Attempted valuation by the risk adjusted net present value (rNPV) method of Versatis
10 May 2014This week I wanted to attempt a valuation of a company called Versartis. Versartis is a single asset company based around a recombinant human growth hormone (rhGH). The key value proposition here is that Versartis can extend the half-life of hGH in circulation somewhere around 60x, they are aiming for a once-a-month injection for treating pediatric growth hormone deficiency. This is achieved by creating a fusion peptide of hGH and a peptide licensed under the name XTEN from Amunix (from where Versartis was spun-out). Hence the product is an XTENylated hGH known as VRS-317 primarily positioned at treating paediatric human growth hormone deficiency. Improved clinical outcomes are intended to come from improved patient compliance as ultimately it will mean less uncomfortable sub-cutaneous injections for the kids, and extend the lifetime of hGH within a therapeutic concentration window.
Existing hGH drugs on the market are hardly differentiated hence there is an opportunity here to separate from the rest of the market where all the players are present. These include Nutropin (Genentech), Humatrope (Lilly), Genotropin (Pfizer) and Norditropin (Novo Nordisk).
Versartis IPO’d on March 21 2014 on NASDAQ and have previously raised capital all the way through to a series E round!
Risk adjusted Net-Present-Value
I was looking around for a method of valuing a drug co. pre-market and found an article in Nature Biotechnology on a technique which takes into account the risk and time to getting a drug to market and ultimately the revenues when at market and calculates an adjusted value for the present time. The supplementary information for the article comes with a handy spreadsheet model so I hacked away at that for a few evenings.
So here are the parameters I used for calculating the rNPV for Versartis:
Market Data
| MARKET DATA | |
|---|---|
| Number of Cases Forecast for Year 1 | 100,000 |
| Annual Population Growth | 0.27% |
| Peak Market Penetration | 45.0% |
| Revenue Per Unit | $30,000 |
| Market Ramp Time to Peak Penetration (Years) | 5 |
| Orphan Drug (< 200,000 U.S.)? (y/n) | Y |
Bottom up annual paediatric GHD cases
Cases Year 1 based on 1:3480 children in North America are estimated to suffer from GHD1.
42.66M children in North America2 + 30.8M children in Europe3 + Japan 16.38M. (population data from Wolfram Alpha.)
Annual number of cases of Paediatric GHD: 25,816.
Top down annual GHD cases
Another way to calculate number of cases per year is to take the annual dollar size of the market ~$3b and divide that by the annual cost of treatment, approximately ~$30,000. Whilst not really from first principles, this takes in account all other applications of hGH which might not nescessarily be a good idea…
Annual number of cases of GHD: 100,000.
Peak market penetration is estimated to be 45% due to how this drug is so differentiated from all others on the market and the assitance it should receive from being an orhan drug.
Revenue per unit is based on the estimated annual cost of treatment per child in the U.S being in the range of $10,000 to $40,000.
Market ramp to peak penetration is estimated to be 5 which I believe is quite short however with orphan drug status the EMA will aid in facilitating the promotion of the drug.
VRS-317 was awarded orphan drug status by the European Medicines Agency (EMA) on September 13, 2013 and the FDA on December 13, 2013.
Trial Information
Patients
Actual enrolment should only be taken from the published data from the clinical trial. Apart from this estimated enrolment is taken from the Clinical Trials database.
| Phase | Patients Enrolled |
|---|---|
| Phase 1 | 504 |
| Phase 2 | 48 (estimated)5 |
| Phase 3 | 250 (estimated)6 |
Time Scales
| Phase | duration / years |
|---|---|
| Preclinical | Passed |
| Phase 1 | Passed |
| Phase 2 | 15 |
| Phase 3 | 36 |
| FDA | 1 |
| Total | 5 |
FDA clearance duration is estimated at 1 year for a fast-track therapeutic.
Versartis completed a Phase 1 trial in 50 adults earlier this year.
A phase 1b/2a pediatric trial is currently underway assessing 6 month growth velocities of kids with pediatric GHD5 due for completion in June 2014, therefore the the lowest duration of 1 year is used..
Additionally there is a planned phase 3 open label extension study allotted for 4 years to assess the long term effects of VRS-3176. However Results may be announced earlier hence an estimate of 3 years.
Costs
| Item | Cost / $ | Notes |
|---|---|---|
| Annual Pre-Market Patent Fees | $10,000 | |
| Annual Preclinical Costs | $- | |
| Per Patient Phase 1 | $12,000 | Hollister-Stier |
| Per Patient Phase 2 | $12,000 | Hollister-Stier |
| Per Patient Phase 3 | $6,000 | Hollister-Stier |
| Approval Costs | $1,300,000 | $309,647 for PDUFA and $500,000-1,500,000+ for NDA preparation (ProPharma Partners; Covance) |
| Animal studies supporting Phase 1 | $500,000 | SEC documents referencing 2001 survey |
| Animal studies supporting Phase 2 | $1,000,000 | SEC documents referencing 2001 survey |
| Animal studies supporting Phase 3 | $1,500,000 | SEC documents referencing 2001 survey |
| Manufacturing/Marketing Costs + Markup | 25% |
Not sure about any of these costs, stuck with defaults. Went for 25% marketing costs as they can do the production in bacteria therefore getting a great margin.
Rates
| Item | Rate | Notes |
|---|---|---|
| Royalty Rate | 5.0% | |
| Discount Rate | 20% | VC and pharma IRR (cost of capital for biotech) |
Risk Mitigated
| Phase | Risk mitigation entering Phase | Notes |
|---|---|---|
| Preclinical | 0% | Completed |
| Phase 1 | 0% | Completed |
| Phase 2 | 66% | Ongoing |
| Phase 3 | 67% | Pharmaceutical Manufacturing and Research Association |
| FDA | 81% | FDA FY 2000 Performance Report to Congress for the Prescription Drug User Fee Act |
Risk mitigation estimates
I seriously have no idea how to place a percent value on risk mitigation. I am working with 66% and 67% mitigation for phase 2 and phase 3 respectively.
I gave phase 2 a fairly high level of risk mitigation because essentially the in vitro work with XTEN has demonstrated the ability to extend the therapeutic half-life7, needless to say this is probably horribly inaccurate.
Phase 3 has the default from the spread sheet which is an average from the ‘Pharmaceutical and Manufacturing Association’.
Results of the model
| Metric | $ |
|---|---|
| PV of Revenue | 1,191,678,737 |
| NPV Cash Flow | 831,127,445 |
| Risk-Adjusted NPV | 547,557,840 |
The rNPV comes out at $547.5M however if we look at the current market cap of Versartis we see a value $659.21M (13 May 2014). Therefore it is 17% overpriced by the stock market and should be $22.65 per share.
Patient population vs rNPC
| Patient Prevalence | Cases Y1 | rNPV / $ | Notes |
|---|---|---|---|
| 1:3480 | 25,816 | 139,412,886 | Paediatric GHD only, based on epidemiological study and census data. |
| NA | 100,000 | 547,557,840 | All applications of GHD, based on market size and cost of treatment. |
You can see from the above table that the only way one can justify the current stock price of Versartis is that the market size is based on prior global, annual hGH sales rather than purely the incidence of paediatric GHD. This is confusing because most of Versartis’ PR and clinical trials are aiming at paediatric GHD. Perhaps the market cap is based on if Versartis advanced VRS-317 to adult treatments as well?
Some take away questions
- How do you estimate risk mitigation of a clinical trial phase?
- Should the rNPV be equal to the market cap if the stock is accurately priced?
- How do you estimate market penetration of a product?
- Why does this model not take into account cash on the books and burn rate? Surely the length of runway the company has must play some role in defining value?
- Is Versartis being valued based on conditions beyond paediatric GHD?
Conclusions
I have learnt it’s not just about having a great valuation model. You also need models to determine the risk mitigation and market penetration.
I would be able to provide more accurate costs if I had access to a full quarterly report, but Versartis haven’t been public long enough to file that information yet. Additionally I think I will need to play with this model to accomodate different cost types. Additionally I did not have good data for manufacturing and marketing costs.
Whilst I said the market is overvaluing the stock by 17% that’s a difference that would easily fall in to an error caused by an in correct risk mitigation rate or time scale for phase III completion. So I can’t say with any certainty how good the market price is.
I have to say that I was optimising parameters to get the rNPV to fall into a ball park of the market cap which is probably a stupid idea…
I in no way attest to this being a good analysis. However it is my first attempt so I wanted to learn and keep learning. So get in touch with me on twitter at @BenNMiles and call me out on my BS numbers.
I’m looking forward to seeing the results of the Phase 2a trial in mid June 2014.
Disclaimer
I have no idea what I’m doing so you shouldn’t make any investment decisions based on anything I write on my blog. Don’t hold me responsible for any financial losses or even gains. I’m doing this for fun not to inform investment decisions.
References
- http://www.jpeds.com/article/S0022-3476(94)70117-2/abstract.
- http://www.wolframalpha.com/input/?i=population+of+u.s+aged+3-11+years
- http://www.wolframalpha.com/input/?i=population+of+europe+aged+3-11+years
- Yuen, K., Conway, G. S., & Popovic, V. (2013). A Long-Acting Human Growth Hormone With Delayed Clearance (VRS-317): Results of a Double-Blind, Placebo-Controlled, Single Ascending Dose Study in Growth …. The Journal of …, 98(6), 2595–2603. doi:10.1210/jc.2013-1437
- http://clinicaltrials.gov/ct2/show/NCT01718041?term=versartis&rank=3
- http://clinicaltrials.gov/ct2/show/NCT02068521?term=versartis&rank=1
- http://www.amunix.com/content/technology/index.htm