Biotech Values

[DewDiligence]

Poisson arrivals and Genentech’s colossal valuation:

First of all, this discussion has nothing to do with fish, but rather with a branch of mathematics named for the French mathematician Siméon-Denis Poisson (1781-1840).

Poisson’s formula describes the probability distribution of events which are independent of one another. For example, if you receive emails from a large number of senders who are acting independently, the timing of emails arriving at your incoming mail server will approximate a Poisson-arrival distribution during normal business hours.

What many laypeople don’t realize about Poisson arrivals is that they will naturally produce random bunching in event timing –not a uniform interval of time between events as many people intuitively expect.

When viewed within this mathematical framework, DNA’s recent “trifecta” of product launches (Xolair, Raptiva, Avastin) may be just the typical bunching effect referred to above.

What does all this have to do with DNA’s valuation? Quite a lot! Because many investors and analysts do not understand Poisson arrivals, they have extrapolated from DNA’s recent product launches and have assumed that DNA’s R&D labs must be more productive than previously thought. Consequently, these investors and analysts have concluded that DNA’s pipeline must now be several times more valuable than it was a year ago.

Silly? Of course, Surprising? Not really; this is how valuation bubbles are formed.