<have developed some bias/opinion/pessimism>
I think what you've said here is that this is a high risk endeavor? I think you need to quantify that some, in fact a lot: it's very high risk for somebody funding an effort from scratch. However, I rarely invest in any development project on the front end. I'm like Harvey Keitel in Pulp Fiction: the clean up guy. I wait for another investors to throw their money down the rat hole in an orgy of capital creation for some sector, and then after that collapses and they want out, I pick over the remains for value. I've done that in real estate, and I just did it in junior PM stocks. It's been the basis for an excellent investing career for me.
I am a proponent of "real option theory". You could hit Google and see all kinds of academic dissertations and books for the cerebral on it. I don't really want to go there on this forum, as I'm not quite that smart. I would only say that the theory was used falsely to justify overvaluing New Economy stocks during the bubble, and it's now in disrepute. Still IMO it's a totally valid theory that I've always used informally, and now is just the time to dust it off. To make a long story short, it is a model that values longer dated non cash flow generating development projects such as energy, real estate, biotech, mining, trees, etc.
Applying it simplified to one stock off my list: IDEV. Market cap is 320m at 6.90. There's 50m in cash. So the market says IDEV's technology value is 270m. What's is their technology? Since there is no drug on the market bringing in earnings, the non-real option player would just walk right away. Right now that would nearly everybody, so the sector meets my requirement (like the PM juniors did last year) of little interest and no competition to bid up prices.
An option theorist would look further at a stock like IDEV, and see they have a Phase III drug called Pagocione, used for panic disorder and partnered with PFE. Thats' a big market, and IDEV will receive a milestone of $62m on FDA filing, and a 12-13% royalty on sales. That's 100% profit margin. What's that worth as an option?
Maybe that blows up on these guys who knows, but they also have a Phase II/III topical drug called PRO 2000, funded by the NIH for HIV/AIDS prevention, and they have a III for stroke called citcoline, and another II for IBD. This is not an early pipeline, it's really quite advanced (and apparently forgotten?). Someone else has spent their money so that I can take it off their hands now at very reasonable valuations, and I thank them for that.
Now I hear you on the risks, and perhaps every one of these efforts will blow up and fail. But my model still tells me that a $270m TV (or EV) is a very low price to pay for this option, and right now biotech is full of these situations. To me this is like buying BAY and MFL at 1.25 and 1.00. |
