During Emisphere's (OTCQB:EMIS) 4Q2015 conference call this week some very significant news was released. EMIS' management announced their decision to sell or license EMIS' sole commercial product, Eligen B12. This is an extremely important near-term event for EMIS shareholders.
As I described more fully in a recent article, Eligen B12 is a prescription form of vitamin B12 containing an absorption enhancer for people with digestive tract issues that prevent normal uptake of this important vitamin. Those patients are currently being treated primarily with IM (intra-muscular) injection of vitamin B12. EMIS launched Eligen B12 as a replacement for IM B12 injections in March 2015.
Conference Call Announcement
Here's the description of the news as excerpted from EMIS' conference call. The emphasis is mine.
During the fourth quarter of 2015, something else began to occur of positive importance to us in that we were approached by several major pharma and consumer healthcare companies expressing interest in licensing or acquiring our now on the market Eligen B12 product...So, consequently, in light of the launch year performance, particularly of the first nine months, and looking at the Company's limited resources, as well as the emerging external interest, we have determined that a strategic transaction or collaboration with a motivated third party that possesses the requisite marketing power and resources is now more necessary for the product to reach its full market potential in the United States and internationally...in order to optimize shareholder value.
Key takeaways: several companies are interested, which provides some negotiation advantage to EMIS, and an established reputable sales team should bring out the greatest shareholder value in Eligen B12.
Owing to limited funds available and in anticipation of the sale, EMIS is winding down their launch activities. Consequently, I expect the sale of Eligen B12 to be made soon, within the next few months, so as to minimize interruption in the sales momentum.
What can we expect from the sale or licensing of Eligen B12? Five years ago, another SA author estimated that EMIS could get around $100M for Eligen B12. I believe the value is much higher now that it's on the market with over 1000 prescription sales per month.
To answer this, we need to estimate peak sales and then value the product, which is typically 3-5x peak sales for pharmaceuticals. I estimate that EMIS can get a peak of at least 10% of the 4 million U.S. IM patients, or 400,000 prescription sales per month. This would lead to approximate annual peak sales of nearly $250M at $50 per prescription.
The corresponding 4x valuation for these peak sales is $1B. EMIS estimated that 1% of the market value corresponds to $60M in annual sales, over 2x my estimate at 10% penetration, so this valuation could go even higher.
A suitor might offer EMIS half my estimate, or $500M, owing to the risk involved. A potential profit-sharing arrangement could provide EMIS 15-20% of sales, or around 25% of the profits, and an up-front payment on the order or $100-250M.
A payout of this magnitude would be huge for a microcap like EMIS, immediately increasing the companies market cap. While the size of the stock-price change will depend on the specifics of the deal, I expect this announcement to lead the stock price from around $0.60 where it is now to at least a few times this, into the $1-2 range and an undiluted market cap around $100M in the near future.
If you think my valuation is too high by a factor of 2 or 3, just scale these numbers accordingly and you'll see they are still meaningfully large. EMIS was clearly impressed enough by their preliminary sale-price discussions that they decided to sell Eligen B12 rather than try to raise funding and continue on their own.
Who are the several suitors mentioned by EMIS? They could be any number of large pharmaceutical or consumer healthcare companies. One of each, that have strong medical nutrition divisions and are a good fit, at the top of my list are:
Other suitors could include major pharmas such as Sanofi (NYSE:SNY) and Teva (NYSE:TEVA), who have ties to EMIS' board of directors, and pharma/consumer healthcare companies like Johnson & Johnson (NYSE:JNJ). EMIS' current partners, Novo Nordisk and Novartis, who are well-aware of EMIS' technology could also be interested.
The sale/licensing amounts here are very large relative to EMIS' current market cap. It's clearly warranted for EMIS to take advantage of potential offers if they are of the size I describe. EMIS would be able to shore up its finances and provide options for its management team, for example, to develop or extend its pipeline.
I'll note that there is some risk that the sale doesn't evolve as expected and some aspect of it, or the whole thing, falls through. I view this risk as small though, especially in light of them having multiple suitors.
Interestingly, at the end of the conference call, EMIS commented regarding the establishment of executive stock purchase plans, "...we are considering them actually, and discussing it with our lawyers right now, so we can have more opportunities to participate..."
EMIS' first big payday may finally be arriving.
Disclosure: I am/we are long EMIS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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