If VF-001 works an acquirer could comfortably pay 10x the current share price

I’ve been doing some thinking about what a strategic acquirer would be prepared to pay for FTT in the event of success in the VF-001 trial. In this post I’ll summarise two different methods: i) comparable transactions; and ii) shareholder value.

i) Comparable Transactions
As per the Edison report, most of the wound care transactions since 2010 have involved products already being sold in the market and the typical multiple of sales paid has been around 4x. FTT will never build a sales force and will sell/partner the rights to VF-001 before it reaches the market so using a sales multiple isn’t that helpful for us.

The obvious pre-revenue deal to look at as a comparison is the acquisition of Scioderm by Amicus in 2015. Scioderm management believed their Zorblisa topical cream therapy had peak sales potential of $1b and a deal was done on the basis of promising Phase II results (i.e. the same point that FTT will be at in three months time). The deal included US$229m upfront and US$361m in potential clinical and regulatory milestones and US$257m in sales milestones. Total value if all milestones were hit was US$847.

See my previous posts for my derivation of my peak sales estimate range for VF-001 of US$500-900m. If we use the midpoint of US$700m and scale the Scioderm transaction by peak sales estimates, then strong phase II results could see VF-001 valued at US$590 (AU$800). This probably overstates things a little as it looks like Scioderm would be a higher margin product than VF-001 but even if we take a haircut to this valuation we still get a result more than 10x the current market value of FTT.

ii) Shareholder Value
Another way to look at what constitutes a reasonable transaction value is to consider that Smith and Nephew is valued at EV/sales of 3.4x. So if they bought VF-001 and over 5 years it reached the midpoint of my peak sales estimate range of US$700m, then the market would roughly value VF-001 at US$2.4b.

So even if S&N paid US$1.0b for VF-001, as long as it hit the midpoint of my sales estimates then they would still create $1.4b of extra value for their shareholders over this 5 year period. This is effectively a 19% annual return which no doubt would make S&N shareholders very happy. But in reality they may want to target an even larger return to reflect unknown risks and so if they were to pay US $500m (AU$680, and still more than 10x the current company value) then their expected return becomes 37% and the whole S&N management team will take home very large bonuses for several years.

So in summary if VF-001 works like current indications suggest it does, the ultimate payout to FTT shareholders could be easily more than 10x the current value of the stock.