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Biotech / Medical : Biotech Valuation
CRSP 53.85-4.5%Jan 9 9:30 AM EST
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To: Thomas M. who wrote (996)4/20/2000 12:17:00 AM
From: Biomaven  Read Replies (2) of 52153
 
Thomas,

As a result we are shifting to three-year price targets for many of our coverage companies including Sepracor.

Well actually for a company like Sepracor, I think a three-year target makes much more sense than a near-term target.
Three years out you can come up with a defensible guess as to earnings, and a similar defensible guess as to PE ratio. Let's just say $4.00 earnings and a PE of 50, given that the earnings growth will still be pretty steep at that point, giving a nice round-number $200 price target.

Now what target does this correspond to for 1 year from now? Technically you can just discount back at some discount rate - but just what rate to use? It makes a huge difference if you use 20% or 40% as a discount rate. Part of the confusion is that the discount rate is a proxy for two different things - the time value of money and the relative riskiness of the return. The trouble is that for Sepracor in particular, just because the earnings are three years out, doesn't mean they are enormously risky. Sepracor earnings from a drug three or four years out are actually more predictable than for typical biotech drugs one year away from approval. Hence the standard metric of discounting a drug at 40% a year for three years "because it's just in Phase I" doesn't make sense here.

However most published analysts don't seem to adjust their discount rate for the particular drug or company they are analyzing. Given this, I'd just as soon see them giving targets far out, as long as people don't simply assume that if there is a $200 target in three years there should be a $175 target for tomorrow.

Peter
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