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Biotech / Medical : Biotech Valuation

CRSP 57.98

-6.4%

2:12 PM EST

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To: Jibacoa who wrote (2819)	2/5/2001 5:11:10 PM
From: Biomaven	Read Replies (2) of 52153

The Lehman/McKinsey presentation that caused the weakness in the genomics stocks is on the web: netroadshow.com Worth listening to, but I have a number of comments. Perhaps most importantly, their focus is on small molecule drugs addressed to newly discovered (via genomics) targets. They think these drugs will have a higher than normal failure rate in late preclinical and Phase II. This has a profound effect on the NPV of drug programs involving these new targets. Now if they are right, the more profound impact is on pharma, not biotech. With the notable exception of MLNM, not many biotechs (that I know of) are chasing small molecule drugs for brand new targets. There is also some impact on a company like INCY that will ultimately receive royalties on these drugs. As noted here before, they give a "free pass" to a number of biotechs they've done underwriting for. Their thesis implies something of a drought in small molecule NCE's for some years (they say 5) until other improvements (such as improved ADMET and pharmacogenomics) help restore productivity. They also give some figures on implied growth rates in the 2005-2015 time frame. BGEN sticks out as having a very low needed growth rate in this period, implying substantial current undervaluation if their projections for the growth rate in the 2000-2005 area are correct. (BGEN needs only 12% growth vs. AMGN's and DNA's 25%). Some other interesting stuff, including their estimate of spending on genomics over the next few years. Bottom line is that I think they have gotten carried away with one notion (higher failure rate in small molecules) and the overall consequences, even if they are right, are overstated for biotechs. Peter

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