Sepracor-Looks very promising Message Board

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Biotech / Medical : Sepracor-Looks very promising

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To: BMcV who wrote (1463)	11/20/1998 12:57:00 PM
From: Biomaven	Read Replies (1) of 10280

Bruce, Is there any validity in the idea of using LEAP prices to determine at what rate the market itself is actually discounting earnings (as opposed to one individual pulling a number out of the air)? Or are other factors involved in setting those prices? Afraid not. The LEAP price is based purely on the stock's volatility and the risk-free interest rate (as well as the maturity and the strike price, of course). What discount rate to use in a discounted cash flow analysis is a vexed question. Basically the rate should reflect the riskiness of the investment. Thus venture capital investors use ungodly high rates like 80% or higher to reflect the high chance of the investment going belly-up. A very high rate has the effect of ignoring everything that happens in the out years (unless there is huge earnings growth). For SEPR, the analysis is particularly tricky. To my mind, the risk decreases here as you get beyond 3 or so years. If SEPR has reasonable earnings in 3 years, there is very little risk, in my view, that it will not have substantially higher earnings in 5 or 6 years. So a better model might actually be a higher discount rate for the first 3 years, and a lower one thereafter. Peter

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