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However, I just can't agree with a valuation scheme for IPIC based on year 2001 potential sales of Citicoline!!! I would at most agree on a one year projection of sales for an existing product line for a sales ratio calculation. <<
Using discounted future earnings is a standard way of valuing biotech companies (if you look at sell-side analyst reports). If you set the discount rate high enough to account for the uncertainties, it is not totally crazy. I'm still learning about biotechs - trying to figure out if there is a rational way to value the companies. Discounted P/E or P/S is the best I can do so far.
My views on the litigation possibility are based partly on NeuroInvest's post, and partly on my own observations that in most cases the market over-reacts to litigation uncertainty. I have no idea what will happen, and today's (9/29) WSJ article on AHP saying that they will take a charge of $200-$300M after-tax for the recall, with the additional charges in the future for liability concerns me a lot. The article mentions liability of up to $4B, spread over 10 years. If 10% of that gets assigned to IPIC, that's the current market cap of the company.
I am long the stock -a half-position purchased at 14.5, hedged with Dec. 15 calls sold for about 1.5, so I have a net cost of 13. In retrospect, I was foolish to buy when I did (on first news of the liability) - I should have known that later news would drive stock down further especially with end of the year pressures on weak stocks. I have no other relationship with IPIC - got interested because of analyst comments in the media about IPIC's failure to respond to the positive phase III trial of citicholine, but felt $20 was too expensive (based on my crude estimate of a $40 price in 2001 if citicholine pans out).
I consider IPIC extremely speculative at current prices - since my best case analysis gives a 35% compound return over 4 years. I'm not sure that is enough to take on the risk that the liability suits destroy the company. On the other hand, the research on which the recall was based seems quite flawed, and only 9 of the patients were solely on Redux. So the scientific odds are that Redux is not involved. Time will tell.
Nice to meet you, Pancho. Let me know your next target - I think I'd rather be on your side next time :-) |
