Solskin
It’s early days for Biohaven’s (NYSE:BHVN) ‘spinco‘ that started trading this week. Pfizer acquired Biohaven’s migraine assets. However, the residual stub of other assets and cash may have potential, and the CEO, Vlad Coric, from legacy Biohaven’s billion-dollar sale is now leading the ‘newco’ stub. The company’s valuation is undemanding and could have potential, though real upside hinges on various binary outcomes with phase 3 trials and sales targets for royalties. This creates a positive skew, but investor wipe-out is also possible.
$7.14/share in cash
Biohaven has $275M of cash and 38.5M shares outstanding based on the company’s registration statement. So that implies $7.14/share in cash at inception, though obviously cash burn is expected.
Rimegepant (Nurtec) and Zavegepant Royalty
The details are below, but Biohaven retains a royalty right on two drugs should combined sales exceed $5.25B a year (see details below). This royalty could pay up to $400M a year, though sales are nowhere close to the $5.25B level today, running at around $800M-$900M a year currently, but growing rapidly. Then Zavegepant has a PDUFA date in Q1 2023, which could add the next leg of growth.
To get the full payout, the drugs would have to sell around $8 billion a year combined. That would likely put these drugs in the top 30 selling drugs globally, that seems unlikely, but is not impossible.
For valuation purposes, I would put the chances of a material royalty payment at 5% and value the royalty stream capitalized at $3B. That works out to around $4/share in expected value, but is highly uncertain, so the range of outcomes is anywhere from 0 (most likely) to perhaps $100/share in the best case. Of course, watching the sales run-rates and Zavegepant approval (as well as other migraine related assets at Pfizer) will be important to evolve the probabilities here.
Still, simplistically, the fact that Pfizer paid $11.6B for these drugs suggests that peak sales may well be significantly under $5.25B in most scenarios, or else Pfizer got a very good deal very recently. In that case, ironically, you may not want to back the CEO on the other side of the transaction, who’s currently running Biohaven.
Here is the summary of the royalty agreement for reference (RemainCo is essentially now Pfizer, SpinCo is the current Biohaven):
Following the Spin-Off, RemainCo will be required to make certain tiered royalty payments at percentage rates in the low-teens to midteens to SpinCo in respect of aggregate annual net sales of rimegepant and zavegepant in the U.S. in excess of $5.25 billion, subject to an annual cap on royalties of $400 million per year (which cap will be reached if the aggregate annual net sales of rimegepant and zavegepant in the United States amount to $8.15 billion), for all years ended on or prior to December 31, 2040.
source: registration statement
Kv7 Platform
Then Biohaven retains the Kv7 platform which it acquired in April 2022 for $94M as a potential treatment for epilepsy and other mood and pain disorders, all in phase 1 trials. Assuming that transaction was at market value, that’s $2.46/share.
Phase 3 Trials
Then, while the company has a broad range of clinical discovery beyond migraines, it is notable that two phase 3 trials are in progress for treatments for Obsessive Compulsive Disorder and Spinal Muscular Atrophy.
The base rate of approval from phase 3 to approval is typically 50% to 60%, so there’s a reasonable chance of approval for one of these drugs on an expected outcome basis. The median value of an FDA approved drug is perhaps $400M.
Valuation
Thus we loosely have the following valuation:
| Asset | Notes | Value ($M) |
| Cash on balance sheet | Cash burn highly likely | 275M |
| Kv9 | Price paid April 2022 | 94M |
| Migraine royalties if blockbuster | Very broad range of outcomes here | 150M |
| Phase 3 candidates | Chance of approval for OCD or spinal muscular atrophy (assume one is approved at median drug valuation) | 400M |
| Other | Diverse range of platforms and other early stage research and a recently failed phase 3 drug etc. | 0M |
| Combined Value | 919M | |
| Value per share | 38.5M shares outstanding | ~$24/share |
Management Quality
The CEO has a strong track record creating the assets that Pfizer purchased for billions, and a credible academic background beyond that. He is apparently bringing a strong team to Biohaven, and equity ownership and equity incentives among executives appear high. Hence, incentives are aligned and management is strong. Indeed, the fact the CEO chose to move to ‘spinco’ is an encouraging sign.
Catalysts
It’s worth noting that to understand Biohaven today you have to wade through some relatively esoteric SEC filings and dig up past press releases, as the legacy investor relations site is gone.
In time, the company will produce attractive investor decks and do a better job marketing itself at conferences, since it only started trading on Monday, October 3, 2022.
Furthermore, industry buyers may have interest in the diverse range of Biohaven’s assets now they are separated from the larger migraine drugs consuming management’s time.
Therefore, as a spin-off, there are reasons to think that Biohaven may be reasonably well-positioned in the near term as it better markets itself to investors and potentially even acquirers.
Risks
Most of the value in Biohaven is speculative and binary. Cash is likely to be burned over time. Failure of both current phase 3 trials easily cuts my estimated valuation in half. Migraine royalties could very easily be zero. Therefore, though the expected value could look attractive, bear in mind that this is a small-cap pharma company dependent on a few outcomes going very well for value to be realized.
Also, even if various outcomes are successful, dilution is possible as equity raises may be needed to fund further research or bring drugs to market.
Conclusion
Biohaven appears to be an interesting, if speculative, setup. If phase 3 trials for OCD or spinal muscular atrophy perform well, or if their recently sold migraine treatments flourish under Pfizer’s management, then the company may see upside.
On the other hand, if Biohaven’s current ongoing phase 3 trials both fail to deliver results, then the company is likely fairly valued as a diverse platform of research assets.
The company may also be an interesting bolt-on acquisition to another pharma company, given the diversity of its portfolio relative to its estimated value.
Ultimately, Biohaven appears relatively inexpensive today on an expected value basis, but does carry material risk.
