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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Grantcw who wrote (40479)	12/8/2010 9:25:55 PM
From: E_K_S	Read Replies (1) \| Respond to of 78752

Hi cwillyg - Re: Avanir Pharmaceuticals (AVNR) I am the wrong person to ask on this company since I can not really value the company or it's new drugs. To me it's a lottery ticket. My only successful pharma/development play was with VVUS. I bought this one in the $2.00/range some years back and eventually sold it around $7.00/share. I had many round trip rides w/ this company as each new clinical trial was going to be their next big block buster drug. I think I owned it through three different drug clinical trials. The only reason I bought the company was that it was the only one I ever found that generated enough income to pay for it's clinical trials w/o issuing too many new shares. In fact, I think in the five years I owned it, they only issued new shares twice which only represented a total dilution of no more than 15%. AVNR has a book value of $0.34/share so the assets they do own are intangible. Their employees provide the company's intellectual capital and they can leave any time. It looks as though they are burning cash at about 5x as fast as it is coming in. They appear to have enough cash on hand to finance 18 months of day-to-day operations. If they are not able to license a JV partner based on successful clinical trials, they will be required to issue more shares. They already have 94 million shares outstanding and may have trouble selling more shares in the future. Looking at the March 2011 call activity, lot's of open interest is at the $6 strike price and even more OI on the June $7.00 calls. The only way I would play this one would be to purchase covered calls. Sorry, but this one does not provide me any "Value Proposition". The company may do extremely well in the future but I would pass on it. Generally new drug development is a money pit black hole to me and I have no confidence in valuing any new drug proposition. EKS P.S. The small E&P companies that I sell covered calls on from time to time actually own hard assets (ie raw land & producing oil/NG wells). The value of the common stock increases in value as new wells are developed and booked as a proven reserve. The main factors that go into valuing these companies are (1) the market price for Oil & NG, (2) the cost of well development and (3) the price paid for land and permitting. Then it is just the time it takes to bring a well to production. You also must be lucky to hit a drill zone that actually produces enough flow to bring the well to production. I can estimate the cost of all of these factors for an E&P company much easier than for a BioTech company developing a new drug.