I haven't read Barron's yet. but before I do let me add to the assessment of IPIC I started last week. I became interested in this stock as a possible buying opportunity but my assessment came out so negative that I went short on the stock last Friday (wish I had done it earlier but it took some time to complete the homework).
IPIC made a 180 degree turn going from having a drug with the potential of generating very significant royalties (there was talk of a 1 billion a year market before hell broke loose) to having potential liabilities that go far beyond what their insurance policy may cover (this is mentioned in many news articles: e.g. last week's Time and the Barron's article mentioned by Paul).
Before shorting (a dangerous thing to do) I performed the following best scenario analysis: Suppose that at $40.00 per share (this is about as high as IPICI got) the price was fair (i.e., reflected the present value of cash flows tied to Redux) . Now Redux is gone. Suppose that, as the Co. said, they can now put this behind (assuming the lawyers and suffering public allow them) and concentrate on the pipeline (i.e., no need to worry about law suits). At this point the pipeline is, for practical purposes, Citicoline. My estimate is that the Citicoline market is at most one third of what Redux's could have been (i.e., there are many more obese people - including those who could not get into their favorite pair of pants, and used the drug against its intended use, than people with stroke). Suppose now that Citicoline was already approved and already shipping with a similar royalty schedule as Redux, then the price of IPIC should be at most 40*.3333= $ 13.30/share. Interesting..
Now let's start tightening the assumptions. Suppose that Citicoline is approved today, well it would be about two years before it reaches the cash flow level Redux had before the recall so the $13.30 needs to be discounted at least two years which at a mild risk adjusted rate of 12% (This is the market's average return - I hope you agree that we all demand much more return out of biotech's due to the higher risk). Therefore, discounted two years at 12% the $13.30 become:
$13.30/(1.12*1.12)= $10.60.
As a third step let's notice that Citicoline is not yet approved. Based on the first set of clinical trials I would say that an optimistic probability of approval ignoring time frame is 80%. Therefore the price should be taken as approximately $10.60* 0.80=$8.40. Still a very optimistic figure as it ignores cost of recall and more importantly liability cost (also recall the basis: a high of $40.00, Citicoline market at 1/3 of Redux, and an 80% chance of immediate approval).
For sure you will say: Pancho, but you are forgetting about all the other drugs. Well the other stuff is far into the future. If you still have doubts about my conservative analysis read the Barron's article (which I read in the middle of writing this - I could not resist the temptation) which is about 100 times more pessimistic than my piece.
One last observation, if you are a Corning or PG or a big guy like that you could not afford to close shop to avoid liability, but in the case of IPIC whose only assets at this point are cash and brain power is it worthwhile to keep bringing cash flow in through new drugs to see it evaporate in liability payments? or "al estilo Pancho Villa" take the cash and run.
Based on my analysis (and the Barron's article), unless someone provides convincing evidence that the picture is any different, I am riding this baby down to zero en mi caballo.
Any opinions? (Pancho tu estas loco! Is not enough I want to hear some arguments) |
