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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Lighthouse who wrote (1117)	5/18/2000 5:14:00 PM
From: Biomaven	Read Replies (2) \| Respond to of 52153

Lighthouse, This is a very interesting issue. First, just to clarify, INCY seemed to be talking here not about their patent values, but their contractual values based on the royalty contracts they have signed with pharma. This is a much better defined and more certain right than the value of their patents, which at this stage are extremely hard to value at all. Second, theoretically speaking, spinning off an entity shouldn't do anything to the valuation model at all. 2=1+1 However, where you are dealing with very different animals, sometimes 1+1=1.5 (for small values of 1 <g>). The point is that a royalty interest is comparatively easy to value, whereas the patent valuation and the rest of the non-subscription-fee part of INCY is hugely hard to value. In this situation investors often behave irrationally and ignore one part or the other, depending on their mood. Thus in the pre-genome rush days, investors looked only at the subscription revenue and ignored the rest - look at how the stock tanked when they said they would have reduced earnings because they were spending more aggressively. Of course during the genome-rush investors bid up the "other" part overly-aggressively. Historically Wall Street has had a hard time valuing biotechs that are just over the cusp of profitability. Once they have a profitable quarter or two, suddenly their pipeline is irrelevant and all that counts is quarterly sales. If INCY was split into two parts, one containing just the royalty interests, then I think you would get a more rational valuation of both parts. I wouldn't suggest selling the royalty interests any time soon, as they are still way too distant to value properly - just spinning them off to the shareholders would work fine. It would also serve to sharply distinguish the INCY business plan from the CRA current non-plan, and demonstrate that a good chunk of INCY's value does not depend on airy-fairy patent rights but good solid royalties (albeit on drugs that don't yet exist. <g>) Peter