Some calculations...I posted this stuff on IV. I delete all my posts over there but kept this one because I didn't want to go through the calculations again. It still reflects my opinion. I think a licensing deal is very likely. However, there are more considerations than these but it represents a point of departure.
What might a buyout and GOR be worth?
I just did a little calculating to determine some values that a Gross Overriding Royalty (GOR) might have. So let's calculate a simple "Net Present Value" of an extended royalty on NexVas drugs.
Here are some assumptions and parameters:
A) Let's say that RVX wants $3 billion to $5 billion as an all-in buyout price and no pharma is willing to pay it. In its place a buyout and royalty arrangement may be accepted.
B) Let's say that, at the time of a buyout, RVX has 60 million shares outstanding.
C) So RVX adopts a buyout and royalty deal, say $2 billion cash to shareholders plus 2.5% GOR that is placed in RVX Therapeutics, RVX's wholly-owned subsidiary.
D) Before closing the deal, RVX takes RVX Therapeutics public (Call it "RXT") with the same number of shares that RVX has and then issues to each shareholder a dividend consisting of 1 share of RXT for each RVX share they own. Shareholders would then own their RVX shares plus an equal number of RXT shares. RVX and RXT are now separate companies with RVX owning the NexVas drugs and RXT owning the GOR.
E) RVX completes the sale of itself for $2 billion or $33.33 per share (based on 60 million shares outstanding). In other words, we get rid of our RVX shares for $33.33 in cash for each share. We get a cheque. The buying pharma now owns NexVas, RXT owns the royalty and we have $33.33 in cash.
So, what would be the value of our RXT shares?
OK, let's make some more assumptions and let's use numbers that are easy to halve or double so that extrapolation is easy.
A) Let's say that if the NexVas programs are successful and go to market, that they generate gross drug sales of $10 billion per year for 15 years. We predict higher sales per year, perhaps double, but let's use these numbers. You can double my results easily enough if that gets you up in the morning.
B) Let's assume a GOR of 2.5% which produces a gross revenue for RXT of $250,000,000 per year. ($10,000,000,000 x 0.025 = $250,000,000 per year)
C) Let's calculate the Net Present Value (NPV) based on a steady RXT revenue of $250,000,000 per year over 15 years.
D) Let's use a discount rate (the cost of money) of 10% to calculate the NPV.
Using a standard NPV calculation we calculate an NPV of $1,901,519,876.58, almost $2 billion. In other words, a company with an income of $250 million (with no real expenses) for a period of 15 years would be worth about $2 billion. Again, with 60 million shares outstanding, that works out to $33.33 per share.
However, at the time of the RVX buyout, there are still 3 to 5 years of Phase 3 trials to go through before any royalty income can start. So, what kind of value would the market place on RXT? Well, that requires a discussion of relative risks at the point of the RVX buyout.
Remember that RVX and RXT have the same number of shares and that RVX was just sold for $2 billion. Looking forward, RXT has no risk in the NexVas program in the sense that the buyer of RVX pays for all future drug trials and development. So RXT may have nothing up front other than some seed money left there by the RVX deal and otherwise just sits and waits for royalty cheques. However, the odds of successful Phase 3 trials are about 60% if my memory serves me well. And then, at that point, the odds that the drug will go to market (FDA approval) are also something in the order of 60 to 70 percent. So that means that RXT has about a 40% chance of collecting its royalty. So let's discount the NPV per share by the 60% chance of failure and then halve that to a value of about $6.67, say $6. (I know this is all quite arbitrary so plug your own numbers in.)
However, RXT might also have been left with some of the NexVas rights and with other drug programs. And, if it has some cash, it can proceed to IND and trials. So the value of RXT could and should be influenced favourably by that.
I think that selling RVX for $2 billion plus a GOR of 2.5% represent a minimal valuation. Based on this valuation and the calculations here, we would see cash of $33.33 plus stock in RXT worth $6.67 for a total of $40 per share. I leave it to the forum to argue these numbers. The potential drug sales could be $20 to $30 billion, affecting all aspects of these calculations by a proportionate amount, especially the value of the royalty.
Re: What might a buyout and GOR be worth?
That's why I used 2.5%. It's easy to multiply 2.5% by 2 or 4 for 5% or 10%. I think it's important to note that Gross Overriding Royalties can be quite small because there are no expenses to confuse and lower the calculations. In all likelihood, 2.5% would yield a half billion dollars per year., or close to $10 per RXT share, with only administration expenses for RXT. That's a lot of profit and once the money started coming in, the stock would have to be $50 to $75. With a 5% GOR, you can double those numbers to $100 to $150.
DM is right about the value of a royalty but I don't think that shareholders would want to shoulder all that risk. That's why the spinoff of RVX Therapeutics with the GOR and the subsequent outright sale of RVX for a couple of billion makes so much sense. Our risk is then covered because we get more than $30 upfront in cash and can also pocket a lot later if the NexVas program is successful.
Yo, DM, I'm sending wire instructions in the morning!