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

To: Vector1 who wrote (183)	11/17/1997 11:07:00 PM
From: Haolin Ni	Read Replies (1) \| Respond to of 645

Investors of AVIR need read this article carefully. A Lesson in Valuation The Motley Fool - November 17, 1997 17:54 IMNX NSTA FDA V%MFOOL P%TMF November 17, 1997/FOOLWIRE/ -- How do you value a company? The principal asset any company has is its ability to generate cash. Whether it does this by selling a product, service, or its own assets, the value of any company ultimately comes down to how much cash it could hand over to investors. Many academics argue that the value of this future stream of cash expressed in today's dollars is the intrinsic value of the company, whether it comes from making anti-gravity devices or bubble gum. If a company is worth the current value of the entire stream of cash it will generate over its life, determining the dollar amount of this stream of cash becomes the duty of all intelligent investors. This is particularly challenging for companies that do not currently generate any cash. When a company has a history of profitability, estimating the future cash flows is usually a matter of assuming a conservative growth rate and trying to build in some room for error. When a company has never been profitable, small shifts in what that the perceived future profits could be can cause huge shifts in the current value of the company. Take today's implosions in shares of Immunex (Nasdaq: IMNX) and Anesta (Nasdaq: NSTA) as cases in point. Immunex plunged $6 5/8 to $63 1/2 after investors became concerned about how much of its new injectable rheumatoid arthritis drug the company could sell. In a written report, two analysts at NationsBanc Montgomery questioned whether Immunex could meet the high expectations investors are currently pricing into the stock given that the drug is expensive to make and competes with equivalent products made by competitors. High costs combined with uncertain pricing power equal questionable future profits, something that caused the share price to decompress. Anesta also took a header, losing $3 9/16 to $16 15/16, on reports that the Food and Drug Administration (FDA) stated it was not ready to approve its painkiller "lollipop" for use on cancer patients. The FDA demanded further data and analysis before any approval could go through. The blow came completely out of the blue for Anesta, as the painkiller had been unanimously approved by the FDA advisory panel that previously reviewed data surrounding the drug. As Anesta has been losing money at an accelerating rate over the past few years, its entire valuation hinged on the cash flows the new product could generate. When yet unseen dollars were questioned, the value of the company changed radically in just a few minutes. Although plenty of investors maintain that the actual financials of the underlying business are insignificant when purchasing stock, preferring instead to examine trading data for signs that shares are being accumulated by institutions, it is hard to deny the reality of how businesses are priced when looking at reactions to news like this. Until today's debacle, shares of Immunex had been rising on decent volume. After one research report questioned whether the company could actually make money with its product given that cheap generic alternatives abound, the entire company is being valued at 10% less than it was the day before. As Immunex has been losing money for the last few years, the valuation completely hinged on unknown future events -- nothing in its past indicated at all what kind of earnings power the company had. In the end, Immunex and Anesta represent object lessons about how much risk investors assume when they buy a company whose business model has never been proven. Even if these drugs are blockbusters, questions still remain about pricing, costs of manufacturing, overhead costs related to other company endeavors, and the continued issuance of shares as a means to finance future development. If a company has never shown a lick of cash on its balance sheet and does not generate substantial revenues from an existing and proven product, the valuation becomes extraordinarily volatile and subject to massive shifts if there are even tiny changes in future assumptions. By and large, unless an individual investor has a powerful knowledge advantage due to education or experience, these kinds of investments would seem best avoided. -- By Randy Befumo