BTG Cyto Fab Study Failure

AstraZeneca’s discontinuation of AZD9773/CytoFab after the failure of a Phase IIb study in severe sepsis/septic shock has a material impact on BTG’s valuation, but given the larger recent share price movement, the investment case remains strong. Removing CytoFab’s contribution and making certain other changes reduces our valuation from 430p to 398p per share. This suggests there is an almost 15% upside to a valuation that is largely underpinned by the DCF value of a solid revenue-generating business while, by biotech standards, BTG has a low risk profile.

0BCytoFab fails in the challenging sepsis indication
AstraZeneca has discontinued AZD9773/CytoFab after the failure of its 300-patient Phase IIb study in severe sepsis/septic shock. Although disappointing, the outcome of the study is a reflection of the challenging nature of the sepsis indication. CytoFab was carried at a low probability in our model, although the attractive economics of the licensing deal meant it still made a material contribution (£136m) to the valuation.

1BBenefix windfall, Zytiga sales tracking $1.2bn/year
BTG recently disclosed a further windfall royalty on Benefix, which added c £10m to its FY13 revenue guidance to £190-200m; Edison’s model suggests revenues may come in slightly higher at £201m. Furthermore, reported sales of Zytiga by Johnson & Johnson suggest this product is on track to achieve $1.2bn sales this year. It thus has the potential to make a significant (and probably under-appreciated) contribution to BTG’s FY13 revenues.

2BCore business performing well
BTG’s core direct sales operations (CroFab, DigiFab and Bead products) continue to perform well. The next key milestone is likely to be the planned filing of Varisolve, due in Q412.

3BValuation: Fair value now 398p per share
Removing the CytoFab contribution and updating the valuation to reflect the Benefix windfall and using FY13 year-end cash (£144m) suggests a valuation of £1.3bn or 398p per share. This compares with the previously published £1.4bn or 440p/share. Thus we consider BTG offers an attractive investment proposition, with the current share price offering 14% upside to a valuation that is supported by the DCF value of its core business activities and a low risk profile by biotech standards.

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