Replies to post #11678 on Biotech Values

[DewDiligence]

Re: GTCB analyst reports / EV

From the same R&R report:

>>With EU launch expected in the next 9-12 months and an EV of <$25 M, we believe GTC is positioned to outperform its peers should ATryn's launch be successful<<

Just to be clear: EV is the Enterprise Value, which is the market-cap of the stock plus debt minus cash on hand; i.e., EV is a measure of how much investors are valuing the business itself irrespective of the balance sheet.

On a fully-diluted bases, GTCB’s EV at the current stock price is closer to $50M than the $25M figure cited by Rodman & Renshaw, but it is nevertheless a very, very cheap EV for a company close to a having an approved drug in a major jurisdiction.

[AlohaDan]

Using the market multiple of 6X, our 2013 ATryn revenue estimate of approximately $226 MM and a 35% annual discount rate that we believe adequately compensates investors for the risks associated with GTCB, we derive a YE06 price target of $4.


This why I believe you can make money in biotech. The model above undervalues a success by combing a risk discount rate of return.

Put the discount rate at what you can get elsewhere.

Certainly more than 5% , but less than 20%. Use an index growth of 12-14% is probably about right.

That gives you your reward when measuring future income.

Assign a risk to GTCB striking out..If the reward to bet (investment) is greater than you have a truer measurement of potential winnings.

The above is somewhat simplistic, but even small companies are doing this in some fashion themselves when structuring deals.

See for example "Getting Real About Valuations in Biotech" Villiger & Bogdan , Nature Biotechnology April 2005.

A good discussion of binomial trees.

If one had the time to do this stuff in depth it would be nice to collect a bunch of different models, stash them somewhere, and have a list of proposed variables to plug in that everyone was familar with. Then guys and gals interested in a particular stock could divie up the work collecting and debating variable values like future sales, etc.

The other thing I still need to work on it a meta model so to speak. Once you have risk reward ratios for individual companies, how to you really measure your basket? Number and mix of stocks.

Since Dew has a math background maybe he will vol....

Err.... maybe I better keep my mouth shut. I might be asked to do something and my plate is full the next two months (transcribing old LP's to iTunes).

[DewDiligence]

Update on the malaria front:

http://news.yahoo.com/news?tmpl=story&cid=594&e=7&u=/nm/20050606/hl_nm/novartis_dc

>>
Novartis boosts cultivation of anti-malarial plant

ZURICH June 6 (Reuters) - Novartis will ramp up cultivation of an anti-malarial plant in Africa to meet spiralling demand for treatments of a disease which kills some one million people a year.

The Swiss drugmaker supplies Coartem, whose main ingredient artemisinin is derived from the artemisia annua plant, on a not-for-profit basis to developing countries stricken by chronic malaria.

A shortfall of artemisinin combined with resistance to older treatments such as chloroquine has hampered a global drive to halve deaths from the mosquito-born disease by 2010, prompting Novartis to boost its cultivation of the plant.

"Our objective is to increase supplies of the plant across a diversified base," said Hans Rietveld, who is representing Novartis at a World Health Organization conference on artemisinin-based therapies (ACTs) in Tanzania this week.

The artemisia annua plant is native to China, but Novartis said it had teamed up with Kenya's East African Botanicals (EAB) group to boost cultivation to more than 1,000 hectares in Kenya, Tanzania and Uganda.

This would bring total production to some 10,000 hectares, Novartis said, spreading the risk posed by adverse weather and enabling the Swiss firm to provide more than 100 million malaria treatments by the end of 2006.

Artemisinin-based treatments such as Coartem fight falciparum malaria, the deadliest form of the disease which causes as many as 400 million infections and at least a million deaths a year.

The WHO gauges demand for ACTs at some 130 million treatments in 2006, and Rietveld said Novartis's Coartem drug would account for roughly two thirds of this quantity.

"Based on our knowledge today we believe we are well set to meet demand," Rietveld said by telephone.

Tight supplies of ACTs prompted the aid agency Medecins Sans Frontieres (Doctors Without Borders) to criticize the WHO last month for relying too heavily on Coartem in its anti-malaria program.

Last November, Novartis said its traditional Chinese suppliers of artemisinin would only be able to deliver 30 million doses in 2005 -- half of the expected demand.

French drugmaker Sanofi-Aventis SA is working with a not-for-profit health group to develop its own artemisinin-based combination pill, which it hopes to launch next year.
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