjusted) in 2025. The peak sales are calculated assuming treatment cost of 200,000 euros in the U.S. and 175,000 euros in Europe.
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Caplacizumab Peak Sales Forecasts in European Union and U.S.
Based on Capla peak sales, Novo’s 2.6 billion euros values Ablynx at a price to sales multiple of around 8x. This is around the average price to sales multiple for the biotechnology sector in the U.S. But remember that the offer also includes the CVR. If we take the value of the CVR out, the upfront cash offer values Ablynx at 10%-15% discount based just on our peak sales forecast for caplacizumab. And as we noted, the CVR also undervalues the pipeline while putting all the risk on shareholders.
Ablynx’s Pipeline
Ablynx’s pipeline includes ALX-0171, a potential first-in-class treatment for RSV infections. The addressable market for RSV is more than 1 billion euros, according to Ablynx’s estimates. ALX-0171 in a phase 2b study in RSV-infected hospitalized infants and in a phase 2 study in RSV-infected adult hematopoietic stem cell transplant patients. Results from the phase 2b study are expected in the second half of 2018 itself, an important upcoming catalyst.
Company Presentation, JPM 2018
Ablynx’s pipeline also includes Vobarilizumab, which is being developed in rheumatoid arthritis (RA) and systemic lupus erythematosus (SLE). In a phase 2b study comparing vobar was found to be more efficacious compared to tocilizumab in RA patients. In a combination therapy (with MTX), vobar again showed solid efficacy profile. Results from the phase 2 study in 300 SLE patients are expected in the first half of this year. This along with AbbVie’s (ABBV) decision to opt-in for further development of vobar are the two near-term catalysts for Ablynx.
We believe that the 2.50 euro CVR does not assign much value to Ablynx’s research portfolio, considering its potential.
What Could A New Offer Look Like?
We believe that Novo will raise its offer in the coming weeks, especially after Ablynx’s largest shareholder said in a statement that he was open to an offer if Novo sweetened the deal.
We expect Novo to increase the cash part of the deal by at least 20% to around 33.50-34 euros. Based on our peak sales estimates for caplacizumab, we believe a 10% hike to reflect capla’s commercial potential is justified. The other 10% increase is to account for the pipeline as we expect Novo to offer some upfront cash for the pipeline.
Based on the increase in the cash offer, we expect the total offer (including CVR) from Novo to be around 36 -36.50 euros.
Disclosure: I am/we are long ABLYF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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