By Alex Gavrish, Etalon Investment Research; author of “Story Investing”
Bioverativ’s story structure and turning points
In my recently published book Story Investing I discuss how to be creative in the investment research process and come up with great investment ideas. One of the highlights of the approach is the proposal to identify important turning point in company’s history. After such turning point is identified, one can develop both a historical perspective as well as future narrative around this event. A major turning points can be a spin-off, sale of a division, a merger, etc. One should not be carried away into fantasy with this storytelling: the story should be combined with analytical thinking and should be supported by fundamental valuation.
Spin-off companies often undergo through a transitional period and present investors with opportunity to easily identify company’s story structure and a major turning point. This often provides interesting investment opportunities.
Biogen expects to complete the separation of Bioverativ into an independent, global biotechnology company focused on hemophilia and other rare blood disorders on February 1, 2017. Biogen will distribute one share of Bioverativ common stock for every two shares of Biogen common stock. According to Biogen’s press release, NASDAQ has approved the listing of Bioverativ common stock on the NASDAQ Global Select Market under the symbol “BIVV” and advised that Bioverativ common stock will begin trading on a “when-issued” basis under the symbol “BIVV WI” on January 12, 2017. Following the separation, Bioverativ will be a global biotechnology company dedicated to the discovery, research, development, and commercialization of therapies for the treatment of hemophilia and other blood disorders. Its existing marketed products will include ELOCTATE and ALPROLIX, indicated for the treatment of hemophilia A and B, respectively. In addition, Bioverativ will continue to engage in the research and development of pipeline candidates intended to provide additional meaningful advances in the treatment of people living with hemophilia and other blood disorders.
Based on pro-forma financial statements, during first nine months of 2016, Bioverativ had an EBITDA of approximately $278 million. On an annualized basis, EBITDA can be estimated to equal $370 million. Net cash is expected to be $271 million. There expected to be about 109 million shares outstanding. Also, during first nine months of 2016, company generated $203 million in free cash flow. On an annualized basis, free cash flow can be estimated to equal $271 million. Applying a x15 EV/EBITDA valuation multiple would value company’s equity at $5,820 million or $53.5 per share.
Company projects a growth of 18% in revenue during 2017. To arrive at our target valuation, we assume similar growth in EBITDA and free cash flow. For four years 2018-2021 we assume growth rates of 10%, 8%, 5% and 5% percent. Based on these assumptions, in 2021 company will have an EBITDA of $572 million and will generate a free cash flow of $419 million.
Based on these numbers, Bioverativ can be estimated to generate a total free cash flow of $1,869 million over next five years. Applying a x15 EV/EBITDA valuation multiple and net cash of $271 million (post-spin) would value company’s equity at $10,718 million or $98.53 per share. It remains to be seen at what price share of Bioverativ will start trading, but based on 2016 estimated financials and similar valuation assumptions this target price provides a potential upside of 84% percent.
We believe this spin-off story provides an attractive investment opportunity for long-term, value-oriented investors.