Bioverativ (NASDAQ:BIVV) was spun off from Biogen (BIIB) on February 1, 2017. Bioverativ started with Biogen's hemophilia therapies and $325 million in cash. The therapies are Alprolix for hemophilia B and Eloctate for hemophilia A.
I estimated the stock value at $45 per share in my pre-spinoff article, "Bioverativ Should Have a Strong Launch." Since the launch BIVV has traded between a low of $41.19 and a high of $54.20. It closed on March 26 at $50.30.
On Friday, March 24, Bioverativ filed a 10-K annual report with the SEC covering 2016, when it was still a division of Biogen. While there are some caveats, data in the report has caused me to substantially upgrade my fair estimated stock price for Bioverativ.
It is important to note that the earnings numbers in this 10-K depend on expense allocations made between Biogen and Bioverativ. These are matters of human judgment. Even if done entirely fairly, Bioverativ could have higher expenses in 2017 from a variety of causes, including having corporate overhead expenses that had been shared with Biogen in 2016. In other words, the opposite of the synergies seen or hoped for when companies merge. This is mentioned in the 10-K.
The other usual caveats about mid-cap biotechnology firms also apply.
A caveat about taxes is important enough to have its own section below.
In the 10-K Bioverativ reported 2016 revenue of $887.4 million. In my prior article, I estimated 2016 revenue at $830 million. I had not included collaboration revenue of $41 million in 2016, and I was also a bit conservative in my Q4 revenue estimate.
2016 Net income was $439.6 million, and EPS was $4.07.
Guidance for 2017 revenue growth is 17% to 19%.
I had estimated 2017 revenue at between $971 and 988 million, net income at $247 million and EPS of $2.27 per share.
On the surface, I was way low on my profit estimate for 2017, as it is below what was released in the 10-K for 2016.
If 2017 EPS grows at 18%, in line with the midpoint of revenue, it would be $4.80.
Using the same 20 P/E multiplier as in my prior article, that would value shares at $96.00. To be conservative, I will call that a range of $85 to $95 per share by year end. Using the reported $4.07 EPS for 2016, I would have estimated an initial stock price (on February 1) of $80 per share.
But it is worth looking at why my original estimates were low.
Since my revenue estimates had been reasonably close (I had not included collaboration revenue of $41 million in 2016), I was off on expenses including taxes. When Bioverativ reports Q1 results analysts should be able to get a better grip on the actual run rate for expenses, and on the tax rates, both cash and GAAP.
Tax rate caveat
In my prior article, I used a 35% tax rate. Instead, for 2016 Bioverativ claimed an income tax benefit of $147.7 million. The 10-K states "As a result of potential changes to our business model, income tax expense (benefit) included in the consolidated financial statements may not be indicative of our future expected effective income tax rate."
If Bioverativ is valued by using an earnings multiplier, the actual tax rate makes a big difference. Subtracting out the 2016 tax benefit results in earnings of $292 million, still substantially above my estimate of 2017 earnings.
Again, when Q1 results come out we should have a much better idea of what the 2017 tax rate should be, and hence 2017 earnings and EPS.
Hemophilia therapies is a hotly contested field. For now, Bioverativ's longer acting factors are likely to continue to gain market share and to expand geographically (through a collaboration with Sobi).
Longer-run, other long-acting therapies will come to market. These could include RNAi based therapies and gene therapies currently being developed by other companies. Predicting what might get regulatory approval, and how much market share new therapies would take, is difficult. Bioverativ has its own preclinical pipeline to compete in hemophilia and other blood diseases, summed up here:
If Bioverativ gets the same tax benefit in 2017 that it received in 2016, it should be worth about $90 per share, or even more given its revenue and earnings growth rate (which would normally win it a higher P/E).
Given my uncertainty about the tax situation and the reverse-synergies that might occur, and the much lower current price, I am increasing my estimate for BIVV to $70 per share. I will revise that lower or higher once the tax and other expense situation becomes clearer.
I believe that, subtracting out any tax issues, earnings growth will be stronger than revenue growth in 2017-2018. Revenue growth should remain strong until geographic expansion is complete and Alprolix and Eloctate have maximized their market shares against older therapies.