Buy BTG at 109p
Says Tom Winnifrith of t1ps.com - 08/04/24

Today on UK-Analyst, we bring you a stock first tipped
on 4 April 2007 exclusively to t1ps.com subscribers at 94.25p.

The Company

When we last visited BTG (BGC), it had £30 million in cash but was loss making and tremendous blue sky potential. Perhaps we got lucky in getting in at a quid and getting out at 221p. I know that Colin Blackbourn - the Black Prince - was furious with that advice but the shares had simply moved too far too fast. The stock now trades at the level of the original tip but the company has - since our exit in November 2005 - made great progress as a trading statement earlier this week made clear.  Its concrete assets more than underpin the current share price - I reckon that net cash plus an ongoing royalty stream are worth c133p per share. The potential of just one product not yet released could double that or more. The shares are a buy at 109p and a one year target of 200p.

The History

BTG was set up in 1950 to help commercialise technology coming out of British Universities. The company grew steadily over the next forty years and l listed on the main market of the LSE in 1995. Within a year it was in the FTSE 250 Index. It then spun off Torotrak (the gearbox designer and a company it had created and nurtured) and during the dot.com boom there were quite barmy forecasts made for the potential of its products. It was a wonder stock. It raised vast amounts and pissed most of it away. The current management team led by CEO Louise Making moved in three years ago, axed duff products in development, slashed costs and started the recovery. Since t1ps and BTG parted company last time there have been a few setbacks - notably delays to the lead blockbuster Varisolve - but this is now a wonderful story (as Colin Blackbourn has told me 7 times this month). But just now and again Colin is right.

The Assets & Valuation

BTG has cash of £55 million plus deferred milestone payments and milestones which are imminent of another £5 million. So that is worth £60 million

It has an ongoing license stream of royalties from products it has developed over the years. That is worth c £25 million per annum but by 2010 I expect that to be £35 million. Corporate overheads are £16 million so if no cash was spend on further in-house R&D this would be a company making £9 million pre-tax rising to £19 million. Actually if this was just run for cash I reckon so many costs could be axed that BTG would make £20 million rising to £30 million. So what is that worth? I reckon it could be more or less securitised with a value of c£145 million.
 

So that is how I arrive at a base case value of £200 million or 133p per share

But the real gems are some products BTG is developing (and that is why short term profits are not really the issue as development costs cash). I am pretty excited by Campath, a treatment for MS which is being worked on by Genzyme and there are a number of other products of note but the one that grabs they eye remains Varisolve a treatment for varicose veins, a market worth $750 million a year. Varisolve has finally passed phase 3 trials in Europe (efficacy) and is almost through its safety trials. It could plausibly be launched by the end of 2009. We know that partner discussions with big name distributors are underway.

In the old days BTG would have done a deal already with a major, happy to bank a 3% royalty at some stage in the future but the new BTG will push this well into phase 3 trials on its own before doing a deal. And that means that it could make margins of 20% or more. Assuming industry wide gross margins, 20% equates to annual income for BTG of $100 million (or £50 million) once Varisolve reaches peak sales. Now we do not know when that will be or indeed there is a risk that Varisolve could still fail in trials but £50 million a year over a 20 year patent is worth a few bob. And within a year we will know both the results of the safety trials and - I am pretty sure - BTG will have signed a partner deal.  So valuing this on a heavily risk weighted basis surely Varisolve is worth a good deal  - some analysts already value it at 50p a share for BTG - I would say about a third of that.

If we attribute another 20p to the other products - largely Campath - we arrive at a sum of the parts valuation of 200p a share.

Biotech is not really very loved but at 109p, BTG as an investment is de-risked by the cash backing and royalty stream which are on their own worth 133p a share. The blue-sky potential of Varisolve and Campath could help you double your money within a year. The shares are a buy at 109p with a one year target of 200p

Key Data

EPIC: BTG
Market: FULL
Spread:108.25p - 109.75p (1.36%)

t1ps.com is edited by Tom Winnifrith. Members are guaranteed 20 hot new tips per year plus regular updates on those tips and over 7 years the average gain per tip on the site is over 68%. The site also features the Diaries of Evil Knievil exclusively 3 times per week - join now for Tom's next hot tip (to be published shortly) at www.t1ps.com.