Biota Analysis and Valuation Part 1 in my Biota series.

Biota is a biotechnology company based in Melbourne’s east. Major revenue driver is flu drug Relenza.

Biota Filings

Final Share Buy Back Announcement 9,166,734 bought for AUD$7,592,564 high $1.29 20/03/08 low $0.63 on 6/10/08. Last $0.475. The world is awash with companies whose management bought there shares back at higher prices.

Latest employee options it’s always good to check if management is being too generous with shareholder equity. 602k ZEPOs, 334k LTIOs, with MD and CEO grants of 976k LTIOs awaiting shareholder approval. 1,180k ZEPOs on issue, 1,827k LTIOs.

CEO Briefing on 2008 results and Outlook. 26 August

• GSK giving no guidance of Relenza royalties, so BTA can’t either and cash flow remains hard to forecast.
• Astra Zeneca have taken over MedImmune rights to RSV program. AZ paid $3.5M for rights to additional areas. Terms of agreement remain same $5M upfront $107.5M milestones, which have been made easier to achieve.
• Relenza patent has six years left estimate royalties of $120-240M based on last two years. (Check if that is a valid time frame to use)
• settlement of GSK case will result in $12M net inflow this year.
• resolution will remove high legal expense, but no clarity on Relenza sales until Q3 09 (Jan-Mar09)
• Trials, commenced phase I RSV, completed LANI PII in Japan and will commence PIII soon.
• Year ahead, board renewal due to announced retirements, complete HRV PIIa, complete RSV P1

Breakdown of last years Relenza royalties
by Q, 4.5M, 12, 4.4 and 0.4 in Q4 [Ed: 4/11] and 1.9M in Q1 09

2008 Annual Report

Speed Analysis prior to reading annual report

• Already have licensed winner. Appear to have ability to sign deals and progress their portfolio.
• Quick stab $10M-$20M annual cash flow over next six years based on Relenza
• $12M net from settlement this year.
• RSV $107M in milestones, need to check terms but give 40% as a starter - $43M over X years. Need to check royalties give 10% chance to that.
• LANI ?
• HRV?
• cash $60.2M

vs market cap from yahoo of $78.82M (need to check that)

BTA and ADR: BTAHY

184,856k shares. Last price $0.475 = $87.8M. My quick valuation of Biota indicates a discount of 24-46% before even considering RSV, HRV or LANI. No wonder management believed $0.63-1.29 was good value. NOTE: the buy back will have reduced the shares outstanding, but cash would also be down.

When you see all those assets sitting there for $28M you should sit up and pay attention. Last week three days in a row BTA could be bought for .435 or all the assets for $20M.

Time to dig through the annual report

Balance Sheet

• $8M owed on difference between receivables and payable.
• PPE $7.5M
• Deferred tax assets $5.1M
• Deferred revenue $6M (need to check what from and likelihood of receiving)
• $1.1M current and $6.6M non-current provisions (check them)
• That’s all close enough to balancing.

Issues

Relenza royalties are the largest risk.

Other Documents of Interest

Valuation of Biota from their website. Target $1.60 NPV $2.92 from Oct 07 with share price at $1.48. “Our final valuation for Biota remains $2.92/share, assuming a $100m settlement from GSK and that 2 of the company’s development products achieve registration and sales.”

More recent Biota analysis from their website.

• 11 Sept 08 State One Stockbroking. Target $1.15 “Other revenues, excluding the $3.4m milestone payment from its RSV program in FY08, should grow 5% to $16.1m. Operating expenses, excluding legal costs, should jump 33% to $42.7m but at least a third should be reimbursed by licensees and government grants. At the bottomline, we expect a profit of $13.2m, or $4.8m excluding an $8.4m
  after-tax gain (imputed 30% tax) from the $20m settlement with GSK. It received the $12m net cash from GSK recently…We have raised our target price by 2% to $1.15, based on 1.2x price/book multiple, net present value of Relenza royalties until its patent expiry in 2014 and the $12m cash from GSK. Biota s quality product pipeline includes 3 programs at the clinical stage.”
• 26 August 08 WilsonHTM Investing Group. Target $1.42
• 26 August Taylor Collision. Target $1.80
• 31 July 2008 ABN AMRO Morgans. Target $1.29 (DCF based)

Initial Conclusion

Markets hate uncertainty and Relenza provides it in spades. This could be an excellent opportunity. Downside very low due to cash. Say maximum* loss of 15 cents with upside of $1.15. That’s a preliminary risk to reward of 1/7.5. Over twice as good as I normally seek, but hey these are exceptional times and there are plenty of bargains to choose between. My valuation spreadsheet shows a risk/reward ratio of 1:1 to 1:5.

To do - better valuation of pipeline. Though that is unlikely to materially effect my valuation.

* Whenever I use definitive phrases like maximum, you should read “likley maximum” or “probable maximum”. For example in Biota’s case, I have seen biotech companies trade below their cash as investors see no hope in the pipeline and concetrate solely on cash burn. So it is possible, but unlikley, that Biota could trade below their cash and the maximum you could loose is 100%.

Article One: Biota Analysis and Valuation Part 1 Quick look, good value.
Two: Biota Analysis and Valuation Part 2 Closer at the down and upside with probabilities and catalysts.
Three: Biota 2008 AGM 
Four: Biota under the microscope A closer look at the pipeline and management.  

[Edit 3 Nov 08 - On top of the usual disclaimers I will soon list another disclaimer that could easily be misconstrued or claimed to be a conflict of interest and should have been declared. I am not yet at liberty to list the extra disclaimer. The to be announced disclaimer has only influenced my analysis in that it increased the priority and to a degree the depth of the analysis. Though the current analysis of four posts is an average level for any company I invest in. ]