Can a guesstimate have a net present value ?
Sure - let's try a very quick back-of-the-postage-stamp valuation. Here's the relevant quote:
Mr Whitfield said Incyte should start earning its first royalties next year or in 2002. At that point it would be easier to persuade investors of the value of such an asset, he said.
Given that it takes at least 10 years to develop a new medicine, royalties would continue to rise until at least 2010. Mr Whitfield estimated annual royalties of $200m-$1bn, depending on how many leads were turned into drugs and how fast the $350bn global pharmaceuticals market grew.
In fact there's a Canadian company out there (Drug Royalty Corporation) that specializes in buying royalty interests:
drugroyalty.com
They carefully don't give details on individual deals, so it's hard to figure out just what multiple they pay - I would guess something like 30 times for a product that still had some growth left in it. The INCY royalties would be particularly valuable as they would be so diversified.
That would value the INCY royalties at between $6 billion and $30 billion. A key question is just how many years you need to discount this back and what discount rate to use. I would argue for a moderate rate (say 20%), as the long term risk is actually pretty small - others may well argue with me here. Call the present value 1/3 of this - giving a present value between $2 billion and $10 billion. (Incyte's current market cap is about $2 billion).
The other way to look at it is more global. If it is really true that 10-15 years from now INCY will be getting a 1% royalty on 1/2 of pharma's drugs, then at that point INCY should be conservatively worth something like 1% of the total value of the pharmas - (say $1.5 trillion), giving a future $15 billion value. (I'm assuming a 50% royalty would wipe out all the profits in the industry, so a 1% royalty corresponds to 2% of the market cap; INCY has royalties on 1/2 the industry, so ending up with 1% of the industry market cap).
With luck, the above calculations are correct within an order of magnitude. <g>
Seriously, though, I think spinning out the royalties would be a fantastic idea, and I have no doubt it would increase the overall market cap that INCY enjoys at present.
Peter |
