Case study: DBV Technologies

DBV Technologies Viaskin Transdermal Patch

A few days ago, a friend of mine from another biotech company pointed out DBV Technologies (ticker: DBVT). It was a week before its secondary offering and my friend suggested it as a possible investment opportunity for a client I advise on portfolio management. To date, I have helped them achieve over 40% total returns, capital gains and income, so they listen attentively to my advice. Anyway, my friend’s enthusiasm for this company was contagious so I took a look at it from a ROKC ™ point of view.

Since the secondary offering, $34, the stock has risen to $42. In hide sight, an $8 per share capital gain in just a few days would have been excellent investment but truth be known, I did not make the recommendation. So I’ll tell you why.

After reviewing the publicly available information on DBV, I came away with reservations over the valuation.

DBV is a biotech startup operating in the allergy market. It provides a way of developing the antibodies necessary to combat certain allergies, like: peanut, milk and egg. In a country like the U.S., a vast and lucrative market especially for children. The antigens used to help develop this autoimmune response are bought in by the company so these cannot be important to the company’s valuation. Instead, DBV’s value lays in their development of a transdermal patch which regulates the flow of antigens into the body. This delivery system is proprietary and protected by several patents.

From a ROKC point of view, DBV has an asset (the patents) which it owns and controls, and is used in their products ( the peanut, milk and egg patches) providing the customer with a competitive advantage (antibodies to protect against potentially fatal allergies). Perfect! This is exactly what we look for in companies.

Company leadership also declared a strategy to maximize the return on this asset by targeting the U.S. market for children with an insufficient immune response to peanut, milk and egg allergies. An A+ for this strategy too.

So why is there a problem with valuation?!

The challenges I see for the company are two fold:

1. The machinery used to manufacture the proprietary transdermal patch is highly specialized and present machines do not have the capacity to fulfill potential market demand.

1st generation machine: 750k/annum
2nd generation machine: 2,250k/annum
3rd generation machine : 20,000-30,000k/annum (forecast for 2016)

According to their website, the recommended dose is one patch/day. Assuming the third regeneration machine gets up and running, between 54,794.5 and 82,191.78 patients can be treated on a full year basis.

According to the American Academy of Allergy, Asthma & Immunology, in 2012, 4.1 million children reported food allergies in the last 12 months. Although treating 54k – 82k children is certainly important, that is only 1.3% – 2% of the children’s market. If we add to that the adult market then the number of patients treated is even smaller. And, if we add other geographic markets it is minuscule. Much, much more productive capacity will be necessary.

2. This brings me to my second point, as far as I can see, no other company is seeking to license the patents or the transdermal patch manufacturing technology. Although some suitors may come out of the woodwork once the product is fully approved for sale, this also suggests that its applications are possibly limited.

Based on these two points, it is a challenge for me to see how a company with 5 million euro in annual sales, or $4.5 million, can have a post secondary offering market capitalization of $1.6 billion!

The market cap is over 260X annual sales when most young biotech companies are trading between 20-50.

Not knowing the patches sale price, it is challenging to estimate how many years of future growth the share price might represent taking into consideration the ramp up in sales. However, if we compare with a nicotine patch that has a public price of $2/patch and allow for 50% margin for distribution we arrive at a selling price of $1/patch. However, knowing DBV’s patches are special, we can augment this price by say 40%, for argument’s sake, leading to an average price of $1.40/patch. With 100% of production going to sales, no samples, the company would max out at $28 – $42M a year in sales, or 38-57X sales.

Although these multiples are much closer to the market they assume all the assumptions are realized without a hitch. Thus, this valuation brings with it a very high level of risk.

Mind you, the risks mentioned in this article relate to production capacity and product pricing. And, our pricing assumption just happened to produce this result because we have no idea of their pricing. In addition to these two risks there are many others, for example: final FDA approval, a marketing and sales organization that needs to be built, foreign exchange fluctuations, and a resulting profitability which is totally unknown.

The risk level is just way too high for $42/share; it is irrational. My recommendation to my client was to wait until the share price came down to half that price before buying.

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