valuation by a CFA two years ago We believe Bellus Health is worth $2.50 per share. Bellus is developing Kiacta™ for the treatment of AA amyloidosis. Our analysis largely values the company based on the potential for Kiacta™ in AA Amyloidosis, with some minor upside over the next several quarters based on progression into new areas of indications such as sarcoidosis, or with pre-clinical monoclonal antibody candidate, Shigamab™, for the treatment of hemolytic uremic syndrome (HUS) related to Shiga toxin-producing E. coli infection (STEC). Bellus has been granted Orphan Drug designation for Shigamab™ in the U.S. and EU for STEC-HUS. During the third quarter 2014, Bellus reported positive mouse model data performed in collaboration with the Uniformed Services University of the United States Department of Defense. The data show Shigamab™ was able to prevent toxicity of Shiga toxin type 2 in a sHUS as measured by body weight loss, renal biomarkers and renal histopathology. We have constructed a model to derive a fair value for Bellus Health based upon a discounted cash flow analysis where we estimate the future revenues that Kiacta™ would likely bring in after approval if Bellus were to market the drug on their own. We use this as a guide for what an acquiring company would reasonably be expected pay for Kiacta™. We are modeling for Kiacta™ to be priced at $200,000/year in the U.S., $150,000/year in the E.U., and have conservatively modeled peak market share of between 25-45%. We model that Bellus would receive 50% of revenues per their agreement with Auven and estimate a 50% net income rate. We apply a discount rate of between 15-25% and believe that the Phase 3 confirmatory study has a 75% chance of success. The following tables give the net present value (NPV) per share of Bellus’ future cash flows from sales of Kiacta™ based on the aforementioned assumptions as well as the price per share based on 65.7 million shares fully diluted.
Based upon our model, we value Bellus at $2.50/share. This is based on a conservative 35% peak market share for Kiacta™ using a 20% discount rate. Given the current stock price, we believe that Bellus is significantly undervalued and offers investors tremendous upside at the current valuation. We reiterate the fact that Bellus and Auven have hired Lazard to facilitate the sale of Kiacta™, which we believe increases the likelihood that a larger pharmaceutical company will end up acquiring the drug.
Another caveat to our valuation is that our model does not account for Bellus signing a licensing deal instead of selling Kiacta™. We forecast Kiacta™ to have peak revenues of between $500 million and $1 billion, which would justify an upfront payment of $50 to $100 million coupled with mid-teens royalties. The upfront cash would certainly cause the market to re-price the stock appropriately, and depending upon the royalty rate could supply Bellus with a steady stream of income to deploy for development of additional products.
Lastly, even if our model is overly optimistic, and no company believes that Kiacta™ could achieve greater than a 25% market share and their cost of capital is greater than what we have forecast, the lowest fair value derived from our model still represents close to a 100% gain from the current share price. Thus, we are confident that an investor in Bellus at today’s price can still expect a substantial rate of return on their investment