WEBVTT 1 00:00:07.600 --> 00:00:10.600 Hello and welcome to this film which is devoted to 2 00:00:10.600 --> 00:00:14.600 the acquisition by Amgen of horizon therapatics. 3 00:00:13.600 --> 00:00:16.100 We are in an industry which 4 00:00:16.100 --> 00:00:19.200 is name Pharmaceuticals. And it seems that they are 5 00:00:19.200 --> 00:00:22.600 plenty of acquisition in the right time for shopping in 6 00:00:22.600 --> 00:00:23.800 the Biotech Industry. 7 00:00:24.500 --> 00:00:27.400 You all remember about fights a fighter made 8 00:00:27.400 --> 00:00:31.000 a lot of money on the vaccines against the covid-19 9 00:00:30.300 --> 00:00:33.700 when you make a lot of money. What 10 00:00:33.700 --> 00:00:36.500 can you do? You can return the cash to the shareholders or 11 00:00:36.500 --> 00:00:39.100 you can reinvest in the development of the company. 12 00:00:39.800 --> 00:00:43.300 Invest and grow research development 13 00:00:42.300 --> 00:00:45.800 Acquisitions and so on and basically 14 00:00:45.800 --> 00:00:48.800 it is a solution which has been adopted the 15 00:00:48.800 --> 00:00:52.000 strategy of Pfizer Pfizer announced 16 00:00:51.100 --> 00:00:55.200 in October 2022 the acquisition of biohaven 17 00:00:54.200 --> 00:00:57.500 for 11.6 billion dollars 18 00:00:57.500 --> 00:01:00.400 and very recently in March the acquisition 19 00:01:00.400 --> 00:01:03.300 of CJ and for 43 billion 20 00:01:03.300 --> 00:01:07.000 dollars. Now when you get cash from something which 21 00:01:06.100 --> 00:01:10.100 is maybe exceptional hopefully the question 22 00:01:09.100 --> 00:01:13.000 is what do you do with the Monet again return 23 00:01:12.300 --> 00:01:15.400 or invest traditional story 24 00:01:15.400 --> 00:01:19.400 now Amgen is offering 27.8 billion 25 00:01:18.400 --> 00:01:21.500 dollars for Horizon to 26 00:01:21.500 --> 00:01:24.900 Rapides. It was announced in December 2022 and 27 00:01:24.900 --> 00:01:27.700 it is ongoing. The reason for Amgen 28 00:01:27.700 --> 00:01:30.500 to buy Horizon is they want to develop 29 00:01:30.500 --> 00:01:33.900 they want to expand in rare diseases treatments. 30 00:01:35.100 --> 00:01:38.700 Us strategy now, I'm Jen was created and 31 00:01:38.700 --> 00:01:41.800 established around 1980 and 32 00:01:41.800 --> 00:01:44.300 they received the first FDA approval 33 00:01:44.300 --> 00:01:47.400 online 1989 for a drug 34 00:01:47.400 --> 00:01:48.700 with name was epogen. 35 00:01:49.400 --> 00:01:52.200 You understand that in the pharmaceutical industry. It takes 36 00:01:52.200 --> 00:01:55.300 time before the mermaid you start investing in research 37 00:01:55.300 --> 00:01:58.600 and development and getting through phase one two, three 38 00:01:58.600 --> 00:02:01.700 and approval it takes time. And then in 39 00:02:01.700 --> 00:02:04.000 the meantime, you have all these products which are in the 40 00:02:04.200 --> 00:02:07.600 pipeline. The company is in a technology, 41 00:02:07.600 --> 00:02:10.500 which is his name recombinant DNA. It's 42 00:02:10.500 --> 00:02:13.700 about biotech. It's about genetics. The 43 00:02:13.700 --> 00:02:16.600 company has been quite successful so far. They 44 00:02:16.600 --> 00:02:20.000 had a little bit of accident in 2012 because the 45 00:02:19.400 --> 00:02:22.600 campaign was accused of making some 46 00:02:22.600 --> 00:02:26.500 indications proposing to customers indications, 47 00:02:25.500 --> 00:02:28.300 which had not been approved by 48 00:02:28.300 --> 00:02:32.100 the FDA and illegal marketing practices 49 00:02:31.100 --> 00:02:35.100 a company had to pay one hand and 50 million 50 00:02:34.100 --> 00:02:38.800 dollars for penalties and 612 51 00:02:37.800 --> 00:02:40.300 million dollars to close all 52 00:02:40.300 --> 00:02:43.400 the complaints related with this really bad 53 00:02:43.400 --> 00:02:46.400 process. That being said the company developed 54 00:02:46.400 --> 00:02:48.700 a strategy which consists in R&D. 55 00:02:49.400 --> 00:02:53.300 Are a debit also plenty of Acquisitions companies firms 56 00:02:52.300 --> 00:02:55.000 cooperations and formulas. 57 00:02:55.800 --> 00:02:58.900 To give you some examples 2015 the Zima 58 00:02:58.900 --> 00:03:02.600 for 1.6 billion biringer ingelheim's 59 00:03:01.600 --> 00:03:04.600 the myeloma treatment in 60 00:03:04.600 --> 00:03:07.900 2016 2017 celga 61 00:03:07.900 --> 00:03:11.400 and the old Sarah program for 13.4 62 00:03:10.400 --> 00:03:14.000 billion 20.5% of 63 00:03:13.300 --> 00:03:16.700 by Gene Beijing which 64 00:03:16.700 --> 00:03:19.800 is a kind of phonetical joke because 65 00:03:19.800 --> 00:03:23.200 a company is located in Beijing for 66 00:03:22.200 --> 00:03:25.400 2.7 billion. It was in 20 67 00:03:25.400 --> 00:03:29.100 20 21 five prime plus plus four three 68 00:03:28.100 --> 00:03:31.200 point five billion. And the last 69 00:03:31.200 --> 00:03:34.000 one last year camel Centrics for three point seven 70 00:03:34.400 --> 00:03:37.200 billion. Now Horizon is much more but you know, 71 00:03:37.200 --> 00:03:40.800 it's a kind of continuation in investment. You 72 00:03:40.800 --> 00:03:43.800 can consider that the company is very much investing 73 00:03:43.800 --> 00:03:46.300 but it's also returning plenty of cash to 74 00:03:46.300 --> 00:03:49.900 shareholders. And so far the sales the 75 00:03:49.900 --> 00:03:52.000 revenue are not growing at a high rate 76 00:03:52.400 --> 00:03:55.600 the kagger increasing sales. I'm Jen 77 00:03:55.600 --> 00:03:55.700 from 78 00:03:55.800 --> 00:03:58.800 2019 to 2022 is 79 00:03:58.800 --> 00:04:01.300 just 4% per year and it 80 00:04:01.300 --> 00:04:04.200 was less last year. So of course there is a 81 00:04:04.200 --> 00:04:07.800 list of Acquisitions and if you take these four years the sub 82 00:04:07.800 --> 00:04:10.300 up to 23 billion dollars, but in the meantime, 83 00:04:10.300 --> 00:04:13.800 we share BuyBacks during the same years and 84 00:04:13.800 --> 00:04:16.900 dividend so cash return to shareholders account for 85 00:04:16.900 --> 00:04:19.500 38 billion. So 15 billion 86 00:04:19.500 --> 00:04:22.400 more given back to shareholders as opposed to 87 00:04:22.400 --> 00:04:24.300 reinvested in business operations. 88 00:04:25.100 --> 00:04:28.400 It's quite important to understand where the company stands today. 89 00:04:28.400 --> 00:04:31.400 Now if you compare and Benchmark, I'm Jen 90 00:04:31.400 --> 00:04:34.500 and Horizon. Amgen is bigger the sales 91 00:04:34.500 --> 00:04:37.700 in 2022 where 26 billion and 92 00:04:37.700 --> 00:04:40.600 for Horizon 3.6 billion. We'll 93 00:04:40.600 --> 00:04:42.400 see in a minute based on one product. 94 00:04:43.200 --> 00:04:46.500 But the sales grows, he's just 1% at Amgen when 95 00:04:46.500 --> 00:04:50.400 it is 12% currently for Horizon a 96 00:04:49.400 --> 00:04:53.200 discussion on growth is for layer. Now 97 00:04:52.200 --> 00:04:55.800 on a commercial point of in terms of returns sales. 98 00:04:55.800 --> 00:04:58.300 The return sales is much higher than 99 00:04:58.300 --> 00:05:01.800 the one for Horizon. So 36% as 100 00:05:01.800 --> 00:05:04.800 opposed to 17% the return Capital 101 00:05:04.800 --> 00:05:08.400 you remember the performance indicator is 29% 102 00:05:07.400 --> 00:05:10.600 and only 12% for 103 00:05:10.600 --> 00:05:11.600 Horizon. 104 00:05:12.400 --> 00:05:15.400 But you remember that to calculate the return Capital you 105 00:05:15.400 --> 00:05:18.600 divide the operating income a bit by Capital employed in 106 00:05:18.600 --> 00:05:21.500 the capital employed you have good. Will you 107 00:05:21.500 --> 00:05:24.800 are Branch you have catalyzed R&D acquired R&D 108 00:05:24.800 --> 00:05:27.500 and so on so forth. So the consequence of Acquisitions, if 109 00:05:27.500 --> 00:05:30.300 you get rid of that in the calculation of 110 00:05:30.300 --> 00:05:33.700 the capital employed you get to something which is operating Capital 111 00:05:33.700 --> 00:05:36.700 employed and then you can calculate the return 112 00:05:36.700 --> 00:05:40.600 which is generated by your business operations. Whatever 113 00:05:39.600 --> 00:05:42.100 the cost you paid for 114 00:05:42.100 --> 00:05:45.700 the Acquisitions and then it kind of return on investment. I 115 00:05:45.700 --> 00:05:48.400 often name that return investment. It's more 116 00:05:48.400 --> 00:05:51.600 than 500% for MJ. So you 117 00:05:51.600 --> 00:05:54.900 understand that what is penalizing the company is Goodwill and 118 00:05:54.900 --> 00:05:57.300 Brands and capitalize are the and so 119 00:05:57.300 --> 00:06:01.000 on so forth. The return investment for Horizon is only quotes 120 00:06:00.900 --> 00:06:03.700 78% which is still very 121 00:06:03.700 --> 00:06:06.100 high the consequence of all these 122 00:06:06.100 --> 00:06:10.600 metrics is that the market cap for ham Jen is 129 billion. 123 00:06:10.600 --> 00:06:12.300 It's a very big company with 124 00:06:12.400 --> 00:06:15.700 Wrong capitalization as far as Horizon to 125 00:06:15.700 --> 00:06:18.900 Rapides is concerned the market cap was 14 billion 126 00:06:18.900 --> 00:06:21.800 before the offer made by Amgen 127 00:06:21.800 --> 00:06:24.900 and today it's 25 billion dollars. So 128 00:06:24.900 --> 00:06:27.500 it's smaller. That's quite normal 129 00:06:27.500 --> 00:06:28.900 if you look at the metrics. 130 00:06:30.300 --> 00:06:33.300 We had a look at the story of Amgen. Now 131 00:06:33.300 --> 00:06:36.700 Horizon therapatics is a very specific Company. The 132 00:06:36.700 --> 00:06:39.900 company was created in 2004 by 133 00:06:39.900 --> 00:06:43.000 a gentleman whose name is Tim Walbert is 134 00:06:42.900 --> 00:06:46.000 chairman of the board chief executive officer 135 00:06:45.600 --> 00:06:48.500 founder and customer and 136 00:06:48.500 --> 00:06:52.100 patient now at the origin of horizon zerapatics, 137 00:06:51.100 --> 00:06:54.700 there's the idea of Team Wahlberg and 138 00:06:54.700 --> 00:06:57.700 the idea comes from the fact that is suffering from 139 00:06:57.700 --> 00:07:00.800 these rare diseases. One 140 00:07:00.800 --> 00:07:03.700 of them only want to develop an offer a 141 00:07:03.700 --> 00:07:06.800 portfolio of treatments for these rare diseases. 142 00:07:06.800 --> 00:07:09.300 You understand the communication point of 143 00:07:09.300 --> 00:07:12.400 view that when the CEO says I am the one 144 00:07:12.400 --> 00:07:16.000 who is using the same treatment as you the customers, 145 00:07:15.500 --> 00:07:17.400 this is quite strong. 146 00:07:18.300 --> 00:07:21.400 Now the company is very much based in the United States 147 00:07:21.400 --> 00:07:24.500 97% of sales and revenues 148 00:07:24.500 --> 00:07:27.500 are generated by the company in the United States, but 149 00:07:27.500 --> 00:07:31.300 the company's paying its taxes in Ireland because 150 00:07:30.300 --> 00:07:33.600 in 2014 the company runs 151 00:07:33.600 --> 00:07:36.800 something which is never tax inversion and they 152 00:07:36.800 --> 00:07:40.500 did it three days before all the legislation changes about 153 00:07:39.500 --> 00:07:42.900 these possibility to change 154 00:07:42.900 --> 00:07:45.400 the localization of the head office. In fact 155 00:07:46.400 --> 00:07:49.500 Horizon acquired vidara Therapeutics in 156 00:07:49.500 --> 00:07:52.500 Ireland for 660 million dollars. This 157 00:07:52.500 --> 00:07:55.200 is not the important figure and they moved 158 00:07:55.200 --> 00:07:58.200 the head office to Ireland at the consequence. Now 159 00:07:58.200 --> 00:08:02.100 the company's paying taxes on the basis of 15% as 160 00:08:01.100 --> 00:08:04.500 opposed to 35% at that 161 00:08:04.500 --> 00:08:07.700 time. When you save 20% of tax, what 162 00:08:07.700 --> 00:08:10.500 do you do with the money it's cash which is available. And the 163 00:08:10.500 --> 00:08:13.400 company says I pay less taxes. I 164 00:08:13.400 --> 00:08:16.500 have more cash available to make Acquisitions for 165 00:08:16.500 --> 00:08:19.800 the sake and the wealth of my dear beloved shareholders. 166 00:08:19.800 --> 00:08:22.500 Now, you understand that there are some questions behind that 167 00:08:22.500 --> 00:08:25.600 put yourself in the shoes of the US government. 168 00:08:26.600 --> 00:08:29.400 You're in charge of trying to prevent the 169 00:08:29.400 --> 00:08:33.300 companies to move from USA to anywhere 170 00:08:32.300 --> 00:08:35.700 else kinds of tax Havens, right? 171 00:08:35.700 --> 00:08:38.700 What would you recommend to change in the 172 00:08:38.700 --> 00:08:42.300 legislation? Would you recommend to change the law unforbids 173 00:08:41.300 --> 00:08:44.500 this kind of process now, it's forbidden 174 00:08:44.500 --> 00:08:47.700 and you're not allowed to move your head office tax Wise 175 00:08:47.700 --> 00:08:50.500 from I don't know, New York to Dublin. 176 00:08:51.600 --> 00:08:54.500 Second alternative. Do you reduce the 177 00:08:54.500 --> 00:08:57.300 corporate tax rate? So that companies have 178 00:08:57.300 --> 00:09:00.400 less motivation to move abroad you 179 00:09:00.400 --> 00:09:03.400 understand that if the situation is currently 35 as opposed 180 00:09:03.400 --> 00:09:06.300 to 15. The motivation is high if it 181 00:09:06.300 --> 00:09:09.200 is 25 or 20 the motivation is 182 00:09:09.200 --> 00:09:12.300 less because it's costly to move the head 183 00:09:12.300 --> 00:09:12.600 office. 184 00:09:13.500 --> 00:09:17.000 Now, of course, there's no one best 185 00:09:16.400 --> 00:09:19.500 way but just take a couple of minutes thinking 186 00:09:19.500 --> 00:09:22.800 about the implications of these 187 00:09:22.800 --> 00:09:25.600 two Alternatives. If you decide to implement one 188 00:09:25.600 --> 00:09:28.700 as opposed to the other, it's quite an interesting 189 00:09:28.700 --> 00:09:31.300 intellectual process. Now, let's move 190 00:09:31.300 --> 00:09:34.100 on with Horizon Therapeutics. The capital is paying 191 00:09:34.100 --> 00:09:37.700 less taxes. So the company holds more cash. What do 192 00:09:37.700 --> 00:09:41.600 you do with the cash make Acquisitions Hyperion torapatics 193 00:09:40.600 --> 00:09:43.700 for one point something billion in 20 194 00:09:43.700 --> 00:09:46.400 15 one year after the tax 195 00:09:46.400 --> 00:09:49.700 inversion earlier Raptor pharmaceutical for 196 00:09:49.700 --> 00:09:53.200 0.6 billion recently the lrbo 197 00:09:52.200 --> 00:09:54.700 for 3 billion. 198 00:09:55.300 --> 00:09:58.600 Interestingly the company tried to take over 199 00:09:58.600 --> 00:10:01.200 Diplomat and Diplomat. It 200 00:10:01.200 --> 00:10:05.400 was not successful at all in 2015 Horizon 201 00:10:04.400 --> 00:10:07.500 is offering three billion dollars 202 00:10:07.500 --> 00:10:10.200 thirty three dollars per share. 203 00:10:10.200 --> 00:10:13.100 Remember this figure to buy 100% of 204 00:10:13.100 --> 00:10:16.900 Diplomat shares. The offer is rejected by the board of Diplomat 205 00:10:16.900 --> 00:10:19.300 this as a price is not high enough, of course, 206 00:10:19.300 --> 00:10:22.500 they always say that but they are also going to implement 207 00:10:22.500 --> 00:10:26.300 a poison pill which is named shareholders rights 208 00:10:25.300 --> 00:10:28.000 plan. If there is 209 00:10:28.200 --> 00:10:31.300 a whole style take over and if a Raider holds most and 10% 210 00:10:31.300 --> 00:10:34.400 of the share, you are allowed to flood the market with new 211 00:10:34.400 --> 00:10:37.900 shares diluting the process and that's just impossible 212 00:10:37.900 --> 00:10:39.000 to buy the company. 213 00:10:39.800 --> 00:10:42.500 But this is about a poison pill it was nicely 214 00:10:42.500 --> 00:10:45.600 complemented and supported by a decision 215 00:10:45.600 --> 00:10:48.700 taken by the superior court of justice in 216 00:10:48.700 --> 00:10:51.300 California. And the quarter just 217 00:10:51.300 --> 00:10:54.500 said, hey, you know Horizon you 218 00:10:54.500 --> 00:10:58.200 use some confidential information to 219 00:10:57.200 --> 00:11:00.400 prepare your takeover on Diplomat, 220 00:11:00.400 --> 00:11:03.300 which is absolutely ill. You're not 221 00:11:03.300 --> 00:11:06.200 allowed to do that. And this is why there was this kind 222 00:11:06.200 --> 00:11:09.300 of Justice decision, which was a nice compliment to 223 00:11:09.300 --> 00:11:12.000 the poison pill. What was the story about? 224 00:11:12.800 --> 00:11:15.900 A few years before Horizon and 225 00:11:15.900 --> 00:11:18.600 Diplomat they made an offer joint 226 00:11:18.600 --> 00:11:22.400 offer to buy from Johnson & Johnson a portfolio 227 00:11:21.400 --> 00:11:24.800 products including Nucynta. 228 00:11:25.500 --> 00:11:28.200 The art field was rejected the withdraw the 229 00:11:28.200 --> 00:11:31.500 offer whatever end of the story but in 230 00:11:31.500 --> 00:11:35.000 order to make the offer you need Horizon to 231 00:11:34.300 --> 00:11:37.600 know a little bit about papermed and diplomed a 232 00:11:37.600 --> 00:11:40.900 little bit about Horizon. So you have access to confidential information. Of 233 00:11:40.900 --> 00:11:43.100 course, you sign an NDA and so on so forth, 234 00:11:43.100 --> 00:11:46.300 but you know, what is happening in the culture of 235 00:11:46.300 --> 00:11:50.000 your beloved neighbor later on Diplomat bold 236 00:11:49.600 --> 00:11:52.100 Lucinda, which was part of the portfolio and they 237 00:11:52.100 --> 00:11:55.700 had one billion dollars lucinta is 238 00:11:55.700 --> 00:11:58.600 a painkiller but it belongs to a 239 00:11:58.600 --> 00:12:02.100 family of product which is named opioids. All 240 00:12:01.100 --> 00:12:04.400 right, and so the Wall Street 241 00:12:04.400 --> 00:12:07.000 Journal are not already in 2015. Well say, you 242 00:12:07.900 --> 00:12:10.400 know opioid it's it's a cash cow, but it's 243 00:12:10.400 --> 00:12:13.700 a little bit of problem on a technological unhealth point 244 00:12:13.700 --> 00:12:16.400 of views are plenty of Critics on that now 245 00:12:16.400 --> 00:12:19.600 Diplomat by his new center and wants to 246 00:12:19.600 --> 00:12:22.000 fully benefit from Lucinda. 247 00:12:22.700 --> 00:12:25.400 And says that service regards per share does not 248 00:12:25.400 --> 00:12:28.500 reflect the true value of new center and they are 249 00:12:28.500 --> 00:12:31.500 right because when Horizon makes the 250 00:12:31.500 --> 00:12:34.200 offer it is at 33 dollars a few months 251 00:12:34.200 --> 00:12:37.800 later mid 2015 and of 252 00:12:37.800 --> 00:12:40.300 2015 the stock price reaches a 253 00:12:40.300 --> 00:12:43.200 high of 125 dollars per share. 254 00:12:43.200 --> 00:12:46.500 This is why Diplomat rejected the board 255 00:12:46.500 --> 00:12:50.100 rejected the offer but nucinta 256 00:12:49.100 --> 00:12:52.300 is part of opioid and you 257 00:12:52.300 --> 00:12:55.400 know all the problems related with that with plenty of 258 00:12:55.400 --> 00:12:56.100 death. 259 00:12:56.900 --> 00:12:59.600 This is why later on Diplomat had 260 00:12:59.600 --> 00:13:02.700 to sell Nucynta for 10 million dollars 261 00:13:02.700 --> 00:13:06.700 acquired one billion dollars Diplomat 262 00:13:05.700 --> 00:13:08.300 was really very much in 263 00:13:08.300 --> 00:13:11.700 trouble. They change the name of the company as they moved to assess 264 00:13:11.700 --> 00:13:14.100 you changing. The name does not get rid of problems and 265 00:13:14.100 --> 00:13:17.500 issues and today currently the stock price is six 266 00:13:17.500 --> 00:13:18.500 dollars per share. 267 00:13:19.200 --> 00:13:23.000 But at the end of the day, it was probably not a bad news for Horizon not 268 00:13:22.500 --> 00:13:24.600 to buy the permit. 269 00:13:25.100 --> 00:13:28.100 But let's go back to Horizon. Now. There is an 270 00:13:28.100 --> 00:13:32.200 acquisition. There's a price. Let's try to evaluate the company to evaluate 271 00:13:31.200 --> 00:13:34.400 a company you use a free cash flows, which 272 00:13:34.400 --> 00:13:37.600 you discount at the weighted average cost of capital free cash 273 00:13:37.600 --> 00:13:40.100 flows. The formula is very well known it's a bit 274 00:13:40.100 --> 00:13:44.000 I minus change in working capital requirement inventories and 275 00:13:43.500 --> 00:13:46.700 receivables that have payables minus Capital expenditures 276 00:13:46.700 --> 00:13:49.600 minus taxes you pay on their bit. You 277 00:13:49.600 --> 00:13:52.200 take their current a bit. It's what I 278 00:13:52.200 --> 00:13:55.300 did by the way in terms of Delta increase in 279 00:13:55.300 --> 00:13:58.100 the working capital requirement. I can't commit to 280 00:13:58.100 --> 00:14:02.000 the working capital requirement which I'm multiplied by the current growth rate 281 00:14:01.300 --> 00:14:04.500 of the revenues to our present 282 00:14:04.500 --> 00:14:07.100 Capital expenditures. It's about 2% to 283 00:14:07.100 --> 00:14:09.700 sales. It's not very Capital intensive. It's kind of business. 284 00:14:10.700 --> 00:14:13.600 The free cash flow which you get after this calculation is 285 00:14:13.600 --> 00:14:15.800 880 million dollars. 286 00:14:16.700 --> 00:14:19.300 Now this free cash flow has to be discounted and 287 00:14:19.300 --> 00:14:20.700 the way the average cost of capital. 288 00:14:21.600 --> 00:14:24.300 You remember cost of equity time share of 289 00:14:24.300 --> 00:14:27.700 equity cost of that time share of that share of that Neil almost 290 00:14:27.700 --> 00:14:30.100 zero. So the walk is the cost of 291 00:14:30.100 --> 00:14:33.000 equity to calculate the cost of equity. You need to know 292 00:14:33.200 --> 00:14:36.200 the government born. Right and you're going to add a risk 293 00:14:36.200 --> 00:14:39.300 premium, which is a beta the systematic risk coefficient. 294 00:14:39.300 --> 00:14:42.300 You remember the correlation to stock market index which 295 00:14:42.300 --> 00:14:45.100 is supposedly the correlation between the value of the 296 00:14:45.100 --> 00:14:48.600 company and macroeconomy conditions and the beta 297 00:14:48.600 --> 00:14:52.100 is multiplied by the average historical Market risk premium. 298 00:14:52.800 --> 00:14:55.400 The beta as you see on the graph is about 299 00:14:55.400 --> 00:14:58.300 one 36 months beta you 300 00:14:58.300 --> 00:15:01.400 remember the 12 months beta is much more for a time. It's quite 301 00:15:01.400 --> 00:15:04.700 stable around one. No big deal about the calculation 302 00:15:04.700 --> 00:15:08.000 work again is cost of equity garment 303 00:15:07.300 --> 00:15:11.200 bone rate currently about 3.4 6% 304 00:15:10.200 --> 00:15:13.300 for the equity Market which premium which you 305 00:15:13.300 --> 00:15:17.900 multiply by one to add 3.4 and you get 9.4% again, 306 00:15:17.900 --> 00:15:20.400 the cost of capital does not include any cost of 307 00:15:20.400 --> 00:15:23.600 that now once you have calculated the weighted 308 00:15:23.600 --> 00:15:26.400 average cost of capital and calculated the 309 00:15:26.400 --> 00:15:29.300 current cash flow, you can discount the free 310 00:15:29.300 --> 00:15:31.900 cash flows which are going to be generated by the company in the future. 311 00:15:33.200 --> 00:15:36.100 But then there are two situations if the company 312 00:15:36.100 --> 00:15:39.400 is at maturity the free cash flow is going to smoothly grow 313 00:15:39.400 --> 00:15:42.200 by G percentage and every year and then you 314 00:15:42.200 --> 00:15:45.400 have a beautiful formula which tells you that the Enterprise Value 315 00:15:45.400 --> 00:15:48.100 is a kind of terminal value because you are 316 00:15:48.100 --> 00:15:51.100 at maturity. It's free cash flow to the multiplied by 1 plus 317 00:15:51.100 --> 00:15:54.800 rows divided by walk less grows. If 318 00:15:54.800 --> 00:15:57.500 you remember a bit about many many eggs, it's about 319 00:15:57.500 --> 00:16:00.200 geometric series one plus X Plus x 320 00:16:00.200 --> 00:16:03.700 to the second power blah blah, which is converging towards 321 00:16:03.700 --> 00:16:06.300 the formula which shows on the screen. 322 00:16:06.300 --> 00:16:08.500 Now the question is, what about the growth rate? 323 00:16:09.500 --> 00:16:12.500 And then you have to Alternatives, you know, 324 00:16:12.500 --> 00:16:16.000 the price rate you calculate the Enterprise Value, you know, 325 00:16:15.200 --> 00:16:18.800 the Enterprise Value, then you can calculate the underlying 326 00:16:18.800 --> 00:16:21.300 growth rate which justifies the Enterprise 327 00:16:21.300 --> 00:16:22.700 Value on the stock market. 328 00:16:23.700 --> 00:16:26.400 If you take a stock price of $62 329 00:16:26.400 --> 00:16:29.300 per share, which is a pre takeover price. 330 00:16:30.100 --> 00:16:33.400 It represents an Enterprise value of 14.4 billion dollars, 331 00:16:33.400 --> 00:16:36.400 which is justified by a kind 332 00:16:36.400 --> 00:16:38.800 of underline growth of 3.3% 333 00:16:39.900 --> 00:16:43.300 Three percent it's less than inflation today. It's 334 00:16:42.300 --> 00:16:45.600 a kind of History called inflation rate for 335 00:16:45.600 --> 00:16:48.400 the United States. So you understand that at the 336 00:16:48.400 --> 00:16:51.900 end of the day. The company was probably under revolved 337 00:16:51.900 --> 00:16:52.600 with it by the market. 338 00:16:54.200 --> 00:16:57.500 If you take the offered price for the Takeover, the Enterprise Value 339 00:16:57.500 --> 00:17:00.400 is about 27 billion dollars. 340 00:17:01.500 --> 00:17:04.900 And then it is justified by a growth 341 00:17:04.900 --> 00:17:09.200 in our revenues by 6.1% 6.1 342 00:17:07.200 --> 00:17:10.400 is kind of inflation plus 343 00:17:10.400 --> 00:17:13.200 GDP grows. No big deal about 344 00:17:13.200 --> 00:17:16.400 that. The problem about the calculation is that the company's 345 00:17:16.400 --> 00:17:19.900 definitely not at maturity yet. This 346 00:17:19.900 --> 00:17:22.000 is why you need a second method which is a little bit 347 00:17:22.300 --> 00:17:25.800 more sophisticated. It's a two-step model first 348 00:17:25.800 --> 00:17:29.200 high growth second. Maturity Enterprise 349 00:17:28.200 --> 00:17:31.500 Value is a present value of the cash 350 00:17:31.500 --> 00:17:34.400 flows when the company is fast growing plus the terminal 351 00:17:34.400 --> 00:17:37.200 value of the company you use the same formula with a free 352 00:17:37.200 --> 00:17:40.500 cash flow divided by workplace grows, which you discount 353 00:17:41.300 --> 00:17:44.300 No big deal. The question is what is a growth during 354 00:17:44.300 --> 00:17:47.000 this first phase and what will be the growth in the long term? 355 00:17:47.700 --> 00:17:50.300 I took 12% for the next 10 years, 356 00:17:50.300 --> 00:17:53.900 which is a current growth rate. And I took 2.5% which 357 00:17:53.900 --> 00:17:56.400 is a little bit less than inflation for the 358 00:17:56.400 --> 00:17:59.300 terminal value calculation and at the end of the day, what 359 00:17:59.300 --> 00:18:02.400 do you get you get the same Enterprise Value as a one which 360 00:18:02.400 --> 00:18:04.600 is offered today by Amgen. 361 00:18:05.400 --> 00:18:08.500 110 dollars per share as supposed to one hand 362 00:18:08.500 --> 00:18:11.200 16.5 now you understand that the price which 363 00:18:11.200 --> 00:18:14.300 is offered by mg and is consistent with you keep on 364 00:18:14.300 --> 00:18:17.200 growing at 12% and then a terminal 365 00:18:17.200 --> 00:18:20.500 value. It takes into account 2.5% looks quite 366 00:18:20.500 --> 00:18:21.100 reasonable. 367 00:18:22.100 --> 00:18:25.500 But the question is is it the right way to evaluate a 368 00:18:25.500 --> 00:18:27.400 company in pharmaceutical industry? 369 00:18:28.300 --> 00:18:31.200 When you want to evaluate a company, there's a kind of general rule. 370 00:18:31.200 --> 00:18:34.200 The value for company is the sum of the 371 00:18:34.200 --> 00:18:37.800 value of the existing embedded assets put 372 00:18:37.800 --> 00:18:39.100 the value of growth options. 373 00:18:39.900 --> 00:18:42.700 To make it simple. The existing assets are 374 00:18:42.700 --> 00:18:45.200 generating the current and near future 375 00:18:45.200 --> 00:18:48.800 free cash flows. But in a long time the value 376 00:18:48.800 --> 00:18:51.400 of the company is about exercising growth 377 00:18:51.400 --> 00:18:54.600 options. This is I identifying projects 378 00:18:54.600 --> 00:18:57.500 and implementing the growth options, which is going to generate 379 00:18:57.500 --> 00:18:59.400 long term free cash flows. 380 00:19:00.300 --> 00:19:03.400 What about these growth option? It's about competences. It's about 381 00:19:03.400 --> 00:19:06.300 skills. It's about Rd. It's about human capital. It's 382 00:19:06.300 --> 00:19:09.400 about reputation The credibility of your industry and 383 00:19:09.400 --> 00:19:12.700 The credibility of the company within the industry. All these 384 00:19:12.700 --> 00:19:15.600 assets are intangible assets. It 385 00:19:15.600 --> 00:19:18.600 does nothing to do with property plant and equipment in 386 00:19:18.600 --> 00:19:21.500 order to understand the difference between an existing asset 387 00:19:21.500 --> 00:19:23.900 and a growth option. There's an interesting case. 388 00:19:24.800 --> 00:19:27.700 You remember any Academy? We studied the 389 00:19:27.700 --> 00:19:30.600 acquisition of farmer said by Gilead the 390 00:19:30.600 --> 00:19:33.900 treatment which had been developed by pharmaceut was extremely 391 00:19:33.900 --> 00:19:37.700 valid and successful for hepatitis C 392 00:19:36.700 --> 00:19:39.900 pharmaceut was a One Drug 393 00:19:39.900 --> 00:19:40.500 Company. 394 00:19:41.300 --> 00:19:44.700 So what is a value for one project One Drug 395 00:19:44.700 --> 00:19:47.200 Company? It is yanet present value, 396 00:19:47.200 --> 00:19:51.100 which you are going to generate out of selling the product multiplied by 397 00:19:50.100 --> 00:19:52.900 the probability gives you the approval. 398 00:19:53.600 --> 00:19:56.900 Now in the first calculations made by Gilead 399 00:19:56.900 --> 00:20:00.700 the selling price of the drug walls 36,000 400 00:19:59.700 --> 00:20:02.500 and in reality 401 00:20:02.500 --> 00:20:05.300 once they acquire the company and they got the approval 402 00:20:05.300 --> 00:20:08.800 from the FDA the double the price the double 403 00:20:08.800 --> 00:20:11.900 the price to 72,000 and why 404 00:20:11.900 --> 00:20:14.600 because the alternative on a 405 00:20:14.600 --> 00:20:17.500 health care point of view is a lever transplant 406 00:20:17.500 --> 00:20:21.200 which costs by itself 200,000 and 407 00:20:20.200 --> 00:20:24.300 which requires an animal treatment forever 408 00:20:23.300 --> 00:20:27.400 for the rest of your life which costs 40,000 409 00:20:26.400 --> 00:20:29.500 per year. So you understand 410 00:20:29.500 --> 00:20:32.500 that if you propose to completely cures disease 411 00:20:32.500 --> 00:20:35.700 for 72,000. Everybody's going 412 00:20:35.700 --> 00:20:38.600 to accept on the financial point of view. There were some negative 413 00:20:38.600 --> 00:20:41.000 consequences on a reputation point of view 414 00:20:41.900 --> 00:20:44.300 forget now, if you look at the revenues generated by 415 00:20:44.300 --> 00:20:47.300 the portfolio of products propose and 416 00:20:47.300 --> 00:20:50.300 Soul by Gilead on the treatment of the disease 417 00:20:50.300 --> 00:20:52.600 you see that there is an increase in Revenue. 418 00:20:53.600 --> 00:20:56.300 And it goes down and why does 419 00:20:56.300 --> 00:20:59.400 it go down simply because your product is absolutely 420 00:20:59.400 --> 00:21:03.400 great and people are cured forever. So 421 00:21:02.400 --> 00:21:06.200 the disease simply disappears. 422 00:21:05.200 --> 00:21:08.500 It's a disease disappears. The cash 423 00:21:08.500 --> 00:21:11.400 flow is also are disappearing. So it's a one 424 00:21:11.400 --> 00:21:14.000 drug product and there's no growth option behind that. 425 00:21:14.700 --> 00:21:17.100 Interestingly When You observe the evolution of the 426 00:21:17.100 --> 00:21:20.500 Gilead stock price, the company's acquiring 427 00:21:20.500 --> 00:21:23.700 farmer said doublings are selling price making a 428 00:21:23.700 --> 00:21:26.200 lot of money and a stuck price of Gilead. He's 429 00:21:26.200 --> 00:21:29.800 going to go skyrocketing especially against a 430 00:21:29.800 --> 00:21:32.800 NASDAQ and then what happens farmer said 431 00:21:32.800 --> 00:21:35.700 is over farmer said he's over because you get 432 00:21:35.700 --> 00:21:38.200 to the end of the story and then the stock 433 00:21:38.200 --> 00:21:41.100 price collapses and if you look at the evolution of growth 434 00:21:41.100 --> 00:21:44.200 options at Gilead you understand that farmer said 435 00:21:44.200 --> 00:21:45.200 was a one shot 436 00:21:45.900 --> 00:21:48.500 and gross options are not that very big in 437 00:21:48.500 --> 00:21:50.000 their market value of the company. 438 00:21:51.300 --> 00:21:54.900 Let's go back to this point. What about existing assets at 439 00:21:54.900 --> 00:21:57.200 Amgen? The company's is 440 00:21:57.200 --> 00:22:00.200 marketing two products, which you can for about one 441 00:22:00.200 --> 00:22:03.200 third of the revenues, but when you look at when the 442 00:22:03.200 --> 00:22:06.600 products where developed and when this is 443 00:22:06.600 --> 00:22:09.300 started marketing and commercializing these products you understand 444 00:22:09.300 --> 00:22:12.300 that the company is under the threat of a patent Cliff 445 00:22:12.300 --> 00:22:15.200 the patent Leaf is when your pattern gets too 446 00:22:15.200 --> 00:22:18.200 maturity and the free cash flow falls down because there 447 00:22:18.200 --> 00:22:21.600 will be generics and so on so forth, of course the company announces 448 00:22:21.600 --> 00:22:24.600 four phase three positive results 449 00:22:24.600 --> 00:22:27.800 for project, but it's only phase 450 00:22:27.800 --> 00:22:30.300 three positive results not yet approval just one 451 00:22:30.300 --> 00:22:33.200 approval in 2022. So the question 452 00:22:33.200 --> 00:22:36.600 is grow the sales grows revenues grow the 453 00:22:36.600 --> 00:22:37.500 pipeline. 454 00:22:38.300 --> 00:22:42.100 And Horizon is proposing plenty of growth option 455 00:22:41.100 --> 00:22:44.500 as a complement to the current existing 456 00:22:44.500 --> 00:22:47.300 asset, of course with one product which was 457 00:22:47.300 --> 00:22:50.200 launched in 2022 the generate more than 458 00:22:50.200 --> 00:22:53.200 two billion dollars in sales, which is more than 50% of 459 00:22:53.200 --> 00:22:56.700 the total revenues of the company. There is another product which 460 00:22:56.700 --> 00:22:59.600 was launched in 2010 for the treatment of the gout 461 00:22:59.600 --> 00:23:02.700 and it represents 20% of the revenue 462 00:23:02.700 --> 00:23:04.300 700 million dollars. 463 00:23:05.200 --> 00:23:08.400 But what is interesting in the communication of the company is that they 464 00:23:08.400 --> 00:23:12.200 mentioned that there is no competitor product. No 465 00:23:11.200 --> 00:23:14.600 FDA approved competitors so 466 00:23:14.600 --> 00:23:18.000 far. There are some under process of approvement 467 00:23:17.600 --> 00:23:20.700 products and so on so forth but so far there 468 00:23:20.700 --> 00:23:23.700 are on the planet. So as far as a company's existing assets 469 00:23:23.700 --> 00:23:26.500 are concerned life is okay, but in addition 470 00:23:26.500 --> 00:23:28.300 to that there are plenty of growth options. 471 00:23:29.200 --> 00:23:32.300 They have five products under phase three 472 00:23:32.300 --> 00:23:35.800 phase three is quite close to completion and approval. 473 00:23:35.800 --> 00:23:38.400 They have 11 products in 474 00:23:38.400 --> 00:23:41.100 face, too. So you understand that the company is 475 00:23:41.100 --> 00:23:45.000 a collection is a portfolio of growth options. Now, 476 00:23:44.200 --> 00:23:47.300 what is a value of a company at large? 477 00:23:47.300 --> 00:23:50.600 And what is the value of a pharmaceutical company It's a 478 00:23:50.600 --> 00:23:53.400 combination of probability because you 479 00:23:53.400 --> 00:23:56.600 are plenty of projects product in face to face three. 480 00:23:56.600 --> 00:23:59.400 The question is what is a probabilities that they 481 00:23:59.400 --> 00:24:01.700 receive the approval from the FDA. 482 00:24:02.400 --> 00:24:06.300 And probability is combined with sustainability. 483 00:24:05.300 --> 00:24:08.400 What is sustainability about 484 00:24:08.400 --> 00:24:11.400 durability and during business 485 00:24:11.400 --> 00:24:14.800 is your ability to capitalize on your skills 486 00:24:14.800 --> 00:24:18.000 in house so that you can develop and 487 00:24:17.600 --> 00:24:20.600 manage products so that you can I don't 488 00:24:20.600 --> 00:24:23.600 Define targets you can identify the 489 00:24:23.600 --> 00:24:26.800 right targets and pay the right price and integrate in 490 00:24:26.800 --> 00:24:30.100 your business operations and sustainability is 491 00:24:29.100 --> 00:24:32.800 very much about the growth options together 492 00:24:32.800 --> 00:24:35.400 with the quality of execution when it 493 00:24:35.400 --> 00:24:38.000 is a plan to the current existing assets. 494 00:24:38.800 --> 00:24:42.100 When I make the calculations for Horizon to 495 00:24:41.100 --> 00:24:44.500 Rapid existing assets, I would 496 00:24:44.500 --> 00:24:48.200 name that the first part of the Enterprise Value growth 497 00:24:47.200 --> 00:24:51.000 during ten years. It was accounting for 40% which 498 00:24:50.200 --> 00:24:53.700 is quite High fear the growth options 499 00:24:53.700 --> 00:24:56.400 were counting for 60% of the value. 500 00:24:56.400 --> 00:24:59.500 If you're experiencing this kind of calculation, you 501 00:24:59.500 --> 00:25:03.300 lose that grows options. Sometimes it's not 60% It's 80% 502 00:25:02.300 --> 00:25:05.300 of the value of the company. But what 503 00:25:05.300 --> 00:25:08.600 about these growth options? How do you generate? How do 504 00:25:08.600 --> 00:25:11.800 you I don't Define how do you exercise growth options 505 00:25:11.800 --> 00:25:14.900 with management and technical skills 506 00:25:14.900 --> 00:25:17.900 the ability to identify the ability 507 00:25:17.900 --> 00:25:20.500 to integrate the ability to properly run 508 00:25:20.500 --> 00:25:23.700 these growth options. And so 509 00:25:23.700 --> 00:25:26.600 you understand that the value comes from the growth options 510 00:25:26.600 --> 00:25:29.500 and growth options about skills. It's about human 511 00:25:29.500 --> 00:25:32.200 capital. It's about people so the value 512 00:25:32.200 --> 00:25:36.900 of any company is about human assets business 513 00:25:35.900 --> 00:25:38.300 as usual. No surprise. 514 00:25:39.300 --> 00:25:39.900 Thank you very much.