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Non-Tech : Bill Wexler's Dog Pound -- Ignore unavailable to you. Want to Upgrade?

To: Druss who wrote (2723)	8/2/1999 2:43:00 PM
From: DanZ	Respond to of 10293

Druss, I agree with your point that the total size of a market can decrease when generic products are introduced. It depends on how much the market grows, the price of the generics, and the market share that the generics take. I'd like to provide an example of how nicotine gum might affect GumTech and we can play with the numbers to arrive at a consensus estimate if you wish. Smith-Kline Beecham reported sales of $279 million in 1998 for Nicorette gum and $488 million combined for Nicorette and Nicoderm (patch). Combined sales of Nicorette and Nicoderm totaled $183 million in Q1 99, a 68% increase from Q1 98. Sales of Nicorette increased 92% from Q1 98 but they didn't say how much Nicorette contributed of the $183 million total. If sales of Nicorette increase 50% from 1998 to 1999, then 1999 sales will be approximately $420 million. I think this is a fair estimate given growth of 92% from Q1 98 to Q1 99 and their recent introduction of a mint flavor. Let's assume that the growth rate goes to 0% (unlikely), that the generics are priced 30% below SKB (conservative), and that generics capture 25% of the market (conservative). By my calculations, SKB's sales would fall to $291.4 million and the generics would capture $97.1 million. The total market would be valued at $388.5 million annually, down 7.5% from before the generics entered the market. Now assume that GumTech captures 50% of the generic business. This is conservative given the previous discussion about what it takes to make nicotine gum for domestic sale, the players, etc. Based on capturing 50% of the generic market, GumTech's sales of nicotine gum would be $48.6 million annually. Given this conservative estimate, and factoring in Zicam and GumTech's other gum products (which are also doing well), one can see why the stock may not be overvalued based on the future outlook. I believe that this estimate errs on the conservative side because I expect GumTech to capture more than 50% of the generic business and generic gum to be priced higher than 30% below SKB's. The estimate would also need to be raised if generic gum captures more than 25% of the overall market and if sales overall grow rather than go flat. These too are good possibilities. Please note that the figures used in my calculations are based on the manufacturer's prices to retailers and would be as reported on their income statement. Best of luck, Dan