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Biotech / Medical : Biotech Valuation
CRSP 55.11-2.6%Nov 7 3:59 PM EST
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To: David Howe who wrote (6600)6/21/2002 8:26:17 AM
From: Elmer  Read Replies (1) of 52153
 
I have generally have had a lot of respect for Robert Walberg and Briefing.com, but in this case he blew it.

He bases his overvaluation argument on the P/S ratios of a group of biotech companies that are still in development stage without consideration of the replacement cost to recreate these businesses. For example, HGSI, which was included in his table, is trading slightly above cash per share. That price means that essentially none of its sunk R&D or intellectual property has any value and that the ongoing trials will not succeed. It means that their efforts have been a debit sink and that genomics (even though it has produced a significant number of the industry's current drug targets) provides no advantage over traditional (trial and error) drug development methods. Again, you can't replace HGSI or MLNM or others on his list for their current market capitalization.

The other point you made about patent protection in this industry can't be more on point. If you read Geoffrey Moore's Gorilla Game, he talked about the importance of proprietary technology and high switching costs as key to value creation. The products in this industry are proprietary with, in many instances, no switching alternative. That's the appeal of the sector and why it warrants oversized valuations.

Thanks for your post because it said a bunch of things I was thinking.
David
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