"I don't really buy the judging of the fair price for a company on market reaction. Most of the time I read investors saying that the market is NUTS! We still have analysts saying that the fair value for Ligand, right now is around $16-$20, if I remember rightly. Henry could help in this aspect."
If anything the market over-reacts to good news - particularly for biotechs. If the market doesn't react positively at all, then it probably wasn't such hot news.
As far as analysts' fair value, what they do is estimate the best case scenario and discount it with a HUGE risk factor. But I think the market generally uses a bigger risk factor. I.e. if there is a 50% chance that you will get $1 and a 50% chance of getting 0, the analyst will say, the fair value is $0.50. The market, however, says, if this product doesn't work, I'm going to lose all my money, I'm not paying $0.50 for that. Maybe I'll pay $0.20 - I can live with that.
So this is where you can make money in biotechs IF YOU ARE PATIENT - and if you don't commit TOO much to any one name. If you invest in biotechs it's also a good idea to put some money in a couple of companies to reduce your risk. If you understand the company, the science, I think it is possible to get a better understanding of the odds than the market has. If you think the odds of failure are more like 10%, 20%, and the price is $0.25, and the reward is actually $1.50, that begins to look like a better deal.
I think there is less risk to LGND than the market is pricing in. I like the platform, and I really like oral Targretin. I think the risk of oral targretin not making it to the market is relatively low and that the market doesn't appreciate the full sales potential of the product. At the same time, I don't BLAME the market for being skeptical. Too many people have been burned on what once looked promising.
That's why biotechs don't move in a gradual fashion. When significant risk is removed and the market potential is significant, biotechs LEAP on this news. The clinical trials on ONTAK were publicly available. I thought there was little risk that it would not be approved. The sales potential for ONTAK is small. And I think the market's reaction supports my opinion - the sales potential is small, and the risk of rejection was perceived to be small. Small risk times small value = small to no effect.
"Then why did Ligand pursue SRGN instead of taking the cash? I have to put my confidence in Ligand's management on this one. They have a deep pipeline. Henry says that Ligand is way underfunded. If so, why would they spend $75 million on Seragen, instead of funding their pipeline?"
As I said, it could have something to do with giving their salespeople a couple of products to sell, and this having dividends for their internally developed projects. Maybe the other products in the pipeline were under-rated by the market valuation.
"My guess is that they wanted to effect revenues and earnings ASAP, and ONTAK would do this for them."
I hope that's not the reason! What's the point of effecting accounting earnings and revenue if it doesn't add value to the company? If the present value of the future earnings of a company is, let's say $40 million, if Acme Corp. (apologies to Wile E. Coyote) bought that company for $50 million, it would increase its earnings and sales, but would be destroying shareholder value. Do you see what I mean?
I'm saying I think the acquisition probably added a little value to the company (which is why I HOPE they did it) but that the overall effect was pretty insignificant. |
