Biotech Values

[DewDiligence]

Re: Handicapping OCRX’s CVR milestones

a) $0.34 for the first patient enrolled in a Phase 3 IV trial

This milestone will be paid quickly unless MNK decides that another phase-2 trial should be run to lock down the dosing, which is exactly what I would do if the decision were up to me. If MNK does run another phase-2 trial, it might fail to show a meaningful benefit, in which case phase-3 will not occur and this milestone payment will never be paid.

I think there’s a 30% chance that MNK goes directly to phase-3 and a 70% chance that they run another phase-2. Within the 70% case where MNK runs another phase-2, I think the phase-2 trial will persuade MNK to go on to phase-3 60% of the time. So, all told, milestone a) will be paid 0.3 + (0.7)(0.6) = 72% of the time. (0.72)($0.34) = $0.245, and I’ll arbitrarily apply a 20% discount for value of time, yielding $0.196 of net present value for milestone a).

b) $0.52 for the first patient enrolled in a Phase 3 oral trial

The oral dosage form of OCR-002 is still in a work in progress, so I think the chance of its reaching phase-3 is only 30%. Thus, after applying my (arbitrary) 20% discount for time, the NPV of milestone b) is (.3)(.8)($0.52) = $0.125.

c) $1.72 for cumulative sales exceeding $500M.

I don’t think MNK can get to $500M of cumulative sales before 2029 unless they obtain FDA approval for both the IV and oral dosage forms; however, for the sake of simplicity I’m willing to say that $500M of cumulative sales before 2029 is assured if MNK does get FDA approval for both dosage forms.

In the calculation of milestone b) above, I estimated that the oral dosage form had a 30% chance to start phase-3, so let’s say that the oral dosage form has a 20% chance to obtain timely FDA approval. Let’s also make the simplifying assumption that the IV dosage form will already have been approved in all cases where the oral dosage form is approved; hence, there’s a 20% chance that both dosage forms will be approved in a timely manner. After applying my (arbitrary) 20% discount for time, the NPV of milestone c) is thus (0.2)(0.8)($1.72) = $0.275.

Adding it all up, I get a net present value for the entire CVR of about $0.60. If my model is reasonable, the stock, which currently (@$1.79) ascribes only $0.27 of value to the CVR, is undervalued.

Despite the above, I’m not especially tempted to buy OCRX to capture the CVR value because: 1) my model could be badly wrong; 2) the upside even if my model is right is not that large; and c) non-trading CVRs are illiquid.