Some more lenses for consideration when trying to put a value to WCK 5222/ Zaynich.
A couple of important points need to be made before I lay out my estimates.
- My core premise is to look at this like a VC firm would. An investment in one “Facebook” equivalent is what makes up a bulk of VC returns. One success pays for many many others that go nowhere, and then some more. The “Facebook” for Wockhardt is WCK 5222. I expect this drug to be by far the dominant driver of value for the firm.
- There are still many hoops to jump over before anything can materialize. While the news is encouraging, very many things can derail the whole thesis. This remains a risky bet. On another thread, I have already admitted this being an investment “driven by the heart” for me
Approach 1: Learning from Orchid
Orchid’s drug Enmetazobactum is estimated to generate global sales of US$ 200-300 mn. Orchid is estimated to get royalty of 6-8% from Allecra for US & Europe (from where, let’s face it, most of the revenue will come from). ==> Orchid Pharma Ltd - #25 by ranvir
My sense is that Zaynich has much more potential than Orchid’s drug, given what we are seeing of the drug - one may simply scroll through the thread here to get a feel. So, US$ 500 mn I believe is conservative. Similarly, Wockhardt is likely to get a better royalty deal than Orchid, which means the 6-8% is an absolute floor.
Now, Orchid’s drug has FDA approval, and it has struck its licensing deals. Where has this taken its value? Total enterprise value (market cap + debt) of Orchid = US$ 725-730 mn.
Wockhardt, with around US$ 250 mn of debt, has an enterprise value of US$ 1.8-1.9 bn today (as on 08 Jul’24) - share price of around 880.
Now, I tried to flex the key variables - the global sales for Zaynich (my conservative estimate being US$ 500 mn, and flex being from 250-1,000 mn); and the royalty/ revenue share % that Wockhard will get from a licensing deal (absolute floor being 6%, and flex from 6% to 25%). Here is what the results throw up for the resulting share price.
| A | B | Royalty/ Rev share of Wockhardt | D | E | F | G | H |
|---|---|---|---|---|---|---|---|
| 6% | 8% | 10% | 15% | 20% | 25% | ||
| Zaynach global sales (US$ mn) | 250 | 201 | 314 | 427 | 710 | 992 | 1,274 |
| 500 | 540 | 766 | 992 | 1,557 | 2,122 | 2,687 | |
| 750 | 879 | 1,218 | 1,557 | 2,404 | 3,251 | 4,099 | |
| 1,000 | 1,218 | 1,670 | 2,122 | 3,251 | 4,381 | 5,511 |
Approach 2: DCF of royalties from Zaynich
Again, assuming a conservative number of global sales for Zaynich as US$ 500 mn. At a 7% royalty, Wockhardt would earn US$ 35 mn/ year. Assumed some ramp-up (initial year earnings at 70% discount to this US$ 35 mn, second year at 40% discount to the stable state US$ 35 mn/year), and then growth (the US$ 35 mn growing at 30% p.a. from year 4, tapering down to 10% over the next six years). Finally, applied a discount rate to get the NPV of these royalties, assuming they start coming in two years down the line.
Here’s what this looks like for a 7% royalty share and discount rate for NPV calculation of 17% (asking 20% in INR terms, and assuming USD will appreciate around 3% p.a. against INR):
| Head | Unit | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Royalty earnings | US$ mn | 11 | 21 | 35 | 46 | 59 | 71 | 85 | 98 | 108 | 119 |
| % discount to stable | 70% | 40% | 0% | 0% | 0% | 0% | 0% | 0% | 0% | 0% | |
| % growth | 30% | 30% | 20% | 20% | 15% | 10% | 10% | ||||
| Discounted earnings | US$ mn | 8 | 13 | 19 | 21 | 23 | 24 | 24 | 24 | 22 | 21 |
| NPV | US$ mn | 199 |
So NPV of US$ 199 mn. Wockhardt’s enterprise value today (as we saw in approach 1) is ~US$ 1.9 bn.
I next flexed two key drivers again, this time left the US$ 500 mn as is. I flexed the royalty %, and the discount rate for NPV (which you can say is a proxy for the returns expectation). Here’s what that threw up for the NPV for Zanynich royalties (to be seen against the current enterprise value of Wockhardt of US$ 1.9 bn):
| Royalty/ Rev share of Wockhardt | |||||||
|---|---|---|---|---|---|---|---|
| 6% | 8% | 10% | 15% | 20% | 25% | ||
| Discount rate (expected CAGR) | 12% | 233 | 311 | 388 | 583 | 777 | 971 |
| 15% | 192 | 256 | 321 | 481 | 641 | 802 | |
| 17% | 170 | 227 | 284 | 425 | 567 | 709 | |
| 20% | 143 | 190 | 238 | 357 | 475 | 594 |
So, the NPV of Zaynich even with high royalties does not seem as big. Of course, if the US$ 500 bn turns out to be, say US$ 1 bn, then these numbers go 2x.
I also did one last thing. I was curious to see, with the US$ 500 mn as global sales assumption for Zaynich, what royalty % and discount rate would make the Zaynich royalties match the current valuation of Wockhardt (the whole company; recall my initial premise that I expect Zaynich to be by faaaar the biggest driver of value for Wockhardt). One answer was 36% royalty with 10% discount rate. So US$ 500 global sales, with Wockhardt getting 36% revenue share as royalty and with expectation of 10% returns would mean that Zaynich royalties would represent the whole of Wockhardt’s current value.
It’s been a long post, and a little technical (in terms of finance calculations). Apologies if I ended up confusing you, rather than providing any insights.
Disclosure: Invested, from lower levels. Investment driven by the heart.