Thanks to "one voice in a billion"23 Mar 2018 14:04
GSK do not have cash burning a hole in their pocket, that is why they have withdrawn from the bidding for the consumer healthcare side of the Pfizer business. Their SP has been depressed by the news, any acquisition of that size was going to require new paper, possibly a rights issue and the likely cutting of the dividend. This was all viewed as bad by major shareholders. Now it is out of the way then GSK can focus on their strategy of firming up the pharma business as the highest priority. The two major thrusts there are the respiratory products (Nucala, Ellipta) and the HIV (Juluca, Triumeq, Tivicay).
The interest for VEC is in the former and i am sure it will be a few weeks before we have any clue how GSK might act. The litigation between GSK and VEC means that both sides have all the info on the IP for the delivery device. If GSK feel that VEC might have the IP protection to get an AB-rated substitutable device on the market then i am sure they will act to remove the threat. GSK will be willing to pay more than a competitor as any US pricing will be heavily impacted by a generic entrant, as the market size and margin decrease if that happens. If GSK take out any potential competition then that threat goes away.
The 2017 US sales of the Ellipta series were 1Bn GBP, with the 5th product (Trelegy) only just launched. The Growth rate is in the >50% region across the series. Global sales were 1.6Bn GBP. Projecting forward to 2020 then i expect the US market to be worth close to 2bn GBP for the series of products. Global sales to be about the same as current ratio so add 60%, or 3.2Bn GBP.
My guestimate is that a generic entrant into the US Ellipta market in 2020 would half the market size due to pricing pressure, so reduce US market to about 1Bn GBP. A generic entrant can expect 25% of total sales, maybe more. An agreement with a tier I pharma or generics company will probably bring in high teens %age for VEC in royalties and manufacturing revenue. If it is a combination of around 4% IP royalty (100% margin) and 12% on manufacturing (50% margin) then VEC are looking at revenues of 10M+30M=40M GBP p.a. and a bottom line increase of 10M+15M=25M GBP. If the device was approved worldwide then i am sure you can work out the new numbers.
What would this be worth to a competitior to GSK? Probably more importantly, what would this be worth to GSK to protect the market for 5+ years?
To my mind, the threat, if deemed high probability, has the potential to reduce the respiratory division sales at GSK by over 1Bn GBP p.a. from 2020 (just on the US market!). Therefore, they would be willing to pay above the odds due to the higher material impact on their figures from a generic entrant.
Now i am no expert with DCF or other valuation models, but it doesn't take a lot of imagination to realise that GSK buying VEC to get the IP protection, new device technology and to sell off the parts that they have no overall interest in does now make sense
Sign In
Follow the stocks
