BTG: Increasing Operating Leverage

In the same vein
US approval for Varithena represents another inflection point for BTG's, (BTG) Interventional Medicine (IM) business. Four commercial-stage products, which target the fast-growing interventional oncology and vascular markets, could take IM sales to c £390m by FY20. Our revised valuation of £2.2bn (606p/share) could rise to £2.3bn with pipeline success. Marketed assets plus Varithena are worth up to 564p, implying downside protection.

IM business: Another growth inflection point
FDA approval for Varithena, alongside recent acquisitions, represents yet another growth inflection point for IM. There are now has four commercial-stage products targeting the fast-growing interventional oncology (Beads, TheraSphere) and interventional vascular (Varithena, EkoSonic) markets. We expect the IM segment to deliver revenues of £392m in FY20 and achieve peak sales of £436m by FY24.

SP and LG businesses: Highly cash generative
Specialty Pharma (SP) revenues rose 3% y-o-y in H1, with acceleration in DigiFab (+33%) offsetting weakness in CroFab and Voraxaze. SP margins are strong, the segment is cash generative, and we project high single-digit growth (7% CAGR FY14-20). BTG is seeking new SP products to bolster growth. Licensing (LG) is a highly cash generative division due to growing Zytiga royalties (£42m in fiscal H1) and should receive first Lemtrada royalties in FY14.

Financials: Increasing operating leverage
Updating our model for the interims and Varithena approval drives a small increase (1-2%) in FY14 and FY15 revenues and a double-digit rise (10-19%) in underlying operating profit. We forecast FY14 revenues of £289m, underlying operating profit (pre-acquisition adjustments, reorganisation costs and share-based payments) of £76m, normalised EPS of 19p, and cash of £31m. We project FY15 revenues of £355m, underlying operating profit of £96m, diluted EPS of 22p and cash of £69m.

Valuation: Fair value rises to £2.2bn (606p/share)
We now value BTG at £2.2bn (606p/share) based on a probability-weighted, sum-of-the-parts DCF analysis. This compares to our previous valuation of £1.9bn or 516p/share. Pipeline successes could see our DCF rise to £2.3bn or 643p/share. Our fair value is underpinned by a valuation of 421p for marketed assets, which rises to 564p following Varithena launch. This implies considerable downside protection if the pipeline fails to achieve key clinical and regulatory milestones.

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