RE:RE:RE:RE:Purposeful choice this PLI?This is from a PLI long. Enjoy the read!
Prometic evaluation Q1 -2016
First the PPPS (Plasma Protein Purification System) plants
Contrarily to any "biotech", Prometic already controls an important plasma fractionation manufacturing base.
In 2014, we had the Laval 150kl plasma fract capacity already in prod + the Taiwan 300kl capacity expected for 2017. So ~½Ml capacity.
Nowaday, we've learned that Taiwan could be scaled to reach 400kl if need be but will likely be late and we've added that Winnipeg plant that starts at 250kl (and could as well reach 400kl, if necessary, I've been told), and is already doing runs of plasma frac. Since Generium has agreed to use US-approved plasma only we can also add the 600kl to the total. That's anything between 1.3 and 1.5 Ml, in the 2018 horizon. And 400kl from Laval and Winnipeg starting this year until then.
So from now on I'll use a rough conservative estimate of 1 million litres (Ml) of plasma fract. capacity available by 2019.
(I like conservative, if anything goes wrong at one plant we have a margin of safety). As noted below, because of the Pg seemingly endless possibilities, that 1M litres plasma fract capacity is far from enough. One should expect this capacity to be doubled and quadrupled with time. More on that later.
Estimated Plant Capacity (kl) CNBG Laval Taiwan Hematech Russia Generium Winnipeg Emergent US LatAmer Total \ CNBG Total
2016 0. 150 0 0 250 0 0 400 400
2017 400 150 0 0 250 0 0 400 800
2018 800 100 200 300 300 0 0 900 1700
2019 800 50 300 450 400 0 0 1200 2000
2020 800 50 400 600 400 500 0 1950 2750
2021 800 50 400 600 400 500 400 2350 3150
2022. 1200 50 400 600 400 500 400 2350 3550
Note that I expect the Hematech and Generium plants to be ready only by mid 2018 (half their max annual capacity in 2018). Note that I also scale up the capacity over year to simulate the ramp-up of sales of the additional capacity over a few years.
Plant Royalty CNBG Laval Taiwan Hematech Russia Generium Winnipeg Emergent
Pg 100% 13% 0% 0% 0%
Albumin 95% 13% 0% 95% 0%
IVIG 95% 13% 0% 95% 0%
AAT 95% 13% 0% 95% 0%
Fg 95% 13% 0% 95% 0%
C1-INH 95% 13% 0% 0% 0%
Factor VIII 95% 13% 0% 0% 0%
IAIP 100% 13% 0% 0% 0%
Orp Rx4 100% 13% 0% 0% 0%
Now the PPPS proteins
Let's start with C1-INH (C1 esterase inhibitor). Pierre has said under record that there's 3500$ worth of C1-INH by litre of plasma and that we have more than double the yield of the industry at fractionating it. A little research taught me that the industry is running at 20-40% yield, so I expect that our yield be about 60% (with much better purity than the competition, as usual).
1 IU of C1-INH is that found in 1 ml of fresh citrated plasma (~270mg/l), sold 2450$/500 IU by competitors. So there's about 4900$ worth of C1-INH per litre (about 18$ per mg). At a yield of 60% it would gives us 2940$. That's close to the 3500$/l that Pierre was referring to and indeed >>500$ as the last AGM slide showed it! However I also heard that we could gain significant market share from the competitor by cutting our price. At 2000$/litre, we still do > 95% gross margins and hurt the competition badly, stuck with their old Cohn limitations
For Alpha 1 Antitripsin (AAT), Fred answered me 2013-11-07 that "About only 7000 to 10000 patients of the 100000 are treated in the US. Accepted price is 120,000 $US per year. With the Laval and Hematech capacity, there's enough to treat 4000-5000 additional patients, for sales of 500-600M $US." Laval and Hematech have ½Ml capacity so curiously that represents more about 1000$/l than the 300$/l that have been shown in PLI presentation slides everywhere. The full 1 Ml capacity would then bring in sales of 1 to 1.2B$, and cover 8-10k patients. 8Ml of plasma and 8-10B$ in sales would be required to supply all the US demand. Maybe the price would have to go lower then. and reach the 300$, or it is what's supposed to remain to PLI after some marketing deal or price cut. Anyway I'll still conservatively use 300$/l but keeping in mind it could be more than 3x that to start with.
Different source tells us there's between 140 and 180 mg of Plasminogen per litre of plasma (so say 160mg) and the AGM 2011 presentation (2012-05-07), tells us that PPPS has a yield of ~90%, so we can expect to get about 140 mg of Pg per litre. Congenital Plasminogen Deficiency (CPD), Type 1 (T1PD: patient has no Pg at al) and Type 2 is that quite limited orphan indication: 2500 T1PD patients in the developed markets, each paying 50-60k$ per year or about 150M$ total, and it's been heard that Laval alone would be more than enough to supply the condition. So I max the entire T1+T2 CPD market at 200M$ long term.
But of course, that was before the OMNIO deal for Wounds.
The US market would then use the full Prometic 1Ml of plasma fract. capacity curing ½M wounds at 10k$ each. Or 5000$ worth of Pg by litre of plasma. That's only the US diabetic foot ulcer market so we will need to build more plasma fract plant to meet market's need that are expected to be 4x larger than that by 2020 (13B$ US, 20B$ WW). Note that at 1Ml and 5B$ in sales Pg would be in the top 10 WW blockbuster drugs. As we double that or more by adding other Ml of plasma fract capacity it will most likely end up no 1.
No kidding. Do the maths.
For the Wound condition, Omnio receives a "low single digit royalty" from it (let's say 5%). Not shared 50-50 with Hematech like T1PD is. It will however most likely need some marketing partner when it hits the market in 2018. And the cost in margin of sales for that Pg-Wound marketing partnership is simply going to be the most crucial factor for Prometic future profitability.
There also tons of rumors circulating about many more extra large indications for Pg. So there's place to update this model! :-) Fred lately: "Pg could turn out to be even bigger than we all originally thought. Hopefully we’ll have more to disclose going forward in 2016. It seems Pg is involved in even more things than even us thought possible at first. To be confirmed later on..."
If this materializes, it could be more than, what, 10M litres worth of Pg plasma fract we're gonna need? But ~4M litres is already pretty certain.
I'll be conservative here too and use 4500$ worth of Pg per litre, to include a mix with other indications to come which could not afford the full 5000$ pricing. We'll see!
The last divulged IAIP plasma proteins to be developed with ProThera has been reported (Fred email) to be worth north of 500$/l so that's the conservative figure I'll use. Don't know if it will require the full 1Ml of plasma fract capacity though. That's may be why they used the 350$ figure when it was not still divulged. A January 2016 article explains: The IAIP helps fight inflammation. When a patient's level drops precipitously, the chances of death increase dramatically. The protein is produced in the liver, but production shuts down when a patient suffers a severe infection such as sepsis, has a stroke, or develops acute lung disease or neuro-inflammation of the brain from a brain injury.
But it's unlikely the company's first clinical trials will evaluate the protein's response to sepsis, Horan says: "Sepsis is like the therapeutic equivalent of climbing Mount Everest." "Many companies have gone down that road and failed." And so, as ProThera Biologics prepares for clinical trials, the team is working to determine what to test the therapy on first — perhaps stroke patients, lung disease, brain injury.
If we add up info, you minimally get something like:
-Plasminogen 4500$/l
-Fibrinogen 300$/l (150$ as GMP API,
-IVIG 400$/l
-AAT 300$/l
-Albumin 100$/l
-C1-INH 2000$/l (the last 7 ones starting in 2020)
-IAIP 500$/l
-Orphan Rx 4 350$/l
-Orphan Rx 5 350$/l
-Protein 10 350$/l
-Protein 11 350$/l
-Protein 12 350$/l
---------------------------------
Total ~10000$/l
(versus the competition, Cohn process average 400$, max 540$ (CSL) per litre)
Then we add up the coagulation factor from Russia. They'll have WW sales, and we get 50% of it for "free". :-) I'll put the minimal 350$/l but I expect much more.
Pierre said many times there would be 12-14 proteins max per PPPS pipeline. So I guess that until we know more we could pretty well stick to its suggestion of 5600$/l once the first bunch is approved. And I suggest that this be in the 2018-19 horizon where the 1M litres capacity will be available. And then we reach 10000$/l when the first full pipeline is approved.
I've been told that my past sales projection were too aggressive time-wise and to expect linear sales ramp up over four years for most of the proteins. Except maybe Pg-Woud for which a two years ramp up is more likely (conveniently enough it bears the largest share of the PPPS pie). Another big question mark is of course "When do the sales of each protein starts"? I've been told my previous prediction was a little too aggressive in that regard too. So my updated educated guess is given below. Note that I bet for the critical Pg-Wound indication to be approved H1 2018. Prometic hope for the Pg-Wound trials to start in H2 2016. Sooner will only be better.
Plasma Protein PLI sales ($/l)
Sales ramp up 25% 50% 75% 100% 100% 100% 100% 100%
PI 16 2017 2018 2019 2020 2021 2022 2023 Tot cost
Pg-CPD $0 $125 $111 $125 $103 $85 $85 $85 50%
Albumin $25 $50 $75 $100 $100 $100 $100 $100 26.50%
IVIG $0 $0 $100 $200 $300 $400 $400 $400 26.50%
AAT $0 $0 $75 $150 $225 $300 $300 $300 26.50%
Fg $75 $150 $225 $300 $300 $300 $300 $300 26.50%
C1-INH $0 $0 $0 $0 $500 $1,000 $1,500 $2,000 26.50%
Factor VIII $0 $0 $0 $175 $350 $350 $350 $350 50.00%
IAIP $0 $0 $0 $0 $125 $250 $375 $500 26.50%
Orphan Rx4 $0 $0 $0 $0 $88 $175 $263 $350 26.50%
Orphan Rx5 $0 $0 $0 $0 $88 $175 $263 $350 26.50%
Pg-CW $0 $0 $1,389 $3,875 $4,397 $4,415 $4,415 $4,415 26.50%
Total $100 $325 $1,975 $4,925 $6,575 $7,550 $8,350 $9,150
But the general consequence of the ramp up is for the sales to reach the end of the dramatic growth in 2019 rather than 2018. It might be earlier than that if everything runs perfectly, all plants and all FDA approval are delivered quick. But I prefer to use 2018 as a buffer for uncertainty. By the end of 2018 though all should normally be in place for a strong 2019.
So we get about a 1M liters of plasma fract capacity, and about 5600$/l. That's 5.6B$ of PPPS sales in 2019.
Now about the margins. Production margins on the overall protein mix have been guessed above.
Then there's the marketing/development royalties that we have to pay for different third parties. As seen above, we only receive 5% of the sales in royalties on some commodity proteins from our CNBG & Generium partners. On certain co-developped protein-indication the sales are shared 50-50 like Pg-T1PD with Hematech. For Pg-Wound we pay Omnio a ~5% royalty for their early development. A good news is that the original 12% royalty to ARC seems to have meanwhile been reduced to 1-2%. It's small enough to be included in the ~95% gross margin.
The big difficulty, as long as marketing deals are not yet signed is to guess at the margin we will have to pay some marketing partner for the sales. We know it's gonna be less than 50% (because that's what it cost PLI for Pg-T1PD *development* by Hematech, with upfront and milestone payments for the whole cost of the development program). I've heard number as low as 10%. And I expect it to be lower than 35%. So my average bet is in the 20-25% range, I will play with that number and see the impact on the earnings below.
Our overall expense runs at about 50M$ nowaday, including our R&D program. Let's x4 that to 200M$ (a 25% growth rate) and buy ourselves the sales team, managers and R&D program of an ambitious pharma. Add PBL legacy PPPS and bioseparation resins/royalties Baseline sales about 70 M$ by then (at 70% gross margins), plus some 10M$ of upfront on marketing deals. At that point we're at about 3.65B$ of EBITDA.
For the Depreciation and Amortization, I suggest here that we use the metrics of the well managed large pharmas: it runs at about 10% of sales. At 5.7B$ of sales in 2018, this would make 570M$. Unless we start to build our own plasma fract plants by then (which could and should be largely financed out of debt), I expect the interest to be negligible. By 2019 however, I also expect the dramatic 2018 raise in profits to have used most of the accumulated loss so that we get hit by the full 26.9% provincial/federal tax rate, that is 830M$.
So we could expect PLI PBL + PPPS businesses to earn about 2.25B$ of net profits in 2019. And 2.8B$ of free cash flow, available for reinvestment, shares buyback, dividend payment and acquisition.
Projected Earnings 2014 2015 2016 2017 2018 2019 2020
BaselineRevenue $23.0 $40.0 $50.0 $58.0 $62.0 $71.0 $82.0
Gross Margin $16.1 $28.0 $35.0 $40.6 $43.4 $49.7 $57.4
R&D -$32.2 -$45.0 -$80.0 -$100 -$125.0 -$156.0-$195.0
Finance -$2.8 -$3.1 -$3.4 -$3.7 -$4.1 -$4.5 -$5.0
SG&A+Share Based -$14.0 -$21.0 -$25.2 -$30.2 -$36.3 -$43.5 -$52.3
Pre-PPPS total -$32.9 -$41.1 -$73.6 -$93.4 -$122.0-$154.4-$194.8
PPPS
Pg $0.0 $0.0 $0.00 $5.66 $914.13 $3,409.89 $4,677.66
Albumin $0.0 $0.0 -$4.84 -$2.18 $12.83 $25.21 $37.18
IVIG $0.0 $0.0 $0.00 $0.00 $24.90 $85.93 $174.83
AAT $0.0 $0.0 $0.00 $0.00 $12.83 $55.57 $123.21
Fg $0.0 $0.0 $8.89 $27.28 $85.28 $146.66 $174.83
C1-INH $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $495.65
Factor VIII $0.0 $0.0 $0.00 $0.00 $0.00 $54.03 $211.50
IAIP $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $78.43
Orphan Rx4 $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $38.70
Orphan Rx5 $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $38.70
PPPS OpEarning $0.0 $0.0 $4.1 $30.8 $1,050.0$3,777.3 $6,050.7
PreTaxOpEarning -$32.9 -$41.1 -$69.5 -$62.6 $928.0 $3,622.9 $5,855.9
UpFront on Deals $6.0 $2.0 $30.0 $100.0 $30.0 $30.0 $30.0
Depreciation/Amorti -$1.7 -$1.9 -$2.1 -$29.2 -$175.3 -$572.7 -$919.0
PreTaxEarning -$28.6 -$41.0 -$41.6 $8.2 $782.7 $3,080.2 $4,966.9
Tax $0.0 $0.0 $0.0 $0.0 -$42.1 -$828.6 -$1,336.1
Earnings -$28.6 -$41.0 -$41.6 $8.2 $740.5 $2,251.6 $3,630.8
That, by the way, is a stunning net profit margin of 40%. And a free cash flow rate of 50%. Far above the best industry players 20% and 30% approximation that I had used, up to now.
With about 600M shares, that would give us around 3.75$ of earning per share (EPS). In 2019. For PBL and PPPS alone. An almost de-risked meat processing factory. And by that I mean, only operational risks.
With a "normal" P/E (Price / Earning) ratio of 20x, PLI SP (Stock Price) would then be at 75$.
That's more 150$ at a "takeover" P/E of 40.
Do you hear me laugh ? :-D
Never accept a takeover offer under that price. Or you are getting ripped off. Seriously.
Cause this is as lowest risk as can be. With all the conservative scenarios being used all the time.
Of course by 2021 that 2019 number would have at least double because a litre of plasma would yield over 10k$ in sales, new plasma fract capacity added and shares would have been bought back.
The numbers above have been calculated with the sales + development royalties of our non-commodity protein standing at 25%. Just a word here to say that if those royalties are 10-15%, the earning result are about 17% higher. And if those royalties cost us more 30-35%, the earning result are about 17% lower, and the net profit margin still stands above 30%!
The last thing to note is that oddly enough the 2019 PBL + PPPS results are easier to evaluate than the 2017 and 2018 ones, because the timing of plant certification and FDA approval add a layer of uncertainty that vanishes come 2019.
You'll also see I included a guessed 30M$ of upfront and milestone on marketing/development in every years starting in 2016, except in 2017 where I expect the bulk of 4050 + Pg-Wound to be signed WW which I guessed deserves a 100M$. Oh and, for reference, the PPPS part of the above table have been computed automatically using the numbers from the precedent tables. So the idea is to have a model built and to just update the numbers as we learn more . :-)
PPPS growth
As a Buffett-minded value investor, what I'm mainly looking for is a sustained high earning growth for a long period of time.
In that regard, this PPPS asset is literally a money printing machine. On top of a life saving one, I mean. :-)
After more than 10 years and 450M$ invested in developing the process, each new protein can be rolled to the market spending only 10-15M$ and 3-4 years. And once you get one Ml of plasma fract capacity, be worth more than 350M$ in sales each, with ridiculously low risk. That's a stunning long term RoI (Return on Investment) of > 1000%.
Protein RoInvestment $400.00 /l x 1 Ml Sales ramp: 25% 50% 75% 100%
Money cost 2014 2015 2016 2017 2018 2019 2020
5.0% IVIG CapEx(M$) $2.0 $4.0 $4.0 $0.0 $0.0 $0.0 $0.0
Net Margins IVIG Sales (M$) $0.0 $0.0 $0.0 $100.0 $200.0 $300.0 $400.0
40.0% IVIG NetEarning $0.0 $0.0 $0.0 $40.0 $80.0 $120.0 $160.0
Actualised Earning -$0.1 -$0.4 $39.1 $78.5 $118.0 $157.4
Actualised CapEx $6.1 $10.4 $10.9 $11.5 $12.0 $12.6
Return on Investment -1.6% -3.9% 357.7% 684.6% 979.3% 1244.2%
Once there's enough proteins engineered in a PPPS cascade, (say 6000$/l and above) it also makes a PPPS plant a very lucrative investment. A brand new green field facility cost about 60M$/100kl of plasma fract capacity and 3 years to be operational. This boasts a very impressive RoI of > 400%.
Plasma Fract Plant Ro Investment
Cost(M)/100kl: $60.0 Proteins: 6 9 12 14
2016 2017 2018 2019 2020 2021 2022
Money cost CapEx (M$) $15.0 $20.0 $25.0 $1.0 $1.0 $1.0 $1.0
5.0% Sales($)/l $6,000.00 $7,000.00 $8,000.00 $9,000.00
Net Margins Sales (M$) $600.0 $700.0 $800.0 $900.0
40.0% NetEarning $240.0 $280.0 $320.0 $360.0
Actualised Earning -$0.8 -$2.5 $234.3 $271.0 $307.5 $343.7
Actualised CapEx $35.8 $62.5 $66.7 $71.0 $75.5 $80.3
Return on Investment -2.1% -4.1% 351.5% 381.7%407.0%427.9%
The out-of-this-world part about PPPS is that the sales resulting from these reinvestments is the PRODUCT of the cascade $/l capacity and plasma fract capacity. In other words the sales and earnings are going to grow at half the SQUARE of the free cash flow you're going to reinvest back into it. I've never seen anything even close to that in 15 years of financial research. Totally unheard of as far as I'm concerned.
And the depth of the pipeline may allow you to apply that growth for little more than 2 cycles of 4 years. Pierre already said in the past there's more than 25 such proteins in the work at PLI, and more than 250 protein-indication waiting their turn. As of now.
The results are given in the following table. They are based on the hypothesis that a cascade is made of at most 14 proteins filter. And that the first 5 proteins are going to be needed in enough volume so that they're going to be used in all the cascade, regardless of the rest of the protein mix in the cascade from plant to plant. (I expect some proteins will be low volume and extracted in only a few plants). I also expect the 2000$/l C1-INH to be used in at least one cascade, and I used a somewhat conservative revenue of 350$/l for all other new proteins (which is the average Pierre has given repeatedly in the past).
PPPS organic growth
Protein average cost: 4 years 10 M$
Protein min sales: 350 M$ 50% Cash flow
100kl plasma fract. plant 3 years 60 M$
Operations 2019 2023 2027
Proteins sold 5 25 90
Distinct protein cascades 1 2 7
Avg sales/litre of plasma $5,600 $9,925 $10,000
Plasma fract. vol. (kl) 10 50 170
Sales (M$) $5,600 $49,625 $170,000
Net cash flow (M$) $2,800 $24,813 $85,000
x4 years (M$) $11,200 $99,250 $340,000
Reinvestment
New proteins 20 65
Proteins cost (M$) $200 $650
Plasma fract. vol.(kl) 40 120
Plasma fract. cost (M$) $2,400 $7,200
Total $2,600 $7,850
% of Net Cash Flow 23.2% 7.9%
EPS $3.75 $39.90 $155.32
The first 2019 column of result is pretty certain based on the info divulged as of now.
The 2023 column is giving a look at the results if the free cash flow is reinvested to develop all of the 25 proteins Pierre already mentioned, plus 4 more Ml of brand new green field plasma fract capacity. That is still quite plausible with what have been already divulged (and necessary just to cover all of the Pg-Wound market). Note that this would result in earnings above 20B$ and put us in the top WW Pharma. No need for 4050.
The last 2027 column err a little further on the speculative side of things just to show what could be possible. It uses the astounding free cash flow to add 65 more proteins (of the > 250 reportedly known ones) and an extra 12 Ml of plasma fract capacity. It would result in earnings of about 80B$ (a yearly earning growth rate of 40% over 4 years) and probably makes of Prometic the largest pharma on earth. :-)
And it's not *that* far fetched... ;-)
Oh and by the way it only uses respectively 23% and 8% of the free cash flow so there's ton left to pay dividend, buyback shares, or competitors... :-D
As a side note, I expect at least the next few M litres of plasma fract capacity to be built with partnership akin to the Hematech and Generium one. But passed 2018, when Prometic will just be flooded with cash flow, it would probably make financial sense that it builds the next 10 M litres of plasma fract capacity by itself.
---
4050
Now about PBI-4050 "Giga-Bonus"...
From AGM 2011 pdf (2012-05-07):
~500 000 ESRD (End Stage Renal Disease patients) patients on dialysis in the USA a an annual cost of ~$ 40 Billion. (80k$ per patient)
~26 Million CKD (Chronic Kidney Disease) patients in the US alone
Orphan Drug Designation opportunities include:
-Kidney transplant (~18 000 patients)
-CKD stage IV or Stage V pre-dialysis
-Stage V dialysis
-Acute Kidney Injury (AKI)
-Pulmonary Fibrosis
-Myelofibrosis
Plus the other development since then:
-MS and associated Type 2 Diabetes (MS-T2D)
-NASH
-MS-T2D + Multiple fibrosis
-Other ODDs...
This one is so disproportionately huge I don't even know where to start.
But nothing has much changed since my last valuation.
Except that human success for MS-T2D probably kicked the chance of long term success up from about 20 to 40%.
So let's start with the biggest indications.
CKD/DKD/ESRD:
A post-Phase II deal for CKD/DKD/ESRD would appear to bring-in about 20% in royalties.
There's 25M CKD/DKD patients in the US which can end up degenerating in ESRD costing 80k$ per year in dialysis.
So the Rx US market is valued at ~100B$ by Prometic. (That's at an annual cost of 4000$ / patient by the way at 100% coverage. Quite low.)
If 4050 offers a long term cure, Each slice of 10% of that market we grab will be adding directly ~4$ of earning per share.
Or 60$ of SP at a P/E of 15.
20% of the market is 120$ of SP
30% of the market is 180$ of SP...
Note that for CKD/DKD/ESRD, I use a P/E of 15. Because the size of the thing is so, well, "humongous" ;-), that there will be space for less further growth afterward. And it's high potential earning growth that mainly commend higher PE. As for the timing of it all, I guess that 3 years of clinical trial is enough so if it is to succeed at all, we'll probably receive approval by the end of 2018 for sales to start early 2019. Yeah right, the same 2019 as for PPPS, so taking 20% of the market that first year would mean a 4B$ in royalties...
MS+T2D:
No idea about the dimension of the thing. Other than its cost to Medicare was 125% that of CKD/DKD/ESRD in 2012.
And that 100M Chinese, and 1 in every 3 Americans born today is a candidate.
IPF:
There's 150 000 IPF cases in the US, 300 000 WW, official price tag of both perfinidone and ofev is just under 100 000$ a year, but I've read elsewhere that real sales are done around 45k$, so 25k patients reached at these price will be worth more than 1B$ in sales. Pirfenidone Intermune was bought at 8.3B$. With a "common" 25 P/E, it means Roche expected earnings from it above 330M$. Roche having net margins around 20% it means they expected sales above 1.5B$/year at maturity. We know Pirfenidone alone is only slowing down the condition, whereas in combination with 4050 it could be reverted and cure the patient. We might then carefully speculate that it could command more than the actual 20% market share. The interesting question is if we stop killing 50k of these patients per year, how large will the market grows overtime? Anyway, I once evaluated a rough estimate would conservatively result in at least 1$ of EPS in the US alone after 5 years. Double that for WW sales.
Then there is all the other indications, a lot of them Orphan...
Then there is the qualitative part of it. Huge markets normally come with huge competition. And in that regards, 4050 both as shown very impressive above-competition efficiency in rats and humans, and in one case, seems potentially safer than other antidiabetic drugs. As noted by Paradigm, on August 28 2015, the FDA released a warning that common Type 2 Diabetes medicines sitagliptin, saxagliptin, linagliptin and alogliptin may cause joint pain that can be severe and disabling. A warning and precaution about this risk has been added to the labels of all medicines in the DPP-4 Inhibitor drug class. Additionally, saxagliptin carries a warning for increased risk of heart attack and canaglitlozin (a SGLT2 inhibitor in Figure 2 above) carries a warning for the risk of bone fractures. Note than 4050 utilizes a different mechanism of action and such adverse events were not experienced by patients in any 4050 trial.
Your guess is as good as mine, if it all works long term, what, over 200$ total ?
Too early to tell. :-)
That's such an all-or-nothing case. A valuation nightmare. :-P
The most interesting part would be the timing of it all, especially considering the cases where the patients are dying.
Since IPF is to enter pivotal Phase II early this year and CKD later this year, my guesstimate is that if it gets good clinical results, the first sales for IPF will happen somewhere in 2018, and using the 4 years ramp up, to reach about 320M$ in royalties in 2019.
So if all clinical trials turn out well, I calculate that the 2019 earnings with 4050 would be about double that of PPPS and PBL alone.
The full picture
Just for the fun of it, here's what I guess in the next 4 years if 4050 IPF and CKD promises materialize, considering a linear ramp up of sales over 4 years (20% of the market on the first partial year of 4050-CKD).
Projected Earnings 2014 2015 2016 2017 2018 2019 2020
BaselineRevenue $23.0 $40.0 $50.0 $58.0 $62.0 $71.0 $82.0
Gross Margin $16.1 $28.0 $35.0 $40.6 $43.4 $49.7 $57.4
R&D -$32.2 -$45.0 -$80.0 -$100.0-$125.0-$156.0-$195.0
Finance -$2.8 -$3.1 -$3.4 -$3.7 -$4.1 -$4.5 -$5.0
SG&A+Share Based -$14.0 -$21.0 -$25.2 -$30.2 -$36.3 -$43.5 -$52.3
Pre-PPPS total -$32.9 -$41.1 -$73.6 -$93.4 -$122.0-$154.4-$194.8
PPPS
Pg $0.0 $0.0 $0.00 $5.66 $914.13$3,409.89 $4,677.66
Albumin $0.0 $0.0 -$4.84 -$2.18 $12.83 $25.21 $37.18
IVIG $0.0 $0.0 $0.00 $0.00 $24.90 $85.93 $174.83
AAT $0.0 $0.0 $0.00 $0.00 $12.83 $55.57 $123.21
Fg $0.0 $0.0 $8.89 $27.28 $85.28 $146.66 $174.83
C1-INH $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $495.65
Factor VIII $0.0 $0.0 $0.00 $0.00 $0.00 $54.03 $211.50
IAIP $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $78.43
Orphan Rx4 $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $38.70
Orphan Rx5 $0.0 $0.0 $0.00 $0.00 $0.00 $0.00 $38.70
PPPS OpEarning $0.0 $0.0 $4.1 $30.8 $1,050.0 $3,777.3 $6,050.7
PBI
4050-IPF (40% Roylt) $0.0 $0.0 $0.0 $0.0 $120.0 $320.0 $600.0
4050-CKD (20% Roylt) $4,000.0 $10,000.0
PBI OpEarning $0.0 $0.0 $0.0 $0.0 $120.0 $4,320.0 $10,600.0
PreTaxOpEarning -$32.9 -$41.1 -$69.5 -$62.6 $1,048.0 $7,942.9 $16,455.9
UpFront on Deals $6.0 $2.0 $30.0 $100.0 $30.0 $30.0 $30.0
Depreciation/Amortization -$1.7 -$1.9 -$2.1 -$29.2 -$187.3-$1,004.7 -$1,979.0
PreTaxEarning -$28.6 -$41.0 -$41.6 $8.2 $890.7 $6,968.2 $14,506.9
Tax $0.0 $0.0 $0.0 $0.0 -$47.9 -$1,874.4 -$3,902.4
Earnings -$28.6 -$41.0 -$41.6 $8.2 $842.7 $5,093.8 $10,604.6
Shares (M) 600 600 582 558.72 536.37
EPS -$0.07 $0.01 $1.45 $9.12 $19.77
P/E 25 20 19
SP $36.20 $182.34 $375.65
Cash Flow \ buyback $378.45 $1,853.70 $4,188.24
Net margins 45% 51% 54%
All of these 4050 numbers are obviously extremely hypothetical. The merit is to start somewhere and to have a model to update as the real margins and timings are finally being known.
I've included what I think will happen with the share emission in 2016. And buyback starting in 2018, considering the average SP for the year. It also gives you an idea of what's left of the free Cash Flow, after shares buyback, to pay dividend, grow liquidity, build plants, and buy competitors :-)
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You've noted that I'm not in the game of guessing the right price to place on the above figures here. (I will cover that next week, stay tuned.)
The scenario I'm betting on is more than 3.75$ of PPPS earning in 2019 (plus the hypothetical 50¢ of 4050-IPF (and 4$ of 4050-CKD/DKD/ESRD)).
At a classical pharma-PE of 20 it gives you a PPPS SP of above 75$ in early 2019
Discounting it by 50%/year, allowing the SP to still double each year, gives you a SP of
38$ in 2018,
19$ in 2017, and
9½$ early 2016. Which is kinda now heh? (!)
Catchup will be dramatic at some point.
Of course even at this point I do not consider 4050 "investment grade" the way PPPS is. Because it is not proven yet that it works long term in any indication. However, as suggested by the table above, I expect both it's gigantic and speculative nature will drive the SP much higher and help us avoid any hostile takeover offer by the time it's largest most valuable indication have been approved or rejected on the 2018-19 horizon.
The great part is that this will most certainly help to preserve the PPPS portion of the business to also be taken over while we haven't achieve the full earning it promises in the 2018-2020 horizon, and until it is fully valued at > 75$.
For what we know now anyway, cause heh! how the "conservative-part" of Prometic's valuation have sky rocketed lately with Pg-Wound! I'm not the one who would bet this is the last surprise PPPS (or PBI) valuation boost Pierre and co have us enjoy...
My 2 cents,
I've exposed that Prometic business is really made of two major components:
1) A PPPS division that will boast the very high return on equity, low risk, high moat, and plasma protein portfolio depth that will allow Prometic to start with 2¼B$ in earning in 2019 and then offer a rare > 40% earning growth over a long period of time. A Buffett-perfect textbook case, really. As shown in the valuation, this means about 20B$ of earnings in 2023 according to what we know today, and if my guesses are not wrong, possibly more than 3 times that in 2027. Which would place Prometic in the top WW Pharma long before 10 years from now.
This is the reason why we *invest* in Prometic.
2) A PBI division which most prominent small synthetic molecule, the all-star PBI-4050, is playing the Giga-Bonus opportunity. Contrarily to PPPS, this still has a high risk of failure and carries this gambling feeling around it that's not compatible with Buffett-minded value investing. (Rule #1: never lose money. Rule #2: never forget rule #1 ;-) ). Normally it would just pale in comparison to the PPPS high growth and low risk asset and remain in its shadow, except that this time around the bet carries an extremely high reward (among which, an untapped 100B$ US market). This will most likely have two important consequences:
a) before very long, when the 5 phase II clinical trials in IPF, CF/CFRD, MS/T2D+MultiFibrosis, CKD/DKD, and MS+T2D conclusions will come in sight, and/or when a couple of development / marketing deals will be signed for different indications-territories, as is the plan, it will be impossible to ignore its impact in the intrinsic valuation of PLI;
b) it will bring along a large crowd of enthusiast gamblers (a.k.a. Wall-Street pros) that simply won't be able to resist. They will use options to hedge their bet in one direction or an other and move a lot of stock (and hot air) in some wild unpredictable ride.
Now we have that PLI stock, market priced at less than 3$ as of early 2016, and we have both this firm 75$ target price for 2019 plus this wild 4050 lottery ticket >200$-or-nothing in the 2019 horizon, that comes as a Giga-Bonus.
If the market was perfect it would used past Prometic bioseparation experience (17 approved proteins, no failure), PRDT guaranteeing safe prion free plasma proteins, succesful Pg-CPD phase I and third party human plasma proteins track records to consider that PPPS plasma proteins cannot fail to reach market, it can at worst be delayed a few Qs. But being still in the dark, Mr Market is considering the PPPS business as a risky venture exactly like its 4050 synthetic drug counterpart and valuating the whole of ProMetic like a regular biotech business with a large risk of failure.
If I, as a shareholder, would hold more than 50% of the stock, I would be more than happy about this situation. It would allow me to buy more shares at this deeply discounted price and never worry about the future realization of this investment. Just have to wait 3 more years to have all 5 of the 5 first proteins hit their respective markets, Mr Market finally realize how sure a shot PPPS is, and bring PLI share price at at least 75$ per share, just for PPPS.
However I unfortunately don't own 50% of the stock and that causes me some worries, because at any time between now and 2019, some smart player with much more profound pocket than I have can come over and offer double the price of the actual stock and if enough person thinks that makes sense, I may be forced to let my share go with their full value being very far from being realized.
Which would be unfortunate indeed.
Since I largely depend on you, long folks, to decide over the fate of my own shares, let me try to explain how I would see the situation if *I* was that guy with the deep pocket.
In search of the right pricing of PLI
In my last economic valuation update, I simply used a "normal-biotech" P/E (Price/ Earning) ratio of 20 over PPPS projected earnings to select my 2019 target SP (Stock Price). This is quite high a P/E to recommend for a Buffet-minded value investor like me. I honestly just used some low average of the P/Es that could be found around in the actual Pharma valuation landscape (someone on this BB computed some industry average that was around 30 if I recall correctly).
So let us just explore the issue a little more in depth, so that we can make our mind about the kind of P/E that could be more appropriate for PPPS and 4050.
But first I want to make the obvious note about cost-plus vs value-based business. It's one of the hallmark of business school: me-too products offering poor differentiation and no business moat tend to be both sold and valued at a cost-plus basis. Take the CMOs that are building plasma fract plant for Prometic for instance. Akin to the generic drug industry players, these are capital intensive businesses which compete on price and execution. Their service is seen as a commodity. So they charge ~30% gross margins over their cost for their work and capital allocation. Whereas company like Prometic which have moat to protect their business (patent, brand, and other legal monopoly of some form), can price their product according to their *value* irrelevant of the cost. That's why, for instance, each of the ½M US patients with diabetic foot ulcer will be glad to pay Prometic 10000$ for a one month treatment to cure their chronic wound, thus avoiding a 45000$ amputation, regardless of the fact that it costs Prometic, say, 78$ to provide the drug for the cure.
With that in mind, lets have a look at 4050 and PPPS which different natures offer quite different valuation profiles
4050 really has the profile of an oil field: it is a static asset with a bounded value in time. If it succeeds at receiving regulatory approval, for a fix amount of time (the duration of its patents) it will bring high revenue in all of its indications, and then at the end it will be considered as depleted and bring further much lower revenue. Of course, like with an oil field, its earnings could be used to explore for other "oil fields" (it's seems the PBI-XXXX pool of possible drug/claims is quite plentiful in that regard). But each time, it's gonna be a high risk venture. And as Buffett-minded value investors, we don't like high risk, and the loss of capital that goes with it. So the static nature of 4050 commend the use of an fix "depletable asset based" valuation. The value will grow for the first few years as all possible market shares are taken, and then because it's a one shot, will shrink considerably when the patent expire and the generic drug competition reduce it business to a cost-plus one. Like all fix asset, the value of 4050 asset shrinks as time passes.
Contrarily to 4050 static nature, PPPS is an asset which value *grows* over time for the foreseeable future (at least two decades). It's a low risk *process* able to grow more and more revenue out of new proteins as time passes, and the pool of such protein is so large that it will be decades before we see the end of it. The earlier ones will finance the no-risk low-cost development of the growing number of later ones, which will all reach market. While still under the protection of our patents, the size of the thing is going to grow so large so fast that it would allow us to quickly price the proteins at a slightly above post-patent level and still be that top WW pharma. That situation has the potential to create a de facto toll bridge monopoly over the whole market. Just because we have 15 years of advance in techno development over any competitor, both in terms of patent, but also trade secret and awkward fancy know-how/dark-art (running small and stealth for that long while the industry buzz was all about recombinant *does* have its advantage). Without this moat in their favor, everyone else in the pharma world seem to think extracting proteins from plasma is a very cumbersome and risky process that should be avoided if one can. Nobody seems interested in spending 15 years catching up on Prometic. Actually the answer I get from our management is that of potential competitors surrendering along the lines of "Ok, you won, how can we partner this." Which is a nice monopoly / toll bridge in the making indeed. And as a Buffet-minded value investor, I *love* toll bridge monopoly.
That's because contrarily to 4050 and oil fields, the value of the asset keeps growing as the future earnings grows with a rate way above that of long term bond/inflation rate.
BerkshireHathawayIncOwnersManual1999 wrote: Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.
My favorite way of valuating such Buffett-minded fast growing value asset, is to use Buffett own metrics. Buffett got his fortune by having its asset grow at a compounded rate of about 23% for 35 years. So I'll aim at a rate of 25%. :-) Now imagine that I would want this from a company with *no* further expected earning growth, I would have to pay a P/E of 4 (1/4 = 25%). 30 years from now it would still be worth 4 x the earnings and yield me 25%, say mostly returned in dividends. The relative value would be lower due to inflation as the earnings don't grow (this is only one of the plague of non-growing asset) but it's nominal value would be the same. (That's overly simplistic of course, but it helps one to have a rough illustration of it in mind).
The important question to value growing asset is : how much growth and for how long ?
Because we live in a finite world, there's limit to growth and this will have the most impact on your valuation of an asset.
Now the great thing about PPPS is that not only we know it's earnings are about to grow at a rate above 25% for more than decade, but due to the low-risk pipelined nature of its business, we have a fairly good idea of what they're going to be up to 6 and 10 years from now. So as we aim at a 25%-ish Buffet like growth rate, we can discount all these future earnings that we're pretty certain of.
Let's recap here what they are:
PPPS future earnings
Net Earning Margins: 40%
Operations 2019 2020 2021 2022 2023
Proteins sold 5 7 10 14 25
Distinct protein cascades 1 1 1 1 2
Avg sales/litre of plasma $5,600 $6,300 $9,000 $10,400 $9,925
Plasma fract. vol. (kl) 10 15 20 30 50
Sales (M$) $5,600 $9,450 $18,000 $31,200 $49,625
Earnings (M$) $2,240 $3,780 $7,200 $12,480 $19,850
Shares (M) 600 575 550 525 500
EPS $3.75 $6.57 $13.09 $23.77 $39.70
2019 Discounted EPS $3.75 $5.26 $8.38 $12.17 $16.26
Discount rate 25%
Sum of discounted EPS $110.86 30 :PE $56.76 :2016 SP
This table shows the EPS (Earning Per Share) that are anticipated considering what's known of the pipeline as of now.
It includes the 4500$/l of Pg protein starting in 2019, and the 2000$/l C1-INH protein starting in 2021. All other are priced at the minimum 350$/l expected from the orphan proteins in the pipeline (we already know a few of these are worth much more than that. IAIP at 500$/l for instance). We know that Prometic is working on 25 proteins, and since it takes in average 4 years and 10M$ per proteins to reach the market, all 25 proteins are expected to reach the market by 2023. For the purpose of this first example I make the growth stops in 2023 and the ~40$ of EPS stay at that for the remaining future. (Which of course will *NOT* be the case, there's more than 225 known proteins available for development, so this is a conservative valuation).
If we discount all future such earnings by our target rate of return of 25% to 2019 (including all those non-growing after 2023 which discounted at 25% will of course give you 1 + 1/25% = 5 times 40$, thanks to the magic of DCF we reach a total of 110$ for 2019. That's a multiple of 30 times the 3.75$ 2019 earnings.
This means that if I, as the guy with deep pocket, pay 110$ in 2019 for PPPS, I could still expect a Buffet-like return of 25% on my asset for as far as I can see. If we discount this 25% three further years to early 2016 we get a SP (Stock Price) of 56¾$ nowaday.
And this is based on earnings (with net margins of ~40% of sales) whereas the financing folks normally uses free cash flow (more likely ~50% of sales), but I used the 20% difference as an extra large safety margin to account for the need of cash flow just to maintain business at the same level, which wouldn't be "cash that can be taken out of the business", as Buffett own intrinsic value definition goes, in the quote above. And I also used no further growth passed 2023, which is of course ridiculous. So, believe it or not, this would actually be a pretty cheap price.
If we continue with only half the early 80% earning growth, so 40% for another 4 years cycle of plasma protein development it's a PE of 63 we get and a SP of 235$ in 2019 (120$ early 2016). This 40% growth might seem big but is actually still quite reasonable considering the depth of the plasma protein portfolio. It would need 65 more proteins, (so 90 total out of >250) and 12 Ml more plasma fract capacity (17 Ml total) to be developed. This would use about only 8% of the projected 50% free cash flow made on sales over four years, leaving a lot for stock repurchase. And dividend. And acquisitions! ;-)
Another, earning-based, way to see it is that it would result in an 2023 EPS of ~40$ on sales of ~50B$ and which, with a P/E of 25, would commend a SP of 1000$.
Just for PPPS.
Own 1000 shares today, be a millionaire in 7 years.
Oh and from there, still expect a Buffet-like return of 25% on your asset for as far as you can see.
Well, providing Prometic is not acquired.
Of course, using a smaller, more reasonable discount of, say, 15%, you get a "fair" PE of 56 and a 2019 valuation of 209$ (137$ in early 2016) for the only-4-years-of-growth scenario. And a "fair" PE of 145 and a 2019 valuation of 542$ (356$ in early 2016) for the 8 years of growth more-likely scenario.
Yeah. I know. Insane. Just do the maths. Violent uplift in sight. No matter how.
That's just the power of the growth ahead.
As a shareholder of Prometic you need to have those numbers in mind if an hostile takeover materialize, because that's how our hypothetical purchaser thinks, especially if they try to up bid each other. That's the model they use. Don't let yourself be ripped off.
Oh and I leave the DCF price valuation of the 4050 business as an exercice for the reader. ;-)
You'll see, it's fun!
Some numbers could be found in this fundamental valuation. The Buffett-minded part of me don't bother doing it for a 4050 business which only have 40% of chance to come to fruitition yet. That might change before long though, as the pivotal Phase II reach some conclusion in the coming Qs...
By now, you've understood that if PPPS is going to grow at that rate for 2 decades to cover a large part of the 250 as-of-now known plasma proteins, the locked in value will quickly become unaffordable for any of our competitors to buy.
Indeed at a "takeover" P/E of 40 (discount rate of 20% on the DCF), our market value is about:
88B$ in 2019 and
147B$ in 2020
(not mentioning 280 B$ by 2022).
At that point, PLI's kinda the largest market cap pharma on the planet, bar none :-). And it would only have scratched the surface of the plasma proteins portfolio (25/250 proteins).
Another thing you must have in mind, is that the main reason we're so under-priced (out of not still being traded on the NASDAQ) is that Mr Market haven't realized yet how our PPPS protein pipeline is such a sure bet. I suggest that by the end of 2018, with 6/6 of our PPPS clinical trial having succeeded and about 6B$ of sales about to be realized, everybody will have understood how much of a low risk money printing machine PPPS is. That is, an asset which risks are comparable to that of a "cost-plus" meat processing factory, so only operational risk, but rewards of that of a value-oriented biotech. And the valuation will most likely have to adjust violently up by then, to reflect that quality of PPPS asset.
So I suggest that this end of 2018 horizon is about the window of opportunity for a takeover.
After that, as further NRs will have divulgated the depth and richness of the PPPS pipeline, it's simply won't be affordable anymore.
Why resisting a takeover
So why prepare to resist a takeover ?
Because a takeover is the process of taking the PPPS asset out of your shareholder hands in exchange for an other asset. Namely, money or shares of an other pharma. And there is very few chances that the asset you'll receive in exchange will be of equal or higher quality, and thus, value, than the Prometic PPPS you're going to be deprived of. That's called being ripped off and you wouldn't want that, would you ?
Let's consider the two assets you're going to be offered in exchange for your PPPS asset.
#1) Money.
Money is the ultimate commodity. It loses value due to inflation every days that goes by.
The "good part" about this one is that after paying your capital gain tax, (that's a 25% hit for any share not in a RRSP/TFSA in Canada), you'll be able to select the asset you'll want to invest in. Lucky you! Good luck finding any better one than PPPS.
I probably wasn't clear enough in my calculation above, but the 57$ SP calculated for early 2016 (considering no further growth after 2023) or 120$ if we add up only 4 more year of "lower" 40% growth till 2026, this was considering a *FREAKIN 25% DISCOUNT*.
It means the entity acquiring this asset at that price would earn 25% per year for EVER afterward on its purchase. That means a higher rate of return than what legendary Buffett earned for 35 years. You most likely *won't* be able to find a better asset than that, at that price. 25% compounded, means it double about every 3 years and 2 months! Forever! Yeah that's x9 every 10 years, and x80 every 20 years! and on and on!
(Of course it most likely won't work that way, because it will not grow by a smooth 25% in the first years. It will incur much dramatically larger growth over the first 5-10 years and slow down afterward, with the P/E shrinking accordingly, but it will give the owner of that asset the equivalent of a perpetual 25% growth.)
If with your PLI's takeover money you buy an asset that's expected to grow at a more common compounded rate of 15%, you would have to discount PLI's expected revenue at that rate too to find the price at which the deal would be fair. And as seen above it would require that you get paid anywhere between 137$ and 356$ in 2016 (that's a market cap between 82B$ and 213B$). You can as well dream in color, regardless of the fact that's what the future cash flows are really worth, nobody's going to offer you a fraction of that today. So just get ready to say no. And wait from 3 to 7 more years for that precise value to be fully realized in your own shareholding hands, thanks to the pristine earnings the PPPS pipeline won't miss to generate.
Never forget this wise piece of advice from Grandpa George in Charlie And The Chocolate Factory: "There's plenty of money out there. They print more every day. But this Golden Ticket, there's only five of them in the whole world, and that's all there's ever going to be. Only a dummy would give this up for something as common as money. Are you a dummy?"
#2) Shares of an other large pharma. (say, Merck)
Either by receiving such shares directly or by using your money to purchase the shares of the PPPS buyer, most likely than not, you are going to incur a terrible dilution of your earning power. As an example let's take the case of Merck hostile-takeovering us and study the result.
Let's postulate that:
a) takeover is done in early 2017 for 15$ on no earnings.
b) 2019 projected PPPS earnings are 2¼B$ for PPPS, 3.75$ of EPS.
c) 2021 projected PPPS earnings are 7.2B$ for PPPS. 13$ of EPS.
If PLI remains independent, such growth would commend a PE of at least 30 so the SP growth would look, at a minimum, like that:
2017: 10-15 CAD
2019: 3¾$US EPS x 30 = 112 $US, that's 1020% - 650% SP yield in 2 years, over the 10 - 15$
2021: 13$US EPS x 30 = 390 $US, that's 3800% - 2500% SP yield in 4 years, over the 10 - 15$
That is not even including 4050 of course, just the delay-risk-only PPPS.
Now what if we're taken over by Merck for 15$ worth of shares of Merck. (I highly doubt this takeover would be done in shares, this represent only a 9 B$ purchase for Merck so it would probably be done in cash, and you would then have to purchase Merck at a higher SP, considering PLI added value post-announcement). First you would most likely have to pay 25% tax on anything outside of TFSA/RRSP. That's a 25% hit at your future yield right away (especially when PLI starts paying dividend hopefully around 2018...)
Then, and it's what matters most: the big PLI earning growth will be totally flooded in MRK already large earnings, so your SP yield will be nowhere near as big as if PLI would have stayed independent. Let's have a look:
In 2014, MRK declared net earnings of 12B$ on sales of 42B$ (Net margins of 28%), let's conservatively guess that it reaches 15B$ by 2019.
So we would add 2¼B$ in 2019 and 7.2B$ in 2021 to their total.
Which, flooded in their 15B$, is only an increase of 15% over 2 years and 48% over 4 years (7 and 10.3% compounded, respectively). Nothing to write your mother about. I mean, you must *really* want to receive those stupid dividends two years earlier to deprive yourself of the annual > 500% SP yields expected above.
If you really want those, do yourself a favor and just sell a *few* of your PLI shares (that's what *shares* are for, incremental buying/selling) to either pay yourself a dividend that way, or buy Merck when SP reaches that levels next year, but by all means, please don't cause all longs to be forced to do the same by accepting an undervalued takeover offer.
How to resist a takeover
So once you agree that accepting a takeover would be a very bad deal for you as a shareholder, the question that immediately follows, is of course: what could be done to avoid it?
Happily enough, as a matter of fact, a *lot* can be done.
Of course as a shareholder you have less power than Prometic management in that regard, but it is capital that you use it. So let's explore what's ahead of us as far as takeover avoidance tactics goes.
The most obvious is having a small base of large, already wealthy, very well informed shareholders who owns a large part of the corporation, ready to say no to any offer that's not close to full valuation for our precious asset (see above for that).
Conveniently enough, we precisely have these kind of shareholders aboard.
Specifically, we have 3 billionaires owning each about 10% of PLI stock, or more. (Patrick Soon Shiong, Li Li, and Thompson family's Thomvest.) They don't need the money to pay their bills. There's no way they're going to let this asset go for a fraction of its worth in an early 2016-17 takeover. What other better asset could they buy with the resulting billions anyway? It doesn't make sense. Walking around at the last AGM I heard that Thomvest plans to be there until at least 2020. (How surprising, it's also the horizon for 4050 value to get fully realized...) By that time the SP is going to be worth about 200$ for PPPS alone (P/E of 30 for a DCF with 25% discount).
On top of those big three owners there's, according to many sources:
-A tight group of Qc+European shareholders, owning 15%
-PLI's management and close friends, about 5%
-A group from Western Canada about another 5%
-Plus all the top oll' longs around here on SH owning > ¼M shares, at least another 5-10% more.
(I'd be really happy to know you by the way, just send me a private message, and let's organise the resistance)
Together the top 100 shareholders control about 60-65% of the stock.
About 20 of them, more than 50%.
If they say no, and you do too, there's no deal. Period.
And that's power indeed. :-)
There's of course the "magic pill" already voted by the shareholders. But honestly, passing the word around, that Prometic's not for sale before 2020 will have a much higher impact than that measure. No large pharma in it's right mind will even try running an hostile takeover that's certain to fail. 'Cause it's such a waste of time and money.
Spread the word!
It's something you can and should do as a shareholder. Especially you oll' longs who have convinced your friends, colleagues and family members to jump in that stock. Make sure they follow you saying no. Educate them *before* an hostile takeover offer is on the table. Knowledge is gold here.
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The next tactic is to close the valuation gap as quickly as possible. A 9 B$ takeover is one thing. A 35B$ one is another. That relies mostly on Prometic management to accomplish (and Mr Market to wake up).
It will most probably happen that way, as that's the plan Pierre has repeatedly already hinted at:
-Sign a few licensing/marketing deals for smaller territories / indication (yes I'm talking about Japan, among others)
-Complete Pg-CPD trials and file the BLA.
-Launch all the US 4050 phase II pivotal trials, plus the Pg-Wound one and the 3 other plasma proteins in first half of 2016.
-Hit 10$ and move to NASDAQ.
-Sign most of the rest of the matrix of licensing / development /marketing indication-territory deals for 4050 and the first PPPS proteins, as the 4050 phase II trial get to a happy conclusion and rollover to the phase III.
I cannot stress enough how this matrix of deals is important. As much the earlier than the later part. On top of the non dilutive upfront cash, a perspective on the huge size of 4050 and Pg-Wound markets to come, and the Mr Market spotlight it will bring on PLI, signing a myriad of different optimized players for all possible indications-territories will render an eventual takeover much less attractive. It spreads doubt about competition issues. And each new quarter of uncertainty and doubt from our eventual purchaser means the valuation gap getting further closed as PLI price becomes less and less affordable.
Besides, tactically, a lot of the big pharma departments (and mid-sized pharmas) are very specialized nowadays and don't talk to each others. So it's more likely that each would be interested only in the portion of the pie that's on their turf and be really happy with a good signed deal. The nice part about being that diversified actually. Even for 4050: CKD/DKD/ESRD, MS+T2D, CF and IPF will most likely drive interest from very different businesses. Or so goes the hope anyway! :-D I mean, why bother overpaying to buy A, B, C, X, Y, Z, when one's corporate strategy is to lead only in X ? A very good deal is much more tempting, right? ;-)
The other nice side to this extensive multi licensing by condition-territory, is that it quietly, peacefully places Prometic in the de facto Godfather position, granting generous favors to the best partners. Historically there's never been better way to reach the throne than by making enthusiast vassals out of potential overthrowners.
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It's been said again and again, the single thing that will make the most difference short term is the move to NASDAQ where the valuations are easily 2x that of Toronto. Canadian money knows only about oil, mines and banks nowadays. The bet is about H2 2016, as we hit ~10$ without reverse split, according to the plan above. Just plain old execution will do it. Enough said.
Then, starting about the second half of 2016 will come into play the single last best weapon we have to resist any takeover: the gambling around the 4050 asset.
The 4050 gambling opportunity
As has been detailed in the economic valuation update, 4050 is a lottery ticket carrying about 40% chances to win as 2016 starts, and which Jackpot is worth an SP of at least about 60 USD per 10% of the 100B$ CKD/DKD/ESRD market alone, that's all ours to cease. And with a drug low-pricing policy (4000$/year) that could allow 4050 to take 40%-80% of it all, so it's a 240$-480$ per share lottery ticket we're talking about. With 40% chance to win.
That's "interesting" per se. :-) But the most interesting part, for the long term shareholder, is the timing of it all. Let's have a look.
As of early 2016 there's five 4050 Phase II trials of very different nature about to take place.
The first, most advanced one, IPF, which is already granted ODD in US and EU and which pivotal Phase II IND will be filed in H1 2016. Since it's a relatively small indication it could be approved as early as late 2017. With about 1$ of EPS in sight in a couple years of sales growth it carries a 30$ SP bet with it. (It thus adds up a 75% all-or-nothing upswing to the low-risk PPPS 38$ 2018 target SP).
The second is the UK orphan MS+T2D + multi-fibrosis. If I understood correctly, from a tactical point of view, that's played more as a bold anything-goes human proof of concept than anything else (the suffering patients would certainly not agree, of course). It's an almost impossibly desperate condition to treat which if successful would help fast track and ODD or BTD being granted in almost any other fibrosis and T2D conditions.
The third, most recent one, Cystic Fibrosis (CF) and Cystic fibrosis related diabetes (CFRD), is an orphan condition where 4050 could be very successful due to it's effect on fibrosis AND diabetes. With 70k patients in NA and 150k WW, it's another > 1B$ market where Prometic could thrive. The more the better. (I wonder how many more fibrosis and/or diabetes related orphan conditions there are still out there, PLI's probably going to target them all of course: myelofibrosis, myofibrosis, kidney transplant, acute kidney injury...).
The last two ones, MS+T2D and CKD/DKD/ESRD (not mentioning NASH) are each as large an indication as can be imagined. So even if they end up being pivotal phase II trials that will be launched in H2 2016, it probably won't see final approval before 2019, just because of the huge size of the thing.
And that, if played well, could be the greatest anti-takeover weapon that Prometic has in its sleeves (combined with the licensing of it all to as many partners as there's indication-territories that could be cut out of it). Because as soon as PLI's trades on the NASDAQ, it will most likely just not be possible for Big Money to resist placing a hedged bet on the thing. Just because of the humongous size of the 200$B Jackpot.
Let's say again, for instance, that 300$ is the 2019 target price if 4050 works long term in CKD/DKD/ESRD. And let's just naively price it at a meanwhile equivalent of its approximate chance of success, 40%, as the pivotal Phase II trial is walking closer to it's conclusion. That's a FREAKIN 120$ SP bet in H1 2017! More than six time that of low-risk PPPS.
However, contrarily to Wall-Street pros, the large pharma purchaser-to-be are famous for NOT liking risky bets, and wait for the end of the trials before any takeover attempt, especially when it carries that price tag. A great opportunity to use the first ones against the second ones.
So as long as Prometic is able to stay independent until early 2017 AND keep 4050-CKD/DKD/ESRD under the same PLI owning entity than PPPS, there's a high likelihood that it renders the whole unbuyable until the conclusion of the trial. Because at that price point the whole would be too risky to up bid (~100B$) until the trial outcome are certain (especially if the partnering deals are already signed). And anyway, Prometic billionaire shareholders will not want to let the final billions go, especially with the by then hypothetically successful IPF and MS-T2D + MultiFibrosis.
The great part of it is of course that by the time we reach the 2019 conclusion of it all, the 2020 >100B$ PPPS valuation will be in sight as well, making PPPS a much less easy candidate for hostile takeover. And THAT opens the door to the 1000$ /share 2023 valuation.
The spin off issue
As we've seen, Prometic asset is made of a potentially very big fix one, 4050, and a long and strong growing one, PPPS.
But I wouldn't mind spinning off the 4050 asset, especially in multiple indication-territory parts, once they've been brought to market and their sales reaching more than half of their potential. As noted above, it would be unwise to do it earlier because 4050 trial uncertainty / potential is the best umbrella to protect the precious PPPS asset from being preyed until it's large enough to dominate on its own (circa 2019-20).
As Pierre has already said that there are dozens of scenarios already on the table, it's not farfetched to imagine the game being well tactically played, creating wholly owned sub entities, each owning the distinct territory indication licensing deals. Then when ready, starting to spin off single or group of such entities. I could imagine spinning 4050-IPF earlier for instance, late 2018, to give an idea of what's to come, make the Wall Street wolves salivate and up bid the main stock in anticipation (thus protecting PPPS co-asset), and send a clear signal to the other signed partners about the endless possibilities of being in business with Prometic, once everything's approved and sales on their way. I could also imagine PLI keeping a cool ~4% royalty like position in each such sold spin off, to finance the rest of the seemingly really deep PBI-XXXX portfolio for instance.
By the time H1 2017 unfolds, 12 months from now, as the SP is reaching 20$ territory post NASDAQ introduction, most of you longs with large positions will have already made ~100x your original pre-2103 investment. It'd probably make sense, if your PLI position is your largest/sole investment, to sell a few 10k shares to enjoy life, or diversify a bit. I certainly plan to do so myself, but expect to hold more than 90% of my position for much higher value to come. The idea being to just sell what's necessary today and keep the rest for later at much higher price. One would then probably only have to wait one more year to start comfortably living out of the small dividend PLI would start paying in 2018 (each slice of 10¢ dividend would then represent ~6% of the net business cash flow, 2% in 2019). While enjoying the tremendous PPPS growth predicted by its pipeline for 4, 8 or 12 years ahead... Oh and less than two more years to probably cash massively out of the 4050 spin offs (well, if 4050 happens to work long term and its Lottery Ticket to have win big).