BELLUS Health has more upside left, Mackie Research says

Its chart is one of the rare ones that doesn’t look like a black diamond ski run, by analyst André Uddin says you can still make money off BELLUS Health (BELLUS Health Stock Quote, Chart, News TSX:BLU).

This morning, BELLUS announced it had entered into an agreement to acquire all of the remaining BLU-5937 and related P2X3 antagonists intellectual property assets from adMare BioInnovations’ NEOMED Institute.

“This agreement gives BELLUS complete ownership of the rights to BLU-5937 and related P2X3 antagonists, eliminating any future financial obligations for our compound and allowing our shareholders to realize its full value,” CEO Roberto Bellini said.

Uddin today gave the thumbs up to the transaction.

“We believe today’s transaction should be accretive to Bellus’s bottom line in the long-term run,” he said. “We are maintaining our existing assumption that the company would out-license BLU-5937 in 2021 after completing the on-going Phase 2 trial successfully. We are increasing our assumed deal price and royalties that Bellus would receive by 10% and 5%, respectively.”

In a research update to clients today, Uddin maintained his “Speculative Buy” rating, but lowered his one-year price target on the stock from $16.40 to $16.30 after incorporating the transaction into his model. The new target implied a return of 39 per cent at the time of publication.

“We value BLU using a two-stage probability-adjusted DCF methodology,” the analyst wrote. “We discounted the pro forma net cash flow from 2020 to 2027 and used a terminal value in 2027. We assume BLU-5937 to be launched in 2023. During the clinical testing (from present to 2022), we apply a discount rate of 30% to represent development risk – we used a relatively low discount rate as recent shifts in the competitive landscape have strengthened our confidence that P2X3 inhibitors should be the most promising and advanced class to treat chronic cough – BLU-5937 is potentially the best in class given its higher selectivity toward P2X3 than other rivals. During the commercial stage from 2023 to 2027, we use a WACC rate of 7.5%. Our WACC calculation is based on BLU’s beta value of 0.54 (Bloomberg), the 20-year Treasury rate of 2.59%, and annualized TSX composite return (2016-2017) of 11.60%. BLU currently has zero debt on its balance sheet. To calculate the terminal value of the net cash flow in 2027, we conservatively assume a perpetual growth rate of 1%.”