Replies to post #213799 on Biotech Values

[biomaven0]

>>I agree with mcbio because I would suggest that the market often ascribes significantly too much value to early products with unproven, or even mildly disproven, management. <<

Still makes no sense to me. Let me try to more formally state my position:

We have a company with two pipeline drugs, L(ead) and S(econdary). L is about to have a binary that might succeed or fail. Let's assume a complete fail - value of L goes to zero.

So let's assume that the stock prior to the binary was $10, with $7 ascribed to L and $3 to S. L now fails and the stock price likely goes to something like $2 - the company's reputation has been dented and likely they will need financing in adverse circumstances. So investors take an $8 (80%) loss.

The other side of the picture is L succeeds, and triples in value. So likely stock goes to maybe $25, with some extra value now being given to S as well because financing is more assured. So investors make a $15 gain on their $10 investment.

Now let's contrast with the same lead program, but no S. So stock is initially at $7 and maybe goes to say $0.50 because there is still some cash. So loss is $6.50 while gain on success would be $14 as the stock goes to $21. So if we take our original $10 and put $3 under the mattress, our ending positions are $3.50 and $24.

So bottom line is that the upside is virtually the same, while the downside on the smaller investment in the 1-shot company is actually better.

Obviously you can quibble with the exact numbers I've used, but the principle is the same. And as a practical matter, in the mid-term stocks of companies with a failed first project very rarely do well.