Pharma: PeptiDream (4587) - The Deal with J&J

Sales comment: While Peptidream is understandably fashionable and has momentum, PSA’s top pick in this space is Sosei (4565) whose stock price is currently languishing (YTD the shares are down 17%). However, we would continue to recommend playing the group through a basket of stocks that includes these two, the drug conjugate maker Nanocarrier (4571), and the stem cell firm Cellseed (7776).  
On the surface, PeptiDream’s deal with Johnson & Johnson’s (J&J, JNJ US) Janssen unit looks no different from the deals it has cut with other firms, except for the total milestone payments. Normally, these are undisclosed. In this instance, it was announced after market hours on April 7th – it is US$1.15bil – which is why the shares soared 19% on April 10th. There is one noticeable difference between this and other deals, which is that it will be PeptiDream undertaking research using its peptide discovery platform, rather than the other way around, which is the normal way. Essentially, J&J will select molecules from its library, for PeptiDream to investigate. J&J will therefore be making far more extensive use of PeptiDream’s resources than other firms do; which almost certainly means that the undisclosed upfront fees are higher than normal.  
The deal – and the stock market’s response to it – are evidence that, while PeptiDream is an expensive stock, its upside potential is higher than the downside risk – albeit perhaps not by much. Although many drug companies have already bought tickets to the PeptiDream raffle, by licensing the core technology, only a handful have bought a booklet of tickets, in the form of licensing the platform. However, it should be noted that the first two to do so, Bristol-Meyers Squibb (BMS, BMY US) and Novartis (NOVN VX), have had success. This augurs well for developments down the road.   

We discuss: 

1. the platform agreement history; 
2. whether Peptidream is close to peak licensing revenues; 
3. putting a value on pre-clinical milestones per molecule, on breakthroughs, and Phase II milestone payments; and  
4. the company’s targets vs our targets. 

Key Points:

• Although valuing the proof of concept element is difficult, you could say that the increased correlation triples the portfolio potential.  
• PDCs could have huge value in oncology drug delivery. 
• In both the EV/OP and the asset value analysis, a lot depends on the path of the BMS drug.