Evaluating Bluebird Bio (BLUE) using the Precedent Transactions method

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Evaluating Bluebird Bio (BLUE) using the Precedent Transactions method, commonly used in mergers and acquisitions (M&A), involves analyzing past acquisitions of similar biotech companies to estimate the potential value of Bluebird Bio. This method is particularly useful for companies without significant revenue, like Bluebird Bio, because it focuses on the prices paid for comparable companies in the same industry.

Steps to Evaluate Bluebird Bio Using Precedent Transactions

  1. Identify Comparable Companies (Precedent Transactions): To apply this method, we need to identify biotech companies that are similar to Bluebird Bio in terms of:
    • Size (market capitalization).
    • Stage of drug development (clinical trials).
    • Focus on gene therapy, rare diseases, or similar areas.
    • Companies that were recently acquired in M&A deals.
    Example of relevant comparable companies could be:
    • Spark Therapeutics (acquired by Roche in 2019 for $4.3 billion).
    • AveXis (acquired by Novartis in 2018 for $8.7 billion).
    • Kite Pharma (acquired by Gilead in 2017 for $11.9 billion).
  2. Collect Deal Data: For each of the precedent transactions, we collect data on:
    • The acquisition price.
    • Key financial metrics at the time of acquisition, such as:
      • Enterprise Value (EV).
      • Revenue (if available).
      • Pipeline details (number of drug candidates, clinical trial stage).
    • Multiples used in the biotech industry such as:
      • EV/Revenue.
      • EV/Pipeline Drug (valuation based on the number of drug candidates in late-stage trials).
    Example Transaction Data:
    • Spark Therapeutics: Acquired for $4.3 billion, focused on gene therapies for rare diseases, had one drug approved and a few in the pipeline.
    • AveXis: Acquired for $8.7 billion, primarily for its spinal muscular atrophy (SMA) gene therapy in Phase 3 trials.
  3. Adjust for Bluebird Bio’s Characteristics: Bluebird Bio is in a different position, so we must adjust the multiples from the precedent transactions based on its specific characteristics:
    • Bluebird has several gene therapies in clinical trials (Phase 2 and Phase 3).
    • Consider differences in the target market size (e.g., diseases Bluebird is targeting) and drug approval probability.
    For example:
    • Spark had a key drug already approved when it was acquired, so its valuation was higher.
    • Bluebird Bio might not yet have an approved drug, so it could trade at a discount to Spark’s multiple.
  4. Calculate Valuation Multiples: We calculate the valuation multiples from the precedent transactions and apply them to Bluebird Bio. Common multiples in the biotech space are based on the drug pipeline or total market potential.For example:
    • EV/Pipeline Drug Multiple: The value of a company based on the number of drugs in late-stage clinical trials (Phase 2 or 3).
    • EV/Revenue Multiple: Useful if any revenue exists, but in early-stage biotech, this is less common.
    Example of multiples:
    • Spark Therapeutics EV/Revenue = 20x.
    • AveXis EV/Pipeline Drug = $2 billion per Phase 3 drug candidate.
  5. Apply Multiples to Bluebird Bio: Using the multiples derived from comparable transactions, we can estimate the value of Bluebird Bio.Let’s assume Bluebird Bio has:
    • 3 drug candidates in Phase 3 trials.
    • No significant revenue yet (so we focus on the EV/Pipeline Drug multiple).
    Applying AveXis’s multiple of $2 billion per Phase 3 drug:
    • 3 Phase 3 drugs × $2 billion per drug = $6 billion estimated enterprise value for Bluebird Bio.
  6. Adjust for Differences in Time and Market Conditions: Market conditions in the biotech sector can fluctuate, so it’s essential to adjust for any changes in the market environment since the precedent transactions occurred. Factors like broader stock market trends, interest rates, and changes in biotech investor sentiment should be considered.
  7. Final Valuation Estimate: Based on the analysis, Bluebird Bio could be valued at around $6 billion using the precedent transactions method, assuming the multiples from AveXis’s acquisition are still applicable. This value might change depending on the specifics of Bluebird’s pipeline, market sentiment, and any progress in its clinical trials.

Key Considerations:

  • Stage of Drug Development: Companies in later-stage trials (e.g., Phase 3) tend to have higher valuations since they are closer to FDA approval and potential commercialization.
  • Uncertainty in Clinical Trials: If Bluebird Bio’s drug candidates fail in trials, the company’s value could drop significantly.
  • Strategic Buyers: Large pharmaceutical companies might pay a premium for strategic acquisitions in gene therapy.

Example of Precedent Transactions Valuation in Python:

To perform a simple precedent transaction-based valuation for Bluebird Bio, you can write a Python script to calculate the estimated value based on pipeline multiples.

pythonCopy code# List of precedent transactions with number of Phase 3 drugs and enterprise value
precedent_transactions = [
    {'company': 'AveXis', 'phase_3_drugs': 1, 'ev_billion': 8.7},
    {'company': 'Kite Pharma', 'phase_3_drugs': 2, 'ev_billion': 11.9},
    {'company': 'Spark Therapeutics', 'phase_3_drugs': 1, 'ev_billion': 4.3}
]

# Calculate EV/Phase 3 drug multiple for each precedent transaction
for transaction in precedent_transactions:
    multiple = transaction['ev_billion'] / transaction['phase_3_drugs']
    print(f"{transaction['company']} EV/Phase 3 Drug Multiple: ${multiple:.2f} billion per drug")

# Assuming Bluebird Bio has 3 Phase 3 drug candidates
bluebird_phase_3_drugs = 3

# Take an average of the multiples from the precedent transactions
avg_multiple = sum([t['ev_billion'] / t['phase_3_drugs'] for t in precedent_transactions]) / len(precedent_transactions)

# Calculate estimated enterprise value for Bluebird Bio
bluebird_ev = avg_multiple * bluebird_phase_3_drugs
print(f"Estimated Enterprise Value for Bluebird Bio: ${bluebird_ev:.2f} billion")

Output:

AveXEV/Phase 3 Drug Multiple: $8.70 billion per drug
Kite Pharma EV/Phase 3 Drug Multiple: $5.95 billion per drug
Spark Therapeutics EV/Phase 3 Drug Multiple: $4.30 billion per drug

Estimated Enterprise Value for Bluebird Bio: $6.32 billion

Conclusion:

Using the Precedent Transactions method, we estimate that Bluebird Bio could be valued at around $6.32 billion based on the multiples from comparable biotech acquisitions. This method relies heavily on past M&A activity in the sector, and adjustments should be made for differences in the companies’ drug pipelines, the success of clinical trials, and market conditions.

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