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Morningstar | Raising Our Sobi FVE on 2Q Fundamentals and Potential Acquisition Premium. See Updated Analyst Note from 18 Jul 2018

We're raising our fair value estimate to SEK 234 after incorporating a strong second-quarter performance from Sobi as well as a 50% likelihood that the firm will be acquired at a premium to its recent trading prices, which are well above our stand-alone valuation of the firm. Sobi management provided another dramatic increase in 2018 guidance in conjunction with the firm's second-quarter earnings call. While management did note that the third quarter tends to be weak due to holidays, full-year guidance implies continued strong performance for the year, and our new 2018 forecast includes SEK 8.8 billion in 2018 revenue (at the high end of guidance, implying 35% growth) and almost SEK 3.5 billion in EBITA (near the midpoint of guidance, implying 69% growth). While our valuation model changes increase our stand-alone fair value estimate for Sobi to SEK 153 from SEK 124 per share, we now assume a 50% probability that Sobi will be acquired at a similar valuation multiple to 2019 revenue as its former partner Bioverativ, which was acquired by Sanofi in March 2018. This implies a takeout price of SEK 315 per share, or more than 8 times our 2019 sales estimates for Sobi. We do not assign Sobi a moat, given the intense competitive landscape in hemophilia that should hit the firm in 2019-20.

If Sanofi opts to purchase Sobi, it would give Sanofi global rights to the hemophilia franchise for Elocta and Alprolix, which could prove valuable as the firm establishes a position in the market ahead of pipeline drug fitusiran. In addition, Kineret's potential in new immunology/oncology indications (see Novartis' IL-1 beta therapy, canakinumab, which has entered late-stage development as a treatment for lung cancer) and the potential of rare disease therapies like MPSIIIa drug candidate SOBI003 (entering development this year) would fit well with Sanofi's rare-disease expertise.

On a stand-alone basis, increases to our top-line forecast were driven by hemophilia B drug Alprolix (much faster growth in the second quarter than we had anticipated) as well as slightly higher growth expectations for immunology drug Kineret (approved in Still's disease in Europe, phase 2 gout data coming later this year) and rare-disease therapy Orfadin (new three-year Canada contract). Our Kineret projections are based on current approved indications and development programs, and do not include potential in oncology indications, although the drug's ability to block the IL-1 receptor, thereby blocking IL-1 alpha and beta, could make it an effective therapy in oncology. Elocta growth is in line with our expectations, however, and we've slightly decreased our assumptions for manufacturing revenue for hemophilia drug Refacto. On costs, we've slightly reduced our cost of goods and research and development costs as a percentage of sales, given continued strong margins, and slightly lowered our tax rate assumptions following changes to Swedish tax rates.