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Biotech / Medical : Agouron Pharmaceuticals (AGPH) -- Ignore unavailable to you. Want to Upgrade?

To: Joe E. who wrote (3800)	2/10/1998 9:37:00 PM
From: Pseudo Biologist	Read Replies (1) \| Respond to of 6136

Joe E., try this link ctsl.com for a description of Murphy's valuation method. PB

To: Joe E. who wrote (3800)	2/15/1998 5:51:00 PM
From: Joe E.	Read Replies (1) \| Respond to of 6136

<<Mike Murphy ( CTSL) has an interesting approach to valuating Biotech Companies as a function of their R&D Investments, cash reserves and burn rates? I wonder if it could applied to AGPH.>> Murphy has a scoring system he calls by a proprietary name which he says is useful in screening development stage companies. It is a price/R&D ratio,using R&D for the last five years. This can be used on development stage companies, and operating companies. He says that scores in the 10-12x range are usual, under 8x interesting, under 5x compelling, and under 3x is available and could make you lots of money if the research is good. Once again, he uses it as a screening device to avoid the most hyped research stage companies. Before I give the results of my calculations for AGPH and VRTX as well as my adjustments, let me say I am no expert on this methodology, although it seems reasonable. Also I have no connection at all with Mr. Murphy and his newsletter. Here is a link to learn more about the subject and maybe even buy advice right from Mr. Murphy: ctsl.com Using 33,238,000 shares for Agouron and a closing price of $37.75 and R&D over the last 5 years of $319,059,000 (counting research performed by Alanex), I get a score of 3.93 for AGPH. I call this the gross score, as it includes all of the R&D. For Vertex I get a gross score of 6.79. (Vertex closed at $38.) A lower score is supposed to be better. What follows departs from what i have read of Mr. Murphy's method. Since both Agouron and Vertex do research under contract, and thus don't get to keep all of the benefits of the research, I also looked at the scores on what I am calling a net basis. I figured that the sponsors get half of the value of the research, and so deducted half of the contract research money received from the gross R&D. This gives the net R&D. On this basis AGPH has a score of 5.64 and Vertex 9.34. For the third adjustment I tried to take into consideration the huge pile of cash that Vertex has. I am calling this the net net score and calculating it by deducting the book value from the stock price before calculating the net score mentioned in the preceding paragraph. I am using diluted shares for this too. Agouron's book is $6.48 and Vertex has a book of $10.19. On this basis the net net score is 4.67 for Agouron and 6.83 for Vertex. Neither Vertex nor Agouron is likely to run out of funds any time soon, so there is no worry about the burn rate. The market seems to value Vertex's research about 50% higher than Agouron's. Any corrections cheerfully accepted.