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Biotech / Medical : Biotechnology Value Fund, L.P.
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To: aknahow who wrote (723)6/17/1999 1:27:00 AM
From: John MetcalfRead Replies (1) of 4974
 
Interesting discussion, David and George. Let me put out a crude valuation concept in hope that others will improve it.

Stock as compensation for a takeout should be measured in relative value, rather than inflated paper, or depressed acquiree stock. I took three years of AMEX Biotech Index closes, and divided by Philly Pharm index closes for the same dates. Over that period of time, $BTK has dropped as low as .34 on the (arbitrary) scale (Aug-Sept 98), and risen as high as .97 (June 96). Regardless of whether we viewed the acquirer's share currency as high, it bought the biggest share of biotech last summer. Over these three years, the average value has been .61, and currently stands at .59.

The punch line is that over the past sixty days, this scale has risen from .49 to .59, meaning that the average $BTK stock costs 20% more $DRG shares than it did two months ago. Against this backdrop, I suggest the following munch calculations may be occurring: 1) Accounting rule changes for mergers and writeoffs represent a closing window of opportunity (as Peter has said). 2) Biotechs are still reasonably priced in terms of big pharm stock (at the average for last 3 years) and are farther into development now. 3) Biotechs are getting relatively more expensive at a rapid rate.

Conclusion: Big pharms had better do something to fill pipelines and stop their stock slides while biotech valuations are relatively attractive and before new acounting rules are in force.
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