July 4, 2014.
I’ll start the first valuation report of Iber Biotech with Aegerion (NASDAQ: AEGR). The company markets Juxtapid, a drug intended for the treatment of homozygous familial hypercholesterolemia (HoFH), an ultra-rare disease that produces extremely high blood cholesterol levels leading to a very high risk of heart attack and/or stroke.
There’s some debate around what the actual number of patients is. The FDA review of the drug stated that there’re around 300 patients in the US, that is, an incidence of approximately 1 patient in 1 million people. The company, however, claims that there are as many as 3,000-4,000 addressable patients. Whether the company can expand the base of patients to include those with very high cholesterol, and to what extent its market share will be threatened by competitor ISIS/Genzyme’s Kynamro or new entrants such as PSKC9 inhibitors, are questions that remain open and have sparked considerable debate. Although it’s not the intention of this valuation report to contribute to that specific topic, it’s necessary to make certain assumptions in this regard in order to provide a rough estimate of the value of the company.
Following this survey from LifeSci Advisors, I estimated a maximum number of patients of 1,300 and peak sales of around half billion dollars before protection extensions expire in 2020. The near-term market of Juxtapid depends heavily on US sales. Reimbursement agreements have not yet been reached with EU national authorities – for instance, the drug was deemed as no cost-benefit by Germany’s G-BA – and Aegerion still has to run a small study in Japanese patients to submit a regulatory filing in that country. Therefore I’m not reflecting any potential ex-US sales in the report.
I projected an income statement with several assumptions on margins and growth in line with previously reported company financial statements and future estimations. I also projected a balance sheet (data not shown for simplicity) to account for changes in working capital, fixed assets, shares outstanding and cash. The US composition of matter patent of Juxtapid expires in 2015, but with the Hatch-Waxman act, market exclusivity would be extended for up to five years until 2020. Being Juxtapid a small molecule, generic competitors are likely to enter the market from 2020. Therefore, I projected a downward sloping curve until 2025 and assigned no terminal value from that year.
From the Net Operating Profit After Taxes (NOPAT), I made the proper adjustments for non-cash related expenses, change in working capital and capital expenditures to arrive at the yearly free cash flows, that is, the cash that the company’s assets generate regardless of how they’re financed. Aegerion has little debt and appears to be repaying it year over year to eventually be debt-free in two or three years. Thus, I assumed that the required return on equity (Ke) and the weighted average cost of capital (WACC) are the same. For net debt, I only used the debt and considered all cash in the balance sheet as cash for operations.
I arrive at a fair enterprise value of $651 million or a market cap of $644M without debt. This is $21 per share which correlates fairly well with the stock’s downtrend over the last few months.
This is what the shares are worth for me, and it depends on many subjective factors and assumptions. Remember that there’s no such thing as objective, fair or intrinsic value for a company or an asset, it always depends on who is making the appraisal.
Disclosure: I have no position in AEGR.