RBCAre obviously thinking along the same lines as many on this BB (ie. don't rush to sell your shares) and have bumped their target to $1.30. GLTA
July 15, 2013
Medicago, Inc.
Mitsubishi Bid Appears Somewhat Opportunistic,
Further Upside Possible
Our View: Considering Medicago's disruptive technology, applicability to
a wide range of products in addition to pending catalysts, there may be
scope for further upside. We have increased our valuation as we now
include value for the non-influenza programs and believe added value
could exist in these and the flu programmes.
Key Points:
Mitsubishi Bid Close to Mid Point of Fairness Opinion. Mitsubishi Tanabe
Pharma announced plans to acquire Medicago for $1.16 or $357M total
enterprise value. MDG's board and largest shareholder fully support the
deal. Advisors have provided a fairness opinion for the MDG valuation with
a range of $1.05 - $1.35 per share.
Largest Shareholder Maintaining ~40% Position. Philip Morris
Investments (PMI) is the largest shareholder of Medicago and plans to
retain its 38.5% share following the transaction.
Modest Premium for Change in Control & Recent News. The stock has
had a nice run lately which we attribute to recent H7N9 developments,
positive H5N1 data and meeting significant milestones for the rotavirus
program (partnered with Mitsubishi). Considering the under-appreciated
manufacturing capabilities and the change in control, the 22% premium
to Thursday's close seems modest.
Adding ~$0.30 of Value for Previously Excluded Vaccine Candidates.
Previously, our valuation had not included contributions from the noninfluenza
pipeline (rotavirus, rabies, 3 undisclosed vaccines partnered
with pharma) but we now place a ~$75M value (~$15M each) on these
assets. We also note that the phase II seasonal influenza results should
be released before year end and would add a further ~$0.50/sh if positive
(discount rate would drop from 20% to 15%).
Deal Needs 50% Buy-in from Minority Shareholders. Shareholders are
expected to vote on the transaction at a meeting held before the end of
August. PMI has pledged its support until April 12, 2014. The deal requires
50% approval from the minority shareholder base and is expected to close
by September. Investment Canada approval is not required but filings will
be made in Canada and the US. MDG did not shop the deal around and
was prohibited from doing so following today's announcement. Mitsubishi
has the right to match any additional offers and MDG would have to pay
a $9.25M termination fee under certain circumstances. If the deal does
not close by September 15th, Mitsubishi has agreed to provide a $13.5M
non-interest bearing loan to MDG to provide the company with sufficient
liquidity. The loan would become due if the deal is terminated and payable
through the issuance of MDG shares at $0.82.
Other Bidders Are Not Out of the Question. Medicago's technology is truly a disruptive
force in a vaccine sector that has seen relatively little innovation since the 1930s when egg
based vaccines were utilized. MDG's tobacco plant manufacturing process is faster and less
expensive than the incumbents’ products and could be applied to non-influenza type
vaccines as well. While the PMI agreement could make a competing bid more difficult, if
another company emerges as a bidder for Medicago we believe it would be Board’s fiduciary
responsibility to review it. Mitsubishi does have the right to match any competing offer.
Non-Influenza Value is Likely too Conservative. Previously, we ascribed no value to
Medicago’s non-influenza vaccine portfolio as the known vaccines were at an earlier stage of
development and we obviously could not assess progress relating to the undisclosed vaccine
candidates. However, we believe Mitsubishi’s offer for the company requires some
reassessment of the non-influenza portfolio. There are currently five non-influenza pipeline
products (rotavirus, rabies and three undisclosed products) in development. We are now
assuming $75M of value for this portfolio with equal value ($15M) for each product. That
said, the rotavirus product alone likely represents the bulk of the value and was a key
component of Mitsubishi’s decision to acquire the company.
Rotavirus Affects 125M People a Year. Rotavirus causes severe diarrhea in infants
and young children globally. It is estimated to affect 125 million per year and cause
more than 500k deaths annually. More than 85% of the deaths occur in Asia/Africa.
Two Players Dominate Global Market Valued at >$1B: There are currently two
vaccines (Merck’s Rotateq and GSK’s Rotarix) in use worldwide and sales for the
products represent more than $1B annually. Both vaccines require cold storage that
can make logistics a challenge in these geographic areas. Pricing varies for the
product. In developed countries, a full course can cost ~$200 while developing
areas receive much larger discounts and pay $10-30 for the vaccines.
Mitsubishi/Medicago Product Would Have Competitive Advantages. While speed
would not likely be a competitive advantage for the company,
Medicago/Mitsubishi’s product is expected to be stable at room temperature and
would have cost advantages over the incumbents. We believe the product will
likely take 3-5 years of further development before the company is able to bring it
to market but a 1.5% share of the market ($15M value) seems conservative. Even
7.5% ($75M) should be achievable for a superior product.
We Value Each Non-Influenza Vaccine at $15M (~$75M Total). We are
conservatively placing a $15M value on the rotavirus vaccine by assuming $15M in
sales in 2017, applying a 2x sales value for the asset and discounting back by 20%.
While this value appears very conservative given our 1.5% market share figure and
lower sales multiple, we are applying the same $15M value to each other vaccine
even though these other vaccines are likely at an earlier stage of development. We
believe the total $75M value for the five vaccines is probably low but wish to remain
conservative given we have access to only limited information on these products.
Previously, our $1.00 valuation was based on a 10-year DCF value of $0.99, rounded to $1.00,
in which we utilized a 2.0% terminal growth rate and 20% WACC. Our valuation was further
supported by a price to earnings target of $0.95 based on 2017 earnings of $0.18 and applying
an 11x multiple discounted to 2013E. Our new target takes into account five previously
excluded non-flu-based programmes. Three of these vaccines were being developed with
Mitsubishi (rotavirus plus two unknown candidates), a fourth (unknown) was being developed
with a unnamed major pharmaceutical company and the final vaccine for rabies was being
developed internally. In our view, the bid by Mitsubishi validates these projects as we think
it unlikely that it would have proceeded with the potential acquisition if they held no or little
value. We are assigning what we believe to be a conservative value of ~$15M each to these
vaccine candidates for an aggregate value of ~$75MM, or $0.30/sh. As a result, our target
climbs from $1.00 to $1.30/sh.