Wockhardt: an NiCE story

[phreakv6]

@parkhi_nazar - Appreciate the number-crunching man

Few things to keep in mind

1. I think royalty here is bound to be in the high teens on par with orphan drugs, first-in-class drugs (BLE acknowledgement and higher breakpoint point than Cefepime points in this direction) and highly specialised drugs with a small target market.

2. If drug is manufactured and marketed by another party, along with royalty there is generally a one-time upfront licensing fee which brings in substantial value, alongside the DCF from royalty

3. The market size of WCK-5222 may have gone up after the higher breakpoint since its understood now that its a lot safer to use without risk of resistance (relative). Though it might be early, we may have to compare market size of WCK-5222 with carbapenems ($4b in sales) instead of with Avycaz (already doing close to $1b in sales)

4. The way WCK-6777 (Ertapenem+Zidebactam) works is fairly similar with Zidebactam functioning as BLE and lowering the MIC of Ertapenem.

The MICs are so low even where Ertapenem is resistant.

You can see at what MIC 90% cumulative reduction in population happens for Ertapenem vs Ertapenem+Zidebactam (almost 2-3 dilutions lower!).

Zidebactam can give a new lease of life to lot of old beta-lactam antibiotics in combination as a BLE perhaps. So success of WCK-5222 has more riding on it than just its value. There’s a step-wise recalibration that can happen in expectation at that point of time in future where the money from WCK-5222 upfront licensing fee can help with taking the rest of the drugs through trials and unlocking further value. The balance sheet once it gets deleveraged can make this look like a completely different business once cash flows start.

Again, these are at least a year or 2 in the future, so a lot can change and all of it hinge on WCK-5222’s success, so its like building castles in the air talking more about it at this point prematurely. But WCK-5222 is not the only thing that can affect valuation once its approved is the limited point.

Disc: Invested. No recent transactions

[banskt]

Great to read about the valuation and numbers.

Despite the novelty of WCK 5222, I have a different opinion regarding the revenue potential. I believe the majority revenue will come from WCK 4873 (Nafithromycin, trademarked as MIQNAF). I did some number crunching myself and in my opinion, Miqnaf will bring in $1.2b per year as compared to $0.5b of Zaynich, at least initially. Beyond the first few years, as @phreakv6 mentioned, WCK 5222 will open up new opportunities, which may tilt the balance in favor of the later. Both are conservative estimates.

Disclosure: Invested.

[parkhi_nazar]

I agree. I heard a similar point of view from someone who is familiar with the industry. His broader point was that several optionalities could emerge. This includes the possibility of Zaynich itself having positive effects beyond what was originally envisaged. His view was that clearing Phase 3 was the big hurdle, and passing this obstacle would unlock a lot of value.

Another challenge he mentioned - the relevance of this in developed markets (where drugs make the most money). I’ve got more comfort on that one after the US compassionate use case. I had comfort even earlier, but this US case allowed updating of probabilites further. MDR bacteria looks to be a relevant problem even for developed markets.

I think Donald mentioned somewhere about Ayush’s framework of “business in transition”. It is one marker I have learnt to look for also, and I can fully appreciate where he comes from. The market often reacts with skepticism when early signs of transition show up. It often gives a good risk-reward for those that are tracking and have the risk appetite.

I did mentally put Wockhardt under this “business in transition” bucket. The market sees a drug manufacturer which has faced several FDA issues in the past, and has a splotchy history. But this is taking an innovator/ research turn. The time to act is when the market is still skeptical or has not even recognized the transition. This is obviously only for those with a high risk appetite.

I remember an industry veteran pointing to all the money poured into research and suggesting that the time value of that money should be looked at. Yes, that is true for the promoters, but for minority shareholders who got in when the business was priced such that nothing would come off all the research, the money poured in does not matter. For simplicity’s sake, if they poured in Rs. 100, and I got into the bus when the company was valued at Rs. 60, I just need returns on my 60. I don’t need to worry about the 100 poured in. These views are part of the same skepticism.

It reminds me of Druckenmiller’s story when he was made Director of research at the age of 25, with even a 52 year old reporting to him.

After about a year and a half -I was a banking and a chemical analyst -this guy calls me into his office and announces he’s going to make me the director of research, and these other eight guys and my 52-year-old boss are going to report to me. So, I started to think I’m pretty good stuff here. But he instantly said, “Now, do you know why I’m doing this?” I said no. He says, “Because for the same reason they send l8-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968.” This was 1978. “I think a big secular bull market’s coming. We’ve all got scars. We’re not going to be able to pull the trigger. So, I need a young, inexperienced guy. But I think you’ve got the magic to go in there and lead the charge.”

So I see it a bit like that. Veterans are scarred. Maybe we are the naive ones, but naivette might be the factor that is required to bell this cat.

Time will tell. All the best to those who are on this boat.

Disclosure: Invested from low levels, and views could be unknowingly biased. I see this as a high-risk investment and it is one made “from the heart” for me

[Sanjay_Kumar_E]

Assumptions in DCF are important and there should be a reasoning behind each of them instead of random numbers. Otherwise, Garbage in = Garbage out.

1. Royalty - Orchid will get 6-8% royalty from Allecra for Enmetazobactam because they sold the drug when it was in pre-clinical stage. Wockhardt will sell WCK-5222 either post Phase 3 trials or after NDA application/approval. So they can get 15-20%.

2. Peak sales - Avibactam (Zavicefta in EU and Avycaz in US) with 1/3rd the spectrum coverage of WCK-5222 is doing $800 Mn - $1 Bn and is still growing despite losing exclusivity. So WCK-5222’s market can be 3x of Avibactam and hence $2.4 - $3 Bn is a reasonable estimate. Avibactam is effective against only Enterobacterales whereas WCK 5222 is effective against all 3 - Enterobacterales, Pseudomonas and Acinetobacter. Double clicking on the $3 Bn figure, WCK 5222 can probably do $1Bn each in US, EU and China/ROW.

(Please note that Zavicefta did ~100% growth in 2 consecutive years. We will be using this assumption.)

If you interested, can go through this paper on US which estimates the cost of antibiotics:

Cost Analysis of New Antibiotics to Treat Multidrug-Resistant Bacterial...

The cost is around $1 Bn for US based 2017 numbers:

We know from CDC report that antimicrobial resistance has only gone up post Covid:

3. Upfront / milestone payment - An industry professional told me that usually Big Pharma companies pay 20-25% of the peak sales potential as upfront payment. It will either be in one shot or based on milestones - both regulatory and sales based.

For example:

In September’22, GSK entered into an exclusive licensing agreement with Spero Therapeutics to
commercialise Tebipenem HBr in all regions except certain Asian countries. Tebipenem HBr is an oral
carbapenem antibiotic which was indicated for complicated urinary tract infections (cUTI) and had been
given QIDP and fast track designations by the USFDA.

GSK and Spero Therapeutics announce exclusive licence agreement for tebipenem...

Spero received an upfront payment of $66m and would have received $300 Mn milestone payments and $225 Mn sales based payment.

Plus Royalties if sales exceed $1bn.

(Note - this drug failed Phase 3)

Given the peak sales for WCK-5222 can be anywhere from $2Bn to $3Bn, the upfront/milestone payments that Wockhardt will get can be $400 Mn to $750 Mn. Plus Royalty.

4. Dr. Habil had indicated in media interviews that Wockhardt will retain India market for themselves and out license the other markets. So Wockhardt will sell WCK-5222 directly in India. NCE is very high margin - 80-85% Gross and 65-70% EBITDA margin. I am assuming 60% PBT margin on India sales of WCK 5222. (Not getting into details of India market size as we will have to talk about number of ICU cases etc)

5. Terminal Value - As Bharani pointed out, Carbapenem market is $4 Bn but if you take just take Meropenem, which is the comparator drug in WCK-5222’s phase 3, is doing $1 Bn in sales. Despite going off patent many many years ago. I think WCK 5222 will go off patent by 2037 and I am reducing the peak cash flow by 50% and capping it at 10% to arrive at terminal value.

6. We can’t just look at Wockhardt’s perspective. We will also have to see if the buyer will make money.
   Assuming 4000 Crs capex (very aggressive estimate, can even be half), 6000 Crs ($750 Mn) as upfront & milestone payment and 15% royalty to Wockhardt. Buyer, at 20% PAT margin, will get ~20% IRR.

NPV of WCK 5222 comes out to around ~9000 Crs. Shaving off 1000 Crs for my bias, WCK 5222 is worth 8000 Crs today. Roughly $1 Bn.

Wockhardt is trading at 12,000 Crs M Cap which means the base business is being valued at 4000 Crs.

Based on a discount rate of 18%. So WCK-5222 alone can double the stock every 4 years?

Also, you might question the growth rates assumed. Is it possible? We have already seen Zavicefta doubling for 2 straight years. Has it happened before? My friend @Ahmed_Madha pointed me to Amgen’s wonder drug Aranesp.

Amgen did $3 Bn Sales in 2000:

5 years later, the Sales had quadrupled to $12 Bn:

$3 Bn came from Aranesp - a drug for treating Anemia (kidney and cancer):

Of the $10 Bn anemia market, Aranesp has managed to capture $3 Bn:

The clinical trials started in 1997. The marketing started in 2001:

Stock price move happened in between:

$20 to $80 even before the marketing of the product started!

By the way, Aranesp is still doing $1.5 Bn in sales. (Terminal Value!)

Risks:

1. Phase-3 success but we have evidence to suggest it can be successful.

2. Loss of exclusivity / patent expiry earlier than expected if US FDA approves any ANDA/FTF/505b(2) which I don’t have enough clarity on.

3. Biggest risk in my opinion is what Wockhardt will do with 15,000-20,000 Crs cash flows that they will generate in the next 10 years.

Buying at current price is being naive. Not when market was giving zero value to WCK 5222.