Mid Cap / Pharmaceuticals, Biotechnology & Life Sciences

Expanded Purchase Recommendation: April 2017

The Turnaround Letter recommended this pharmaceuticals stock in April 2017:

 

 

Snapshot

Bioverativ, Inc.

(NYSE: BIVV)

OVERVIEW

Bioverativ, spun off from biotech giant Biogen in February, focuses on treating hemophilia, a relatively rare genetic disorder that prevents blood from clotting. Revenues last year were nearly $900 million, with earnings of $233 million. Its two highly innovative new products provide potentially life-saving treatment as well as important quality-of-life benefits, and have rapidly gained share in the $10 billion global hemophilia market that is growing at about 7% annually. 

While not strictly speaking a turnaround, Bioverativ looks quite cheap relative to its potential.  This is often true of spinoffs once they are freed from the corporate shackles of a larger parent.  A newly incentivized management team can focus on a promising product or technology that was formerly obscured from investor view by the parent’s other more prominent products.

Bioverativ has many key traits of a successful spin-off: healthy revenues, profit margins and cash flow, $325 million in cash with no debt, an impressive leadership team, strong R&D, marketing and regulatory capabilities and a pipeline stocked with promising new products. 

In addition, the highly-regarded, long-term focused activist firm ValueAct has taken a 7.5% position in the company.

Bioverativ is not without competition, as other pharma companies hope to capture market share in new blood treatments.  And, while valuation is not cheap at 20x 2017 earnings and 12.7x 2017 Ebitda, Bioverativ trades at a considerable discount to its peers and to what we believe is a reasonable price given its attractive positioning.  With revenues growing at 15% or more, plus new products, new business development deals and a better tax rate, earnings could be 50% higher in three years. Another source of upside: following its two-year post-spin waiting period (to preserve tax benefits), Bioverativ could be an appealing acquisition target for larger pharma companies looking for quality franchises.  

We recommend buying Bioverativ up to 87.

OPPORTUNITY

Bioverativ was previously housed within biotech giant Biogen, which prior to the spin-off was a $60 billion (market cap) company focused primarily on neurological diseases. As part of Biogen, Bioverativ was constrained by the capital allocation and expense priorities of its much larger parent. As a fully-independent company, it is free to focus exclusively on finding and commercializing treatments for rare non-cancer blood diseases.

The new company has the key ingredients of a successful spin-off: a strong franchise with a growing and profitable revenue stream, a solid financial position, highly capable management and well-developed operations.

1. Strong and growing $1 billion franchise in an attractive niche – Hemophilia is a serious disease that prevents blood from clotting. The condition can range from mild to life-threatening, yet even mild cases require treatment to prevent gradual lifestyle-debilitating damage. The global hemophilia treatment market is estimated to be $10 billion, growing at an annual rate of 7%.

In 2014, Biogen launched the first major treatment advances for hemophilia in nearly 20 years. These two products, ELOCTATE and ALPROLIX, grew from zero to nearly $1 billion in revenues in less than three years. Bioverativ has the first-mover advantage, with large United States’ market shares of 13% and 31%, respectively.

Bioverativ (millions)


2014


2015


2016


Revenues $134.4 $560.3 $887.4
Change   +318% +58%

2. Wide profit margins, strong free cash flow and debt-free, cash-heavy balance sheet

Bioverativ produced $333 million in adjusted operating profits in 2016, for a 37.5% margin. We expect operating profits to increase to $526 million over the next 3 years. Free cash flow is strong, at $216 million in 2016, which will likely grow as capital spending requirements are minimal (most spending is research and development, which is expensed).

The company has no debt or any significant financial obligations and holds $325 million in cash. Biogen provided its progeny with a rare gift as a new company – most spin-offs don’t get this clean of an opening financial condition.

GGAP (millions)


2016A


2017E1


2018E1


2019E1


Revenue $887 $1,047 $1,204 $1,349
Growth   18% 15% 12%
         
Adjusted operating income2 $333 $403 $470 $526
Margin 38% 39% 39% 39%
         
Ebitda $351 $423 $492 $551
Margin 40% 40% 41% 41%
         
Adjusted net income2 $207 $254 $305 $352
         
Free Cash Flow $216 $249 $301 $347
Margin 24% 24% 25% 26%
  1. The Turnaround Letter estimated results.
  2. 2016 Actual is adjusted for the closing of the Cambridge manufacturing facility and a normalized tax rate of 38%. For GAAP purposes, the company recorded a negative income tax of ($147.7 million) related to one-time tax benefits.

3. Strong leadership team with deep ties to Biogen’s hemophilia business – Most of the senior leadership team were previously Biogen’s senior executives that were closely involved in the hemophilia operations and bring critical capabilities to Bioverativ.

  • CEO – John Cox was a 13-year veteran of Biogen, previously on their Executive Committee. He has strong strategic and operational expertise, and ran Biogen’s production, supply chain, technical development quality and engineering operations. His also oversaw the commercialization of Biogen’s biosimilars business and its Specialty Medicines and Rare Diseases groups. His education includes both science and business training (bachelor’s degree in biology from Arizona State University, Masters of Science in cell biology from California State University, and an MBA from the University of Michigan).
  • Head of Business Development and Alliance Management – Richard Brudnick previously was head of Biogen’s business development where he led key transactions to develop ELOCTATE and ALPROLIX, Tecfidera (Biogen’s largest product at $4 billion in revenues) and Spinraza, oversaw Biogen’s $675 million acquisition of Convergence Pharmaceuticals and led other major alliances. His education background is equally impressive with undergraduate and graduate degrees in management from Massachusetts Institute of Technology (MIT).
  • Chief Financial Officer – John Greene brings considerable financial and public company expertise. Previously he was CFO at Willis Group Holdings, one of the world’s largest insurance brokerages (interestingly, activist Value Act was involved with Willis), as well as CFO of three of SBC’s major banking divisions and CFO of General Electric’s Global Business Finance.
  • Head of Global Therapeutic Operations – Rogeria Vivaldi, M.D. was chief commercial officer at Spark Therapeutics which focused on treating rare diseases using gene therapy. Prior to Spark, he led the Rare Diseases unit and the Latin America business of Genzyme ($4 billion revenues). He has a solid medical background including a medical degree (and an MBA) from the University of Rio de Janeiro, a residency in metabolism and endocrinology, and a fellowship at Mount Sinai Hospital in their genetics department.
  • Head of Human Resources and Corporate Communications – Lucia Celona was a 10-year Biogen veteran and the second-highest human resources executive. She worked closely with John Cox, providing valuable continuity in developing the new firm’s culture.
  • Chief Legal Officer – Andrea DiFabio was a 10-year Biogen veteran and its second-highest legal officer with expertise in compliance, intellectual property, regulatory and other legal matters.
  • VP, Finance and Chief Accounting Officer – Diantha Duvall joined Biogen in 2016 bringing financial reporting and controls capabilities from her seven years at global pharmaceutical company Merck.

4. Up-and-running world-class operations – although a new company, Bioverativ’s operations are fully integrated and already running. Nearly all the critical functions transitioned smoothly from Biogen, which is highly-regarded for its world-class operations.

  • Research and development is stocked with key members of the same team that brought hemophilia research to Biogen through its 2007 acquisition of Syntonix. This team, which includes Dr. Robert Peters, a highly-regarded hematology expert, went on to create ELOCTATE and ALPROLIX. Also joining Bioverativ are leading scientists in sickle cell and other blood disease research. The team has strong financial resources, as research and development spending in 2016 was $179 million.
  • Manufacturing and supply will continue seamlessly from Biogen’s facilities in North Carolina, which produce and package all ELOCTATE and ALPROLIX volumes. The exclusive agreement with Biogen allows Bioverativ to have an uninterrupted supply of product from a world-class American-based facility for the next 3-5 years on a cost-plus basis.
  • Distribution will continue to use the same 3rd party distributors in the U.S. and Canada.
  • Sales and marketing will utilize a 40-person dedicated sales and marketing team, including Bioverativ’s well-established direct sales force, to market its products in the United States, Canada and Japan, as well as to develop markets in Australia, New Zealand and Latin America. The collaboration agreement with Sobi (Swedish Orphan Biovitrum AB) will remain intact into 2024, allowing continued penetration in Europe, Russia and parts of the Middle East/North Africa.

5. Shareholder-friendly and biotech-knowledgeable board – The board, currently comprised of five members including the CEO, is well-stocked with individuals who have shareholder value and biotech expertise. It brings heavy experience in disciplined, effective and efficient capital allocation to internal projects as well as acquisitions, joint ventures and other external development opportunities. The board appears likely to seriously consider selling the company if a potential buyer made an attractive offer.

6. Global growth opportunities for its existing franchise products:

Large Opportunity Exists For Expansion in Rare Hematology
Source: Bioverativ.

 

8. Highly credible and long-term-oriented activist as new and sizeable shareholder – ValueAct, a highly respected activist firm with over $16 billion in assets under management, initiated a 7.5% position after the spin-off. The firm has commented that it views the position as a longer-term holding. As ValueAct has a respected in-house research team, their stake adds an important element of independent credibility to the Bioverativ story as well as outside pressure to maximize shareholder value.

9. Potentially attractive acquisition target in two years – Like nearly all spin-offs, Bioverativ was structured as a tax-free transaction. To preserve this status, it cannot be acquired for a period generally accepted to be two years. An exception was Baxalta, a hemophilia firm spun off from Baxter in 2015 which was acquired for $32 billion by Shire only 11 months later at a large premium. While an acquisition is not part of our base case, Bioverativ’s franchise, financial position and relatively small size could make it an appealing acquisition for a much larger firm looking for growth.

GUIDANCE

At its Investor Day in January, Bioverativ management outlined its 2017 guidance:

Revenue Growth 17-19%
GAAP operating margin 38-42%
Non-GAAP operating margin 43-47%
Tax rate 36-38%

 

Bioverativ appears attractive based on current multiples. And, while valuation is not cheap at 20x 2017 earnings and 12.7x 2017 Ebitda, Bioverativ trades at a considerable discount to its peers and to what we believe is a reasonable price given its attractive positioning. 

Biotech companies’ valuations vary considerably based on their disease focus, degree of specialization, long-term outlook and numerous other variables. Our comparable biotech sample includes only blood-focused firms.

Bioverativ’s peers currently trade at an average multiple of 25.6x this year’s estimated earnings per share (EPS) and 16.6x this year’s estimated Ebitda. On this basis, Bioverativ looks attractive.

Comparable1 biotech firm multiples: 

 

 

Price/2017 EPS


EV/2017 Ebitda


CSL, Ltd 32.5x 22.4x
Grifols 23.0x 13.9x
Novo Nordisk 15.5x 11.4x

Sobi


31.4x


18.9x


             Peer average 25.6x 16.6x
     
Bioverativ 20.4x 12.7x

[1] Peers include biotech companies focused primarily on blood diseases. 
CSL is based in Australia, Grifols is based in Spain,
Novo Nordisk is based in Denmark, and Sobi is based in Sweden.

 

At our anticipated end-date for the Bioverativ investment, in 2020, we expect the group to trade at roughly this same 16.6x multiple of Ebitda. We are assuming that Bioverativ will trade at a modest discount relative to its peers, at a 14.0x multiple of its 2020 Ebitda.                                  

We are applying our standard end-of-transition valuation methodology to Bioverativ. Our estimates for the primary value drivers (revenues, Ebitda margin, net cash position, and Ebitda multiple) in the endgame scenario are outlined below:

 

 

2016 Estimated
(millions)


 

2020 Estimated
(millions)


 

Revenues $887 $1,450
Ebitda Margin 39.6% 41.0%
Ebitda $351 $595
Ebitda Multiple   14.0x
Enterprise Value   $8,232
+ Cash balance   325
+ Incremental Cash Flow   1,000

- Gross Debt


 


-0-


Equity Value   $9,648
Shares outstanding, fully diluted   110.5 million
Price target   $87.31
Rounded price target   $87.00
Upside to price target   +65%

 

Assumptions:

  1. Revenues – We are assuming that revenues grow 18% in 2017, with the growth rate tapering to about 7.5% in 2020 as Bioverativ approaches the limits of its likely market share gains and the size of the market. If management executes well on its strategy, these estimates would likely be conservative.

  2. Ebitda marginWe estimate an increase of 1.4 percentage points, or 140 basis points, to 41.0% by 2020, as Bioverativ achieves full operating leverage. For reference, management’s guidance for the 2017 operating margin is 38-42%. Operating income and Ebitda are very similar at Bioverativ as depreciation is minimal.

  3. Ebitda multiple – Our end-scenario multiple of 14.0x is a discount to its peers’ average multiple of 16.6x Ebitda, based on the likelihood of slowing growth in the competitive market for blood disease treatments.

  4. Gross debt – We are assuming the company does not borrow permanent debt within our investment horizon. The incremental cash flows provide plenty of liquidity for any small acquisitions, and we do not anticipate any acquisitions large enough to require debt financing.

  5. Shares outstanding – The company has 2.5 million shares of common stock equivalent outstanding for stock options and time-vested restricted stock units. We have included all of these in the terminal value share count, assuming that the number of additional common stock equivalents that are issued in the interim years are offset by forfeited or unearned awards.

 Sources of Value Creation

 

Sources of Value Creation

 

Compared to the current $52.74 share price, the increase to the $87.31 target price (we rounded down to $87 for the actual target price) represents $34.57/share of net value creation.

For Bioverativ, the revenue growth is a critical driver, producing 91% of the value creation. This dependence is considerably higher than our typical recommendation, reflecting the unique nature of this company – a biotech spin-off with a strong growth franchise.

The Ebitda margin improvement component produces just under $2 per share of incremental value.

Bioverativ produces large amounts of free cash flow, which we expect to increase as revenues increase. In our base case scenario, net cash accumulation contributes about 27% of net value creation, more than offsetting the impact from the Ebitda multiple decay and the share count increase.

We are assuming mild Ebitda multiple compression, to 14.0x (from the trailing multiple of 15.3x), over the horizon. This compression detracts from value creation by 12%, or $4.20/share.

In a weaker outcome scenario, where revenues and Ebitda margins remain unchanged from their 2016 levels, the Ebitda multiple contracts to 12x, and net cash increases by only $500 million, the company’s value would be about $45, or 14% downside from the current price.

A Brief Note on Ebitda

We typically use the EV/Ebitda multiple to value most companies. It not only explicitly focuses on the value of the operating company regardless of the capital structure, but it also separately values any unrelated assets and liabilities. The approach is widely used in private equity transactions, which increasingly drive public equity valuations. An additional merit of EV/Ebitda is that it allows useful comparisons of similar companies even if they have different capital structures.

In a straightforward business, the Enterprise Value (“EV”) is the value of the equity (market cap) plus any debt, less cash. It is the value of the operating business (the “enterprise”). If the company was acquired, the buyer would pay for the entire enterprise, not just the equity. Debts may be paid off immediately or carried over to the buyer, but one way or another the buyer would be obligated to cover them.

We compare the enterprise value to the cash operating profits of the business (earnings before interest, taxes, depreciation and amortization, or “Ebitda”) to produce the EV/Ebitda multiple. The principal shortcoming of Ebitda is its exclusion of taxes and capital expenditures. These costs are accounted for subjectively in assigning the multiple – admittedly a form of art. Interest costs are also excluded, as they are not operating costs but rather financing costs associated with capitalizing the business.

CHALLENGES/MAJOR RISKS

While we believe the Bioverativ investment will be successful and that the stock market will reward the shares with a significantly higher price, it is not without challenges and risks.

Like all biotech firms, Bioverativ has competition.

While it has a first-mover advantage, well-capitalized firms including Shire (Baxalta), Roche Holding, Pfizer, Bayer and CSL are working to develop similar and newer treatments. Also, some of these firms have deep and long-term relationships with key opinion leaders and others in the medical and scientific community, which could hamper Bioverativ’s ability to grow.

While Bioverativ has a wide and deep opportunity set, its efforts may not produce commercially successful products.

Creating and bringing to market innovative and profitable biotech products is complicated and expensive. Bioverativ’s pipeline might not be able to keep pace with its competitors’ innovations or may have unexpected delays or problems (like all new pharmaceuticals) in completing clinical trials or receiving FDA or other governmental approvals. While we don’t expect any dangerous and unexpected side-effects, it is possible that these could be discovered after approvals and marketing have started.

Completing deals is strategically important but may not produce hoped-for results.

Future acquisitions, collaborations, joint ventures and other business development transactions may not work as planned. To some extent, Bioverativ needs to expand its product set as it competes against a range of competitors that are advancing treatments on a variety of fronts. Also, Bioverativ could complete deals that are too large to effectively integrate or that strain its balance sheet or ability to adequately finance. As attractive deals are subject to availability, management may become impatient with its deal pace if it is unable to find enough qualifying deals.

Change in how governments pay/reimburse for treatments.

Hemophilia treatments are expensive and generally paid for by third parties, primarily domestic or foreign governments, insurance companies and other organizations like managed care companies and pharmacy benefit managers. Sales to CVS Health Corporation and Accredo Health Inc. represented 19% and 14% of 2016 sales, respectively. Nearly all payors are increasing their scrutiny of coverage, reimbursement and pricing of medical expenses, which could put downward pressure on the prices that Bioverativ can charge, as well as raise mandatory rebates and discounts and possibly trigger retroactive price reductions.

Other meaningful risks include:

Operational risks – production and supply problems could arise, including those related to expanding beyond Biogen’s facilities or launching new drugs manufactured in a new facility.

Currency risks – 15% of Bioverativ’s revenues come from outside the United States. As the company currently does not hedge its currency exposure, changes in the value of the dollar could create volatility in revenues and profits, particularly if the U.S. dollar appreciates significantly.

News-driven share price volatility – investors may over-react to quarterly revenues and profits if they meet/don’t meet analysts’ expectations for the linearity and pace of growth, to pipeline or product announcements by Bioverativ or its competitors, and other news-driven expectations.

Multiple compression – a sharp decline in the overall stock market or in the valuation of biotech companies for any reason would reduce the terminal value of Bioverativ’s shares.

COMPANY DESCRIPTION

Bioverativ was formed in August 2016 to hold the hemophilia business of Biogen. It was spun-off in a 100% stock distribution in February 2017.

Its roots reach back to Biogen’s 2007 acquisition of Syntonix Pharmaceuticals for $40 million plus up to $80 million in milestone payments. Syntonix was an early-stage biotech firm focused on developing treatments for hemophilia and other related serious chronic diseases.

Syntonix had previously entered into a development and commercialization agreement with Sobi (Swedish Orphan Biovitrum AB) to jointly develop and commercialize Factor VIII and Factor IX hemophilia products, including ELOCTATE and ALPROLIX. The agreement, which has been amended and continues into 2024, gave Biogen (now Bioverativ) commercial rights for North America and the rest of the world markets outside of the Sobi territories of Europe, Russia and several countries in the Middle East and Northern Africa.

Sobi is a high-quality global pharmaceutical company focusing on rare disease. It is publicly traded in Sweden (NASDAQ OMX Stockholm (STO:SOBI), with 2016 revenues of about US$600 million and operating profits of about US$180 million.

Following approvals, ALPROLIX was first sold in the United States in the second quarter of 2014, and ELOCTATE was first sold in the United States in the third quarter of 2014. Sales in Japan started in the following quarters. Bioverativ began earning royalties from Sobi in 2016 on sales of ELOCTATE and ALPROLIX following Sobi’s commercial launch of ELOCTATE and ALPROLIX in the European Union.

ELOCTATE contributes about 58% of total product revenues, while ALPROLIX contributes about 38%. Collaborative partnerships, which include certain royalties from Sobi and other partners, comprised about 5% of revenues in 2016.

Revenues (millions)
2014
2015
2016
     ELOCTATE 44% 57% 58%
     ALPROLIX 57% 42% 38%
     Collaborative partnerships 0% 1% 5%




Total 100% 100% 100%

Totals may not add up to 100% due to rounding.

HEMOPHILIA OVERVIEW

Hemophilia A and hemophilia B are rare genetic disorders that impair human blood clotting. The impairment can produce recurring and extended bleeding episodes that can cause life-threatening hemorrhaging as well as pain and irreversible joint damage.

The World Federation of Hemophilia (WFH) estimated that in 2015, the most recent survey year, over 151,000 people worldwide were diagnosed with hemophilia A (up 6% from their 2014 estimate) and over 30,000 (up 3%) as having hemophilia B. The WFH estimates that over 300,000 people worldwide have a bleeding disorder, including 75,000 with von Willebrand disease and 42,000 with other disorders. There could be a significant population that has not been diagnosed, as 10% of the world’s hemophilia population lives in the United States, which has less than 5% of the world’s total population. Hemophilia is generally diagnosed at or shortly following birth and predominantly affects males.

Hemophilia is caused by reduced levels of a blood protein, factor VIII (in type A) or factor IX (in type B). Patients receive on-demand treatments to help arrest current bleeding episodes, or prophylaxis treatments to help prevent near-term future bleeding episodes.

Beginning in the late 1960s, hemophilia was treated by directly injecting patients with clotting factors drawn from blood plasma. This approach provided valuable treatment but was plagued by lack of adequate supply and contamination issues (including HIV). In the early 1990’s, recombinant DNA technology offered new injection products, which generally required 3-4 treatments per week. This form of treatment is now considered “conventional” or “short-acting”.

Bioverativ’s innovation was to improve upon the recombinant technology to extend the half-life of the treatments to once every 3-10 days.  This form of treatment is termed “extended half-life”. While extending the time between treatments by a few days may not seem like a big improvement, it can reduce the number of annual treatments from 180 to between 60 and 120, while also greatly reducing the life-threatening risk of bleed-out as well as chronic joint pain that internal bleeding can cause.

The extended half-life increases the demand for prophylaxis treatments over on-demand treatments. Currently, 50-60% of patients are treated on-demand, yet prophylaxis treatments are becoming increasingly common for both its safety and lifestyle improvements.

Bioverativ’s research is focused on extending the half-life further as well as increasing the ease and convenience of administering treatments. Its marketing efforts emphasize increasing the penetration of extended half-life products in existing markets as well as new markets which remain heavily focused on on-demand treatments.

The company is also researching solutions to other hemophilia-related problems. An example: one barrier to hemophilia treatments is that 25-30% of severe type A patients and 1-6% of type B patients develop an immunity to the clotting factors that are injected. Immune tolerance induction is a regimen that can reduce or eliminate the tolerance although it may take as long as a year or more to complete.

Longer-term, by perhaps 2025, genetic-based therapies could capture 10-15% of the hemophilia market. Bioverativ is currently in early-stage research on opportunities in this market.

 

CAPITAL STRUCTURE

Equity

Bioverativ’s equity structure is straightforward. It has a single class of common stock, with 108.0 million shares outstanding as of February 28, 2017. Under the terms of the spin-off, completed on February 1, 2017, Biogen shareholders received one Bioverativ share for every two Biogen shares held. Biogen owns no shares in Bioverativ. Each share of common stock is entitled to one vote.

The company has 2.5 million shares of common stock equivalent outstanding for stock options and time-vested restricted stock units. We have included all of these in the terminal value share count, assuming that the number of additional common stock equivalents that are issued in the interim years are offset by forfeited or unearned awards.

Debt and liquidity

At year-end 2016, Bioverativ had no short-term or long-term borrowings. As the company has $325 million in cash and generates healthy free cash flow, it won’t need to borrow to fund its operations. However, the company might acquire other biotech firms or biotech compounds or assets to expand its franchise.

Funding requirements

The company has a research, development, commercialization and licensing agreement with Sangamo Therapeutics for sickle cell disease and beta-thalassemia, two inherited blood disorders. Bioverativ could owe up to $440 million in payments to Sangamo, contingent upon Sangamo achieving various milestones. The treatments are currently in pre-clinical development.

Off-balance sheet arrangements and derivatives

Bioverativ does not hedge or have any off-balance sheet arrangements or derivatives. As such, it is fully exposed to changes in currency exchange rates.

Pension obligations

Bioverativ has immaterial obligations for employee pension plans or other post-employment benefits.

 

BOARD, GOVERNANCE AND ESG PRACTICES

Board of Directors

As a new company, Bioverativ is building its board. Currently at five members, we would not be surprised if two more members were added over the next year or two:

John CoxBioverativ’s Chief Executive Officer.

Alexander J. Denner, PhD – brings strong biotech and shareholder value experience. Currently the founder and Chief Investment Officer of Sarissa Capital, Denner previously was a senior executive with activist Carl Icahn’s firm and a portfolio manager with Viking Global Investors and Morgan Stanley Investment Management. He is currently a member of Biogen’s board.

Louis J. Paglia – brings strong capital markets and director experience. He currently is founder of Oakstone Capital and a board member of Arch Capital Group, an $11 billion (market cap) reinsurance company. His experience includes CFO of UIL Holdings (electric utility), eCredit and TIG Holdings (an insurance company).

Brian S. Posner – brings strong capital markets and director experience. He currently is a private investor and head of Point Rider Group, a financial advisory firm. Previously was president of ClearBridge Advisors, one of the largest mutual fund companies in the U.S., and served as portfolio manager at Fidelity and Warburg Pincus. Posner is a member of the boards of Biogen and AQR, a $175 billion (assets under management) investment firm.

Anna Protopapas – brings strong biotech, business development and leadership experience. Currently CEO of Mersana Therapeutics, an early-stage biotechnology firm, she previously was President of Millennium where she led Tekata Pharmaceuticals’ $1.3 billion oncology business and also led Tekata’s $12 billion acquisition of Nycomed. She has an MBA from Stanford University, a master’s degree in chemical engineering from Massachusetts Institute of Technology and a bachelor's degree in science and engineering from Princeton University.

Governance

Bioverativ has not yet filed its first proxy as a public company. We will review its governance and related issues upon its release. We anticipate that the company will have strong governance practices given its shareholder friendly board.

From its by-laws, Bioverativ provides these governance rules:

  • annual election of all board members.
  • proxy access is available to shareholders that hold a minimum of 3% of shares outstanding for at least 3 years
  • special meetings may be called by shareholders that have a “net long beneficial ownership” position of at least 25%.

The most significant issue for Bioverativ’s board is its ability to work effectively together. As it is completely new, this ability is unproven. However, most of the members have significant board experience elsewhere. While board dynamics cannot realistically be predicted in advance, we do not anticipate any significant issues.

ESG practices

While difficult to directly quantify the impact of strong Environmental, Social and Governance (ESG) practices, we believe these matter to investor relevancy, economic sustainability and business quality, which drive long-term revenues, profits and valuation. Increasingly, solid ESG practices indicate well-run companies, and the lack of attention to ESG issues may indicate other unseen shortcomings.

As a new company, we have essentially no information on Bioverativ’s ESG practices. GMI (a subsidiary of MSCI, Inc.), a leading provider of ESG risk scores, rates its former parent Biogen as having an overall ESG rating of “Average” for all three subcategories of Environmental, Social and Governance quality. Relative to its biotechnology peers, Biogen was in the top quartile for Environmental and Governance, and in the top half for Social quality. Biogen is noted as being particularly strong in human capital management. Despite its lack of disclosure at this early stage in its corporate existence, we would expect a Bioverativ ESG score comparable to that of Biogen.

FINANCIAL STATEMENTS

Consolidated Statements of Income

  Years ended December 31,
  2016
($millions)

2015
($millions)

Revenues 887 560
Cost of sales 238 53
Research and development 179 186
Selling, general and administrative 178 223



Income from operations 292 98
Other income (expense) (1) 1



Net income before income tax expense (benefit) 292 99
Income tax expense (benefit) (148) (10)



Net income 440 109
     
Net income per share:    
     Basic earnings per share $4.07 $1.01
     Diluted earnings per share $4.07 $1.01
     
Weighted average shares outstanding (basic and diluted) 108 108
     
Income from operations 292

98

+ Costs of closing Cambridge manufacturing facility1 41 -
+ Depreciation and amortization2 18 16

Ebitda


351


114

     
Cash interest paid, net of capitalized interest -

-

Cash income taxes paid, net of refunds na na

 Totals may not add due to rounding.
1. Charges and costs associated with closing the Cambridge manufacturing facility in 2016.
2. Depreciation and amortization excluding accelerated depreciation previously included in costs of closing the Cambridge Manufacturing facility.

 

Consolidated Balance Sheets

 

Dec 31,
2016
($millions)

Dec 31,
2015
($millions)

Assets    
Accounts receivable, net 149 94
Inventories 302 252
Other current assets 24 4



     Total current assets 476 351
Property, plant and equipment, net 28 76
Intangible assets, net 52 30
Deferred tax assets 154 -
Other 22 20



     Total assets 732 476
     
Liabilities    
Accounts payable 13 11
Accrued expenses and other current liabilities 89 49



     Total current liabilities 102 60
Other long term liabilities 64 31



     Total liabilities 166 91
     Total Shareholders' Equity 566 385



     Total liabilities and Shareholders' Equity 732 476

Totals may not add due to rounding.

 

Consolidated Statements of Cash Flows

  Years ended December 31,
 

2016
($millions)

2015
($millions)
Cash flows from operation activities    
Net income 440 109
Depreciation and amortization 53 16
Stock-based compensation 15 13
Deferred taxes (154) -
Changes in working capital, net (53) (96)



     Net cash provided by (used in) operating activities 302 41
     
Cash flows from investing activities    
Purchase of property, plant and equipment (9) (11)
Acquisitions of intangible asets (27) -



     Net cash (used in) provided by investing activities (35) (11)
     
Cash flows from financing activities    
Transfers from (to) Biogen    



     Net cash (used in) provided by financing activities (266) (31)
     
Net increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -



Cash and cash equivalents at end of period - -

Totals may not add due to rounding. 

                                                                                                                                          

SOURCES

This report uses sources which we believe to be reliable. However, we cannot guarantee its entire accuracy.  New Generation Research and related companies and their employees may at times hold positions in any of the securities mentioned herein.

Sources include: Bioverativ and Biogen news releases, 10-Ks, proxy statements and other regulatory filings and websites; Bloomberg; Schwab research; Fidelity research; GMI/MSCI; The Wall Street Journal; fundinguniverse.com; World Federation of Hemophilia; The Turnaround Letter analysis and other sources. Chart courtesy of stockcharts.com.

 

 

 

 

 

 

 

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Turnaround Investing Blog

Turnaround Investing Blog

IBM: Not Yet Time to Swing at this Pitch

IBM’s stock underperformance since IBM’s current CEO took the helm in 2012 has been stark, with the shares declining 23% while the S&P500 Index has more than doubled. One big problem: revenue growth rate is zero, at best. Without revenue growth, what’s left to entice investors? The real driver of value at IBM – free cash flow that is used to repurchase shares. Can IBM borrow its way to shareholder prosperity as its cash flows shrink? What to do with IBM shares? Wait for a better pitch in the form of a catalyst or much lower valuation. Read More.

Comparing Stocks Vs. Bonds

While the common stock of a turnaround candidate usually has the greatest upside potential, other classes of securities, such as bonds or preferred stock, may offer attractive profit possibilities with less risk. Many turnaround companies have only one class of securities available to investors but where there are different classes to choose from, it can pay to do a little extra analysis of the various options.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

stock market advicex

 

What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."