So now..., to continue, how about a more refined model, something a little more involved since other metrics show that this is way undervalued? Let's dig a little deeper.
Jay Abella (former biotech analyst at Westergaard's site and sometime SI poster) published an article called "Investment Banking Model of Biotech Valuation" a year or so ago. In that article he sketched a model for evaluating a biotech that I have tried to apply to COCN. As I've mentioned, I already believe it's ridiculously undervalued, but I wanted to look at this in some other ways in order to practice working with some new concepts.
According to the model Abella sketched, when assigning a value to a biotech what you basically do is look at the various compounds in both the clinical and nonclinical pipeline and then attach a value to each by first looking at the market size for the targeted indications, then making a guess as to first year penetration, and finally discounting the value according to each stage of clinical development using the following scale.
A. Preclinical- $5 million
B. Clinical- Phase I- multiply market share penetration by 0.3
C. Clinical- Phase II- multiply market share penetration by 0.4
D. Clinical- Phase III- multiply market share penetration by 0.5
E. NDA submitted- multiply market share penetration by 0.8
The next step is to total these and then add in a value for the patent portfolio by taking each patent at $0.5 million. The result is in effect a crude valuation of the company's technology, discounted according to development risk. The model then proceeds to take into account things like long term debt, current assets, and a value assigned to management.
In the next post, which I'll put up tomorrow, I'll run through the numbers I came up with for this company. It will also be helpful to see the model in action, a kind of case study.
Anaxagoras
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