Deutsche Bank: One step before takeout (Morphosys by Novartis)
29 January 2008
One step before takeout
We re-iterate our Buy and raise our price target to Euro 66 (Euro 57), as we consider the Novartis collaboration great news for shareholders. The total deal should well exceed $1bn, which makes MorphoSys an attractive candidate for corporate activity, in our view. We think that Novartis will increase its 7% stake in the future, when there is less risk for counterbids and more willingness by Morphosys (....)
Upside from extended Novartis cooperation
NPV Euro 30 per share: Our DCF model suggests a total value of roughly Euro 224m (NPV post tax) or Euro 30 per share for the extended Novartis contract.
Total value of Novartis collaboration (MorphoSys view)
- NPV of Euro 39 per share: Based on the same methodology we have also calculated a potential fair value from the total Novartis calculation, i.e. taking the upside of the existing/old Novartis contract into account. We end up with roughly Euro 285m NPV, which implies Euro 39 per share. This means that the existing relationship with Novartis would be worth Euro 61m or Euro 9 per share.
- Total value of MorphoSys collaboration (Novartis view)
NPV of Euro 79-131 per share: As discussed above we have used WACC of 13.5% and tax rate of 35% for MorphoSys to arrive at our NPV of Euro 54 per share for the total Novartis collaboration. If we leave all parameters mentioned above unchanged, but use the WACC of Novartis (8.35%) and its long-term sustainable tax rate< of 16.5% we end up at Euro 628m NPV or Euro 85 per share. Note that this figures does not yet take the value of other collaborations or AbD into account, nor MorphoSys net cash position of >Euro 100m.[/b> If we run our DCF across all value drivers without assigning a negative value to future R&D expenses, we would even end up at Euro 131.4 fair value for MorphoSys (using Novartis DCF parameters).
R&D = value destruction?
Euro 5.8 negative value: Given the increased financial flexibility we believe MorphoSys is likely to invest more into its own proprietary pipeline. We have assumed $16m of proprietary R&D in 2008, $19m in 2009 and $21m in 2010-2013E. As we did not assume any positive outcome, it seems rational to at least decrease further spending. Hence, we have not assumed any proprietary R&D costs after 2017. Hence, we arrive at Euro 43m NPV loss for own pipeline spending, which equals Euro 5.8 per share.
New DB price target Euro 66: We raise our price target by 21% to Euro 66 (Euro 57) as a result of the new Novartis collaboration. The value composition is summarized in the table below, which also includes a fair value calculation from Novartis’ perspective. Note that this table ignores any upside potential from proprietary drug development, which could be substantial, in our view.
Value for Novartis could be Euro 131: As described above, the MorphoSys-Novartis collaboration could be worth Euro 39 for MorphoSys (WACC 10.55%, long-term tax rate 35.0%) and Euro 79 for Novartis (WACC 8.35%, long-term tax rate 16.5%). If we also use these parameters for valuing other collaborations and other assets of MorphoSys, we end up at a fair value of Euro 131 per share for MorphoSys (from a Novartis perspective). This number does not yet include the upside from potential synergies. Hence, we believe that Novartis could easily pay twice the existing share price and the math would still work in their favor.
Key parameters: We have built a flexible DCF model, which we are also happy to share with
clients. Key assumptions are $/Euro of 1.47, 5% royalty rate, 35% long-term tax rate and
13.5% discount rate (risk-free rate 4.5%, market premium 6.0%, beta 1.5, cost of debt
8.0%).
Upside from extended Novartis cooperation
NPV Euro 30 per share: Our DCF model suggests a total value of roughly Euro 224m (NPV
post tax) or Euro 30 per share for the extended Novartis contract. This calculation is based
three cash flow components:
?? Euro 81m for license fees: For 2008-2017 we assume that MorphoSys will receive
on average $30m cash flow as a result of the extended contract with Novartis. Note
that the real cash flow payment will be twice as high, but half of the total $600m
payment will be eaten up by costs. Note that payments won’t be linear, because
double-digit technology internalization fees are likely to be booked in just one or two
years and not stretched over the total duration of the contract. Hence, we have
assumed license fee payment of $36m in 2009/2010 and $29m in other years.
?? Euro 61m for milestones: For milestones we assume total risk-adjusted cumulated
payments of $400m for 2010-2024. First milestones can be expected in 2010 (if a
projects starts today), while the last payments can be expected for 2024. Annual
peak payments of $43 are modeled for 2015-2019E. Note that these estimates are
already risk-adjusted, which leaves substantial upside for blue sky scenarios.
?? Euro 82m for royalties: The third cash flow contributor should be royalties, which
we estimate from 2017-2036. Over this time frame we estimate that total Novartis
revenues will cumulate to $29bn based on projects from the MorphoSys
collaboration. This number may sound high, but it just implies $3bn annual peak
revenues (for 2023-2027), which sounds much less aggressive in the light of 200
estimated joint projects.
Other value drivers
Other Therapeutics collaborations
NPV or Euro 17 per share: Our DCF analysis suggests residual value of Euro 16.7 per share
for other collaborations beyond Novartis. For the sake of conservatism we have assumed
that other partners such as Pfizer or Boehringer might be less keen to initiate new projects
with MorphoSys given its stronger ties to Novartis. We estimate that MorphoSys runs >30
projects with other partners currently with open options of partners to roughly double the
number of joint pipeline candidates. We did not assume any renewal or extension of existing
contracts.
Assumptions: We estimate that Novartis accounts for roughly 1/3 of total projects of
MorphoSys. We now assume that projects with other pharma/biotech companies will
accumulate to 200% of the old Novartis deal volume, which implies Euro 16.7 NPV per share.
Our NPV calculation is based on Euro 6m for license fees during 2008-2011 ($10m p.a.), Euro
31m for milestones during 2008-2018 (annual peak at $30m), and Euro 87m for royalties for
2013-2036 ($21bn cumulated peak sales, circa $2bn annual peak sales in 2021/2022).
Research & Diagnostic Antibodies
Background: MorphoSys began offering custom antibody services using HuCAL technology
to the research and diagnostics markets in late 2003 under the brand name Antibodies by
Design (AbD). In addition to the HuCAL custom monoclonal antibody services, AbD Serotec
offers more than 10,000 ready-made antibodies, antigens and immunology reagents, ISOcertified
large scale antibody production and a range of services including antibody
conjugations.
AbD valued at Euro 2.7 per share: We expect AbD to generate at around Euro 21m
revenues in 2007E and expect 11% growth in the coming years, which is in-line with the
underlying market. We assumed a slowdown of market growth to 3% in 2036, when our
DCF model ends. This business is just turning into positive territory with rising scale and
successful integration of Serotec. As the market is still fragmented MorphoSys might
conduct further acquisitions, if prices are reasonable. Based on 12% free cash flow margin at
peak our DCF model suggests fair value at Euro 21m or Euro 2.8 per share, which translates
into 1.0x EV/Sales.
Net cash
Euro 13.8 net cash per share: We estimate net cash of Euro 102m for year-end 2007, which
is worth Euro 13.8 per share based on 7.4m outstanding shares. We did not include any
upside from MorphoSys own proprietary pipeline candidates in our model.
R&D = value destruction?
Euro 5.8 negative value: Given the increased financial flexibility we believe MorphoSys is
likely to invest more into its own proprietary pipeline. We have assumed $16m of proprietary
R&D in 2008, $19m in 2009 and $21m in 2010-2013E. As we did not assume any positive
outcome, it seems rational to at least decrease further spending. Hence, we have not
assumed any proprietary R&D costs after 2017. Hence, we arrive at Euro 43m NPV loss for
own pipeline spending, which equals Euro 5.8 per share.
Other potential assets
Upside potential: We also did not include any upside from the newly contracted codevelopment
rights with Novartis. Also note that MorphoSys-Novartis collaboration does not
comprise antibody development for infectious diseases, i.e. another major deal and source of
proprietary drug candidates is still in the cards for MorphoSys. Also note that MorphoSys has
gained a co-development and co-marketing option on some of the joint Novartis projects. We
consider this option interesting, as it allows MorphoSys to benefit from Novartis' experience.
However, we doubt that the company will become a fully integrated biotech/pharma
company. If MorphoSys is successful, a bid from Novartis could be forthcoming, in our view. |
