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

To: Jacob Snyder who wrote (511)	3/27/2001 5:05:28 PM
From: Biomaven	Read Replies (1) \| Respond to of 656

Jacob, A comment on earnings quality here. IMNX spent about $120m in 2000 on R&D, or over 20c per share. This was all expensed. Now unlike most high-tech companies, a biotech with a successful product doesn't need to keep running to stay where it is. The income stream from the product is there whether or not they spend on R&D, until the patent runs out (and perhaps not even then in the case of a biologic) or the product is superseded by something better. Product cycles in biotech and pharma are typically very long - 10 years or more, and so current sales are very valuable for products in the early stages of acceptance. (Note J&J just paid 10x sales for Alza). What this means is that the R&D expenditure is really more like a capital expenditure, directed largely at creating new value rather than just defending existing earnings. The current accounting system, however, says that R&D expenditures should be written off immediately (implying they have no current value at all). This means that the earnings quality of profitable biotechs is actually very high, as they all continue a very high rate of R&D expenditures that is not appropriately reflected in their earnings statement. I do agree with your point though that earnings from cash balances are essentially irrelevant in valuing a stock like IMNX, though. Better to just subtract the cash from the current market cap and look at the residual (with the earnings from the cash subtracted out as well, of course). Peter