Following our note on BTG’s interim results, the proposed £3.3bn all-cash acquisition by Boston Scientific was announced. Further, on 21 November, BTG and its partner Johnson & Johnson (J&J) failed to prevent the launch of generic competition to Zytiga (28% of BTG’s H1 revenue). We examine the potential impact of generic Zytiga on the transaction.
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BTG |
The BTG acquisition: Small fly, big ointment
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Pharma & biotech |
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22 November 2018 |
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Following our note on BTG’s interim results, the proposed £3.3bn all-cash acquisition by Boston Scientific was announced. Further, on 21 November, BTG and its partner Johnson & Johnson (J&J) failed to prevent the launch of generic competition to Zytiga (28% of BTG’s H1 revenue). We examine the potential impact of generic Zytiga on the transaction.
Logical acquisition of interventional volume
US medical device company Boston Scientific announced the recommended offer for BTG of 840p in cash or £3.3bn. There are no break-up fees for UK-listed takeovers and further details on the terms of the transaction have not yet appeared in Boston’s SEC filings. The 37% premium to BTG’s 19 November share price should be warmly welcomed by at least the 75% of the shareholders required to approve the transaction.
Are imminent Zytiga generics a complication?
One of the bear points from our previous note was the potential for generic competition to Zytiga (abiraterone) – a blockbuster oral drug to treat prostate cancer. The day after the proposed acquisition of BTG by Boston Scientific was announced, a US Appeals Court ruling allowed generic abiraterone launches while the invalidation of Zytiga’s last valid US patent is being appealed.
The effect of Zytiga generics on the acquisition
The key reason for Boston’s acquisition of BTG was to add volume and therapeutic breadth to its interventional medicine franchise (c 35% of BTG’s total H1 revenue). The royalties from Zytiga are non-core to a medical device company and their divestment after completion may already have been investigated. It is not yet possible to know if Zytiga generics represented a material adverse event for the deal, but the risk to the whole transaction is probably small, although perhaps not negligible in light of there being no break-up fee. A renegotiation on the price of the transaction would probably require a new agreement and, with Boston already having secured funding for the acquisition, we view such a move as unlikely.
Valuation: Academic after Boston’s acquisition
Based on I/B/E/S estimates before the acquisition was announced, BTG traded at a FY19 P/E of 17.3x, which we argued was probably more a reflection of the uncertainty of BTG’s future revenues, including the Zytiga royalties. Since the announced acquisition by Boston, this multiple has risen to 23.2x.
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Consensus estimates
Source: Company data, Thomson Reuters I/B/E/S estimates. Note: *PE values 17/18 are averages. |
EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: Investment Companies
Worldwide Healthcare Trust (WWH) is managed by Sven Borho and Trevor Polischuk of specialist healthcare investor OrbiMed. The managers are positive on the outlook for healthcare stocks in 2019, following a volatile period for global equities so far in 2018. They see reduced political pressure on the sector following the US mid-term elections and believe there will be more of a focus on company fundamentals. The managers cite a series of novel therapeutic products under development, which could meaningfully bolster the revenues and earnings of companies that can successfully bring these drugs to market. In addition, they suggest that an increase in mergers and acquisitions could also focus investor attention on the healthcare sector’s potential.