Biotech Values

[DewDiligence]

How much is GENR worth?

One way to approach this question is to ask how much a reasonable individual or corporation would pay to acquire GENR’s various assets. Thinking this way forces one to deal in present values which take into account:

§ The time-weighted value of the potential return on investment.

§ The amount of money that must still be invested to bring a product candidate to market.

§ Continuing product-related expenses (including taxes) which reduce eventual profits.

§ The risk of program failure.

If my numbers below seem conservative, it may be because many valuation analyses presented on various message boards do not appropriately adjust for the bulleted items above. Moreover, the desire to be recognized as a message-board cheerleader can lead normally reasonable people to make ludicrous assertions. (The valuation posts by “neblo” on the IMCL message board and “gfbalcyy” on the AMLN board are notable examples.)

With the above caveats, these are my estimates of what GENR’s various assets are worth in risk-adjusted present value:


1. Squalamine in AMD and other ophthalmic diseases: $450M.

This program is the major component in GENR’s overall worth, dwarfing the other programs in the pipeline by a wide margin. There are several reasons for this:

o Wet AMD is a huge unmet medical need. (I’ve estimated the addressable market at $6B –see message #480).

o There are relatively few companies competing for this market.

o Squalamine offers advantages over most AMD drugs in safety, efficacy, convenience, or all of the above.

o Other eye diseases potentially treatable by Squalamine, such as diabetic retinopathy, are also large markets.

o GENR’s AMD program is the closest to market of any of the company’s programs.

o Since this program is not yet partnered, GENR still owns essentially 100% of the potential rewards.


2. GENR’s share of MEDI’s IL-9 program: $80M.

Asthma and chronic obstructive pulmonary disease (COPD), the two major respiratory diseases pertinent to the IL-9 program, are huge markets. However, there is considerably more competition in these diseases than in AMD, including a number of established drugs on the market and a great many in development. Virtually every big pharma has one or more products in clinical development for asthma or COPD.

Because the IL-9 program is just entering the clinic and has not yet reached the proof-of-concept phase in human testing, there is a greater risk of program failure than in GENR’s AMD program. Moreover, GENR’s upside from the IL-9 program is limited by the terms of the agreement with MEDI.

If all clinical milestones are met, GENR will receive a cumulative $55M from MEDI worth perhaps $40M in present value and $30M after adjusting for the risk of premature program cancellation. If all goes well, GENR will additionally receive a double-digit royalty on sales beginning late in this decade, worth perhaps $50M in risk-adjusted present value. (Adding the $30M figure from milestones to the $50M figure from potential royalties gives the $80M total.)


3. Squalamine in cancer: $20M.

The cancer arena is extremely crowded with approximately 350 drugs in clinical development and almost 200 in phase-3 alone. Squalamine has shown some efficacy with a good safety profile in a few kinds of cancer, but the data do not differ dramatically from the data of many other drug candidates at a similar stage of development. A heck of a lot of development money will have to be spent to obtain FDA approval for Squalamine in any cancer indication and, even then, the chances for a major commercial success are slim due to the sheer magnitude of current and future competition.


4. IL-9 rights external to the MEDI collaboration: $10M.

The MEDI collaboration is restricted to the development of IL-9 “antibodies and recombinant molecules,” so GENR owns the rights for an IL-9 vaccine product as well as an IL-9-based diagnostics tool for use in various respiratory diseases. However, no significant development has been undertaken in any of these areas.


5. Lomucin program in Cystic Fibrosis: $5M.

Without additional funding from an outside source such as the Cystic Fibrosis Foundation, I doubt GENR will be willing to pursue this program given the modest clinical results from the phase-2 study, the relatively small addressable market, and the fact that another drug might be approved with orphan status, raising the hurdle for Lomucin’s approval in the same indication. Successor molecules to Lomucin on which GENR owns IP may have superior efficacy to Lomucin, but there is no hard data to demonstrate this.


6. Miscellaneous pipeline including Trodulamine and other aminosterols: $10M.

Theoretically, there is a lot of upside here, but there is little in the way of hard data. Any product for a common and chronic condition such as obesity would be many years from a market launch and would require absolutely humongous expenditures due to the large trial sizes the FDA would insist upon in such an indication.


7. Cash and tax-loss carryforward: $20M.

The tax-loss carryforward must be substantially devalued from its nominal value of $117M (at 12/31/02) because: a) The potential tax benefit does not come into play until GENR has taxable income to offset, many years from now; b) The carryforward may partially expire before there is sufficient income to offset; c) The value of the nominal tax-loss carryforward must be reduced by the tax rate in effect at the time that there is offsetting income; and d) Federal tax regulations severely limit the value of the tax-loss carryforward if GENR is acquired.

--
The total risk-adjusted present value from items 1 through 7 above is $595M, which comes to about $11.50 per share based on an effective share count of 51.5M shares.

Dew

--
Addendum: calculation of the effective share count. According to the 11/11/03 prospectus filed in connection with the most recent private placement (http://tinyurl.com/ypmsk), there were 47.0M shares and 4.5M options and warrants as of 11/11/03. From the most recent 10K report, it can be ascertained that almost all of these options and warrants would be in-the-money at an $11.50 stock price. Hence virtually all of the 4.5M options and warrants must be included in the effective share count for valuation purposes because these options and warrants would need to be cashed out in a buyout at an $11.50 price or any higher price. (Please note that the “diluted” share count shown in GENR’s financial statements does not include these 4.5M options and warrants because, under GAAP, net loss per share is calculated without considering derivative securities which expand the share count and thereby “dilute” the loss per share.)