Merritt,
To add to your great post on the difficulty of valuing biotechs
<<they're valued on estimates, based on probabilities, based on
possibilities>>
LJPC is a good example of this. First, as you've pointed out, analyst's projections are more than a little bit of hocus pocus. Their models are output derived since it's so easy to tweak the hard-to-quantify inputs. The analyst decides on the target price, and it's easy to rig the numbers to produce that price. It's a little harder to do with companies with established growth rates, margins, and earnings ... : )
This brings up a serious point. Analyst's reports on biotechs are *not*, not reliable. They're often good for identification and analysis of salient issues, but they're highly suspect when it comes to buy / sell recommendations, both because it's just hard to do well, and these guys are usually talking their book or their comp plans. JMHO, of course.
Another issue raised by the discussion of LJPC. It's even more difficult to assess companies like this. Here are some key points.
Merritt quoted from a Robertson, Stephens report valuing the lupus drug. As pointed out, lots of possibilities, on probabilities, etc. Even if these were objectifiable, there are other "ifs", among those:
- what's the lupus market space going to look like in 2-3 years at target launch?
- what's the optimism that the lupus drug will complete its trials in the timeframe people expect? Having talked with the company, I'd say their timeframes are quite aggressive, even misleading. Could this have anything to do with the fact that they are short on money, and the more aggressive timeframe masks their capital position risk?
- and don't forget the risk of running out of / short on money. kinda hard to get a fair price for your equity when the sand's running out of the hour glass ...
- and what about the follow-on products? lots of investors are concerned, rightly so, about investing in one-product biotechs. The risks are too great to bet the company on one product, so people look for a pipeline, as well as a platform technology. LJPC makes a good surface case for their xenotransplantation product, but if you look under the covers, they're driving for the green from the tee on a par 5. I suppose it's possible they'll succeed with this product, but it's a real high risk initiative at this point.
I don't mean to pick on LJPC (okay, I do, a little bit, I like the people but they could be a little more judicious in the way they present their story), however, they're illustrative of the difficulties in evaluating any given biotech.
Peter |
