It can be tricky putting a price tag on a biotech company, especially one that offers no profits but promises of big success one day in the future. For those companies that are years away from a payoff, analysts depend on analyzing discounted cash flow (DCF). The process involves forecasting how much free cash flow can be generated by the drugs in a company’s portfolio and pipeline and then discounting the value of that future cash to determine present value, and thus the investment opportunity.
Guggenheim analyst Rohit Vanjani went through this process and came out today with a very upbeat and promising report on shares of Revance Therapeutics Inc (NASDAQ:RVNC). Vanjani explains why he is initiating coverage on RVNC with a Buy rating and a $42 price target.
Vanjani noted, “We value Revance using a DCF methodology, calculating anticipated profits from Revance’s RT002 botulinum toxin product through 2028. Revance is seeking approval for RT002 in glabellar lines (phase 3 reported), cervical dystonia (phase 3), and plantar fasciitis (phase 2). We believe fair value for Revance’s shares is $42, which represents ~20-25% of potential upside from current levels. Using a discount rate of 15%, and an exit EBITDA multiple of 4.0x on our estimated 2028 terminal year EBITDA of close to $850 million, we arrive at a $42 per share valuation. The 15% discount rate, we believe, adequately reflects the clinical development risk that yet remains with RT002, as well as the regulatory risk and execution risk for commercialization.”
For those who are not good at math, the analyst offers a few fundamental reasons to buy the stock:
- RT002, a longer-duration next gen neuromodulator could compete with Allergan’s Botox.
- Excipient peptide designed to add longer duration.
- First new neuromodulator product in more than 20 years, addressing ~$3B aesthetics/therapeutics market.
- Positive trials in glabellar lines, and ongoing trials in cervical dystonia, and plantar fasciitis.
- Ph2 results for therapeutic indication (plantar fasciitis) expected in 4Q17, and we anticipate positive results.
Revance Therapeutics has one of the best ratings by the Street. TipRanks reveals that RVNC has a Strong Buy analyst consensus rating with 5 back-to-back buy ratings in the last three months. However, the average analyst price target stands at $35.60, which suggests a slight potential upside.