>> What do you think BTRN is worth to any company that has confidence in the potential efficacy of 507<< estimating >> one year of royalties, six years after introduction...... let's say $150 million. <<
OK, Rick, I'll play. (I ran this up this morning, and have spent some of the time since shaking my jowls over the numbers and wondering what I've done wrong. )
If BT-322/MEDI-507 yields $150 MM annual royalties due to BTRN under its agreement with MEDI in 2008 ("six years after introduction", assumed to be three years from now), what might someone pay for BTRN next week? One might apply a PE of 25 to those 2008 royalties:
$150MM X 25 = $3.75 Billion in 2008. (This disregards any SG&A or other expenses, but also gives no value to BTRN's Xenomune and Allomune programs.)
The 25 PE is arguably low for a company at BTRN's stage of development in 2008 in this hypothetical, but someone else can think up a list of "comparables" and argue for a different PE. (Most big pharmas are running PE's above 30; Pfizer's is somewhere above 50; and if we're talking about the value of an income stream to a big pharma purchaser, those PE's might be the right analogues.)
What, then, for a 1999 present value for this $3.75 billion (in 2008) company? Which is mostly the question, What discount rate should you apply?
What discount rate you use is largely a function of what perceived risk you are trying to account for. Put another way, the discount rate reflects the return you "demand" to compensate for the risk you are taking with the investment. In my back-of-the-envelope calculations I usually use a 25% or 20% discount rate for SEPR (low, diversified risk that it won't achieve the rate of royalties/co-promotion profits I'm trying to value); 50% for more speculative biotechs (MCDE, ISIP), 40% or 45% for TTP's Zomaril [iloperidone] (reflecting Novartis's $100-150 million vote of confidence).
The hypothetical purchaser, you say, "has confidence in the potential efficacy of 507." OK, how about a 35% discount rate if they're so bloody confident. [Someone else (Rick? Peter Suzman?) with a better idea of big pharma's "hurdle rates" - the rate of return they would expect before investing in a drug-development program - might comment on the discount rate a big pharma acquirer would use, and how it might be different than the discount rate an outside minority portfolio investor would apply.)
$3.75B in 2008, discounted at 35% annually for 9 years = $252 million!
(If you use 30%, the number is $354 million; at 45%, the number is still $132 million; at 50%, 98 million; all well north of BTRN's current market cap of about $20 million [about equal to BTRN's cash in the bank - i.e., you get for free the commercial rights to the scientific output of probably the premier transplant medicine research unit in the world? Were you asking whether BTRN was cheap?).
Whatever a muncher would want to pay for 507, it presumably would add a bit for BTRN's earlier-stage Xenomune and Allomune programs. Say $10 million of the pair, given the huge markets they are aimed at? More?
"The answer " then, is that BTRN is worth something like $262 million, or about $30/share, to an acquirer next week; a 10-bagger-plus from here.
So what's wrong with this picture? My math, my (or Rick's) assumptions, or the market's inability to perceive the value of a small biotech?
-- RCM
P.S. For some cross-reference, see the useful discussion on biotech valuation on the ENMD thread, around posts 1741, 1743, 1744, including Peter Suzman's #1743:
Message 7857450 . I don't believe these were noted here before.
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