BTG shares fall as RBC downgrades rating to 'sector perform'

BTG shares fell on Tuesday after RBC Capital Markets downgraded its rating on the pharmaceuticals company to ‘sector perform’ from ‘outperform’ and cut its target price to 790p from 910p.

“We remain long term fans of BTG but we are growing increasingly cautious on the delivery of early stage assets and the impact this could have on estimates.

“We can still see the shares outperforming on the value of its core business, Spec Pharma, other interventional medicine assets or acquisitions (and hence BTG is not a Sell) but think upside will be range bound.

BTG will benefit from a weaker pound as it earns 85% of its revenues in US dollars, prompting RBC to upgrade its forecasts for fiscal years 2017 to 2019.

RBC raised its revenue estimate for 2017 to £557.1 from a previous prediction of £524.3m, its 2018 estimate to £646m from £602.5m and its 2019 estimate to £667.8 from £670.3m.

On earnings before interest tax, depreciation and amortisation (EBITDA), RBC now expects £131.4m, £173.4m for 2017 and 2018, respectively, compared to a previous guidance of £131.3 and £162.6. However, RBC lowered its estimate for EBITDA in 2019 to £192.4m from £215.8m.

The broker believes the positive impact of foreign exchange movements will be offset by slower-than-expected progress on emphysema treatment RePneu and varicose vein treatment Varithena.

“We think BTG's core business, its Spec Pharma assets, its other Interventional Medicine assets and Zytiga can support the current valuation but the investment in both Varithena and RePneu is a drag on earnings that could begin to raise questions on capital allocation.”

RBC believes RePneu will receive approval in 2017/18 but phase 3 data suggests the label will be narrowed towards a specific subgroup of patients, which the broker thinks is the reason “why EU revenues have declined, and why growth will stagnate until further data on clinical utility can be produced”. RBC also believes the product will require another US trial to help with reimbursement and market access.

On Varithena, RBC reckons consensus expectations remain too high for this product and thinks the product will remain a drag on profitability until 2019.

“We think the product has value and in this market, but management's $500m+ revenue target by 2020 is beginning to look a stretch and are cautious that consensus may have near term revenues increasing too quickly.”

Shares fell 3.88% to 632.50p at 0929 GMT.