Enanta Pharmaceuticals Is Simply Too Cheap To Ignore

Aug.11.14 | About: Enanta Pharmaceuticals, (ENTA)


Next-generation hepatitis C drugs have blown away revenue expectations so far.

Enanta Pharmaceuticals is a little-known player in this field, with an attractive valuation.

Based on my conservative revenue estimates, I believe Enanta will easily double from current levels within the next 12 months.

Anyone watching the healthcare sector this year has undoubtedly heard of the enormous sums of money the new generation of hepatitis C drugs have generated for their respective manufacturers lately.

For instance, Gilead Sciences' (NASDAQ:GILD) Sovaldi pulled in a stunning $3.48 billion in the second quarter alone, and is on track to easily top $13 billion in sales in its first full year on the market. And even Johnson & Johnson's (NYSE:JNJ) more specialized drug, Olysio, for genotype 1 patients, raked in a surprising $725 million last quarter.

Given these strong sales figures, Merck & Co. (NYSE:MRK) decided to bolster its own hepatitis C franchise with the purchase of Idenix Pharmaceuticals (NASDAQ:IDIX) earlier this year for $3.85 billion. While that figure pales in comparison to Gilead's purchase price for Sovaldi, it does represent a 240% premium for a pipeline of drugs that have struggled in the clinic.

In short, the pharma industry clearly has high hopes that these so-called "terminator" drugs will continue to post sky-high revenue numbers.

Enanta Pharmaceuticals (NASDAQ:ENTA) is a name you should get to know. Perhaps lost in the glamour of Gilead and J&J's triumphant drugs and the buzz surrounding Idenix's eye-popping purchase price, Enanta Pharmaceuticals hasn't gotten the attention it deserves from investors this year.

Enanta developed a key component (ABT-450) of AbbVie's (NYSE:ABBV) triple-therapy hepatitis C regimen that posted over 90% cure rates across six Phase 3 studies in genotype 1 patients. Based on these strong clinical results, AbbVie has subsequently filed a New Drug Application, or NDA, with the Food and Drug Administration for this combo therapy, where it was granted priority review status last June.

With this new interferon-free combo therapy also under review with the European Medicines Agency, or EMA, we are thus likely to see the drug gain approval in the U.S. and EU before year-end.

Why Enanta is now a compelling buy
Given the strong clinical trial results in terms of efficacy and the relatively clean safety profile of the therapy, most experts believe a regulatory approval is forthcoming.

An approval with the FDA would trigger a $195 million milestone payment to Enanta from AbbVie, and also entitle the company to royalty payments ranging from low-double digits up to 20% of net sales.

Although the market dynamics of competition and first-mover advantage are perhaps impossible to assess in a quantitative fashion at this point, we can make some conservative assumptions to illustrate Enanta's attractive valuation at current levels.

If we assume that AbbVie's therapy underperforms Olysio sales-wise by averaging $500 million in quarterly sales, it would still generate $2 billion in year-over-year sales. Factoring in the milestone payment of $195 million and a low-double digit royalty rate based on a projected $2 billion in full-year sales, Enanta's forward price-to-earnings ratio would fall below 4.

To put this into perspective, the average price-to-earnings ratio across the healthcare sector presently tops 25.

We could easily make slightly more bullish predictions based on competitive pricing regimens, but this brief example drives home the point nicely, in my opinion.

Bottom line
Estimating the sales performance of AbbVie's forthcoming hepatitis C drug is certainly a herculean task at this point. Regulators, politicians, and payers alike are all pushing back against the enormous price tags of these drugs, which may influence top line growth in the near future. Moreover, the curative nature of these new drugs may end up being their own worst enemy by dramatically reducing the overall market size -- a risk that has yet to show any real signs of coming to fruition.

With that being said, I think Enanta offers a highly compelling valuation scenario that will be unlocked with the FDA approval of AbbVie's new hepatitis C therapy. In other words, Enanta is simply too cheap to ignore any longer.

Disclosure: The author is long GILD, ENTA, ABBV, JNJ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.