The doubt seems to be about just how big the market for Krystexxa really is. The estimates run from worldwide sales of $200M/year to $1B/year. Likely the reality is in the middle somewhere. If you guesstimate $500M/year in sales worldwide, you can probably ballpark the company’s earnings potential.
Making the drug is not overly expensive. All the company has to do now is sell it. It has announced that it will hire 60 sales persons by Dec. 2010. It has already manufactured enough Krystexxa for the product launch and the ensuing several months. The product has a shelf life of 2+ years. That will not be a problem. The target buyers/audience are a very defined niche of the medical profession (rheumatologists and nephrologists). This means the sales costs should be relatively constrained. If Savient chooses not to hire a sales team, there are successful consulting companies that provide this service for drug companies. Savient is in a good position.
The net margin on this drug will be high. It is not expensive to manufacture. Development costs have already been paid. It only has to pay sales and administration costs in addition to the small manufacturing costs. Net margins should run 50% or possibly better. If you postulate $500M in worldwide sales per year (although not in the 1st year), Savient may see $250M in profits before taxes, etc.
Small drug companies typically sell for anywhere from 1-5 times yearly sales. Since Krystexxa is not expensive to manufacture, Savient would likely sell for 2-5 times sales. If sales are $500M/yr worldwide, that would mean a $1B to $2.5B market cap. If Krystexxa sales total closer to $1B/yr worldwide, the market cap would be $2B to $5B. It is unlikely the sales will be as low as $200M/yr. The market cap at the $11.56 close Tuesday Oct. 26, 2010, was $778.12M. Most likely Savient is in the range of fairly valued to 5-6 times under valued.
The belief of how Savient should be valued may be why Savient could not find a buyer. The big drug companies have likely been looking at the above numbers. Some pundits were suggesting Savient should sell for as much as $47/share. This would have put the market cap at 4+ times the current market cap (4+ times the current price -- $11.56). Given that the midpoint of above estimates for “exceptional sales performance” is only about 3.5 times the current market cap, this does not seem reasonable. The midpoint of the more reasonable sales estimate above would only yield $1.75B in market cap. This would put the stock buyout price in the $26 range. Even Jon Najarian had been recommending buying $25 calls.
It is clear that the company’s expectations for a buyout price were not in line with the reasonable sales expectation numbers. This goes a long way to explaining why the company could not find a buyer. It does not mean that there is something drastically wrong with the company. The stock should have upside. A rebound to the $16/share level in the near term seems reasonable. A buyout in the $20-$26 range seems reasonable, if the company can bring down its apparently grandiose expectations. Krystexxa is an “orphan drug”. A major pharmaceutical company would be more likely to come close to the higher end sales figures.
$24 pps makes sense from your numbers and with that in mind
we should move higher in the days ahead. I still think
somewhere along the way we get a surprise or new analyst
analysis that the market grabs hold of. I like our
The seven-year exlusivity for the drug is not very important because this is a biologic, not a chemical compound. The manufacturing process is not going to be easy to replicate without violating patents, and the FDA likely will require anyone seeking to introduce a "generic" to go through a full trial process because of the manufacturing issues. JMHO, as there are, so far, NO generic biologics approved anywhere as far as I know. I am open to correction on this point, of course.
If you take a $500 million revenue estimate and apply a 75% gross margin that includes both royalties and COGS, you get $375 million. Take out $75 million in SG&A and you have $300 million of operating profit. Apply a 40% tax rate (NJ is a high tax state) and you are left with $180 million. With 75 million shares (leaves room for 5 million shares worth of future dilution to fully roll the thing out) and you have e.p.s. of about $2.40 per share.
The discount rate on getting to $2.40 per share should be reasonably low at this point because the drug is ALREADY APPROVED.
It is difficult to imagine a P/E of less than 12 as being appropriate, and 12 x $2.40 gets one to $29 a share as a "target price."
In order to be conservative, I would haircut that by 20% and say $24 is VERY reasonable 6 months from now if the drug shows reasonable prescription numbers for Dec-March timeframe.
Don't forget one important factor in the timing
of any buyout - the potential buyer knows the
importance of the 7 year exclusivity for the
drug and must be in to win on this time bracket.
Some other buyers might take the chance on
sales extimate in the middle range to keep SVNT
from proving even higher sales (which are on
the way IMO) and having the company priced out
of their range. The company will be sold be-
cause that's what management wants.
Good morning svnt99.
Okay looks like we have a he said she said thing going on here.
You now say...." did i say determining fair value was to take the low + high, divide by 2 and that's your answer.
no, for illustration purposes i took your most pessimistic number and threw in the most optimistic number to show how wide the ranges are."
So now you are denying saying this in your previous post?......"ok, so take your pessimistic number of $200 million, add the optimistic number of $1.6 billion and divide by 2.
answer = $900 million."
Are there two svnt99's here?
svnt99 Apparently repetition seems the only way you might possibly get what someone says.......so I'll repeat once again......I, I repeat I, did NOT come up with the $200 pessimistic #, it is in the header post on this thread I believe. I, I repeat I plagiarized that $200M figure, that is NOT my estimate!
Where am I saying ANYPLACE that SVNT is "worth next to nothing"?
And one more thing about SOMX Silenor being insignificant in the scheme of things.
Silenor got FDA approval for......a non-addictive drug for insomnia.
Unlike Ambien, Lunesta etc.
You people here blow that off as if big deal how can you begin to compare a non-addictive drug to something that helps with chronic gout.
svnt99......You talk about statistics......you do realize that people with chronic insomnia.......COMMIT SUICIDE?
Whether it be intentionally, or accidebtally by over-dose.
Ever hear of a guy named Michael Jackson?
You may impress the hell out of the majority here with your blather.........and bald-faced denials of what you said.
I was born at night........but NOT last night!
< I is totally ignant. >
yes, you are.
did i say determining fair value was to take the low + high, divide by 2 and that's your answer.
no, for illustration purposes i took your most pessimistic number and threw in the most optimistic number to show how wide the ranges are.
and if you knew anything about statistics you'd know low and high points are sometimes thrown out as statistical outliers. and then you take the remaining numbers which tend to be clustered closer together to get a decent average. same herewith revenue estimates.
ok, we get your point. you see to think savient is worth next to nothing. but again note; krystexxa is a new drug for a group of people who have no other treatment. that's different than your SOMX which does not have a disease modifying drug. hopefully, you get this. it's not rocket science.
One last post I can't resist svnt99.
I never realized big business deals were so easily put together.
So what all they do is ask some analysts', hey whadda ya think analysts'?
Shoot us some figures.
So one analyst shoots them a bunt, $200 Million, and another analyst shoots them a bases loaded home-run, $1.6 BILLION.
So then to make life very simple they drag out the old calculator and divide by 2.
They look at what the Taiwan Instruments says after dividing by 2.
And that's it, done deal?
All these years I been short-changing myself, I coulda got into this big business stuff if I know'd it was this dang simple.
No wonder I'm on the constantly verbally abuse short list.
I is totally ignant.
If I say my house is worth $600,000, but an appraiser says my house is worth $300,000-$450,000, that doesn't mean a fair offer price is $450,000. You are certainly free to offer $450,000 if you really want the house, or even $1.2MM if you're totally crazy, but that doesn't mean a sane person would start the negotiation there. A sane person would start at or below $300,000.
Wishing otherwise doesn't make it so.
ok, so take your pessimistic number of $200 million, add the optimistic number of $1.6 billion and divide by 2.
answer = $900 million.
so $840 million, current market cap is too high? don't think so
you can easily take it to twice current number, you'd be at $24 and with $900 million in potential revenues, that's not an outlandish number, less than 2 x sales
Thank you Ibboyer for an excellent post. All these are good posts on the top subject - valuation for buyout.
Question: SVNT's upcoming Nov 30th announcement, do we think what they will be announcing will be enough to settle investors and buyout candidates relunctance? Just announcing price of the drug or is credible market size from SVNT needed too?
When you buy a company, you do it because you think you will make a profit on the transaction. That means if you think a company has POTENTIAL to make $500MM per year, you don't set a price based on $500MM per year because then you don't have any upside. If you think a company could make $500MM per year, but might make as little as $200MM per year, you make an offer based on the $200MM per year price, hoping for the company to realize $500MM per year. That way, you make a profit.
If you're a company like Savient, and you're claiming that there are 170K potential patients, and the FDA is saying 90K, then the burden is on you (meaning Savient) to prove your company is worth that much. That means actually selling enough product, not waving your hands and scribbling on the back of an envelop. So, I'm afraid the answer to your question is that merely pricing the product is not enough if Savient wants a sale for a "reasonable" price. They actually have to build revenues.
Now personally, I think Savient has a shot of showing strong revenue growth over the next year or two, and I'm willing to wait around for a while to see if that happens. YMMV.
ibboyer....."The estimates run from worldwide sales of $200M/year to $1B/year."
Judging by this news release, which way do you think the potential acquirers' (if there really were any) were/are leaning as far as their thoughts on the sales are?
To the lower end of the estimates, or the higher end?
Now remember, the two speculated interested companys' are no fly-by-night operators, with maybe just a touch more knowledge than any so-called analyst.
If the lower end of the estimates then SVNT was already way over-priced in the lower 20's.
The Bloomberg article says they passed because of concern
about price - are they talking drug price or company pps
price. The drug price announcement will be on Nov. 30th
and will be high enough and approved through insurance
providers to take us considerable higher. A true market min.
value can be calculated at that point. I look forward to
a good Thanksgiving dinner and the following week the
fireworks will commence.