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Biotech / Medical : IPIC
IPIC 0.00010000.0%Dec 18 4:00 PM EST
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To: Pancho Villa who wrote (742)9/29/1997 2:00:00 PM
From: Banjoman   of 1359
 
>>2. you are using sales as the foundation of value. One clear sign this market has gotten a bit ahead of itself is seeing people talk about revenues/sales ratios just like if these were P/E's!. Quite concerning...<<

P/S for these companies is fine for a crude estimate. If you look at a x-section of biotechs with products, you will see that P/S is more homogeneous across companies than P/E - because R&D is expensed immediately rather than capitalized - so companies with high R&D as % sales, tend to have high P/E (because of low E) - e.g. Chiron.

I would however argue that P/S of 4 is more conservative, although 6 may be the average. I am guesstimating (based on Lehman/DLJ estimates) about 500M in sales in 2001, giving a share price of $35-40 (depending on degree of expansion in shares outstanding) in 2001. The prospective return of 30% per annum may or may not appropriately discount the risks of 1) delays in approval, 2) less sales than currently anticipated, and 3) significant liability for redux.

The info I presently have suggests that it is likely that liability for Redux will not be significant, and that the sales estimates above are apporpirate, so I am long IPIC. My experience also suggests that the market tends to oversell stocks when fear predominates - and the litigation concerns certainly have created a lot of fear.

Don
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