Biotech Values

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GILD & ENTA - The HCV market and valuation.

Timing the treatment of a finite and shrinking HCV population is not going away as a factor in the valuation of these companies. Banning discussion won't change that.

Nor have the comments of executives answered the timing distribution question. To say that there will be a market for treating HCV 15 years out (or 20), tells us very little. To illustrate, IF 80% are treated in the first 4 years with the rest to get treated over the next 11 years (or 16, etc.), you are still left with a fundamental question of how to value the companies that will get the bolus of cash and a lesser follow-on stream.

Capital allocation of the profits will be critical. I call this the reinvestment risk. What will it be? Pipeline? M&A? Buybacks? Dividends?

Unfortunately, huge near-term inflows are not likely to be as well deployed (or valued) as steady flows over many years. (JMHO) So the faster the flows the greater the reinvestment risk.

For JNJ, MRK and BMY the flows are going to be modest (even if front-loaded) relative to the company and thus the reinvestment risk is small and should not impact the PE.

For GILD and ENTA the flows are a much larger problem and thus WILL impact the accorded PE. So again it comes back to: Pipeline? M&A? Buybacks? Dividends? The order use is intentional (Best to worst). To the extent that the companies have a worthy pipeline that they can develop and convincingly inform the analyst community - it will best serve to raise the PE. Ranking of M&A vs. Buybacks is a closer question and depends heavily on the quality and cost of the M&A. Buybacks is more certain and can turn an insufficient but quality Pipeline into a positive future and justify PE expansion. Dividends - the tax inefficient and intellectually shallow approach is the clear loser-choice.

I would be interested comments on the quality and prospects of the pipelines for GILD and ENTA should anyone follow that aspect of the story.