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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (42252)	1/5/1999 10:51:00 AM
From: Knighty Tin	Read Replies (2) \| Respond to of 132070

Coby, Biotechs and internuts are valued just like any other stock. You figure out the earnings value for their drug/technology pipeline over time, discount it by their chances for success and the competition, then run it through a regular CAPM model. Easy to value, hard to get the right inputs. The real problem is, Shaman is worth $54 on my model if its first drug is wildly successful and nothing if it is not. So, a lot of these firms are zero/one situations. If you play Amgen, Biogen, Chiron, Genentech, Genzyme, etc., you just treat them like smarter drug cos. But I like the smaller names as you get more bang for the buck. That means lots of diversification. What I look for are: 1. Financing capabilities. Lackamoolah can be deadly. 2. Research Alliances. When a co. has a Pfizer or a Schering-Plough or a Merck KgA behind them, their chances for success go up. 3. Low visible competition. Sometimes competition comes from the Moon, but, in general, you can usually see who is working on similar compounds or different compounds addressing the same area. 4. Breadth of pipeline. I call this the Cephalon factor. I have probably made more money on CEPH than any other biotech. I have had to trade it, as it gets incredibly underpriced and then incredibly overpriced. And, like Ligand, it has a touty mgt. But both of these cos. are working on a large number of products in various stages and no one product is going to take them down. For example, Cephalon ran from $7, where I bought, to $49, and I was out way before that price, based upon its ALS drug. When that turned out to be a dud, the stock crashed. That was a big diappointment, but not the only game in the pipeline. Now, they have another drug facing the market and investors are saying "fool me once, shame on you." That makes it a bargain. Doesn't mean it will win, but the odds are much in my favor. Another hint, HQH and HQL own bio stocks and other small med cos. and they sell at large discounts. Although I am conceited enough to think I pick better than they do, I don't know if I pick 20% better than they do, so I own at least one and sometimes both of the funds. MB

To: Ilaine who wrote (42252)	1/5/1999 11:46:00 AM
From: Merritt	Read Replies (1) \| Respond to of 132070

CB: If you don't mind, I'd like to add a little to MB's reply about biotech valuations. This may seem flip, and I guess maybe it is, but they're valued on estimates, based on probabilities, based on possibilities. To be more specific I'll quote from a 1997 research report prepared by Robertson, Stephens & Co. on LJPC. "About 250,000 lupus patients in the U.S. have kidney involvement and spend about $10,000 per year. At our estimate of $6,000 per patient per year for LJP394, a $1.5 billion U.S. market is generated. If Abbott (their marketing partner, sic) captures only 25% of the market in 2001, about $375 million in sales are generated two years after launch in 2001. La Jolla's profit share of this revenue stream is estimated to be about 17.5% of the $375 million, which is about $65 million. An annuity of this $65 million in 2001 for 10 years discounted back at 15% is worth about $325 million in 2001, or using a 20% discount rate from 2001, the value today correlates to a $9.50 per share price target." Of course that's all based on IF the product ever gets to market, and that's something no one really knows - not even someone directly involved in the industry. A private investor can only make "educated" guesses that are probably best based on what the company's alliances are like, e.g. Abbott is to pay about $50mm to LJPC for marketing rights, with LJPC to retain manufacturing rights, receive royalties from sales, and retain rights to collateral drug developments...a very favorable contract for LJPC, which indicates, to me, that Abbott was very impressed with their science. In addition to alliances, it's important that management has had some experience, or experienced help, in dealing with regulatory agencies; and as MB said, enough money for at least two years of operation (better yet, enough to get them through a pivotal trial, or product launch), plus his other points. MB has said in the past that one should have at least 5 different companies, which makes a lot of sense when you consider all the variables and pitfalls. There's a lot of risk, but the rewards are potentially great. And like anything else, the risks can be lessened if you do some thinking and a lot of research. But it's a fascinating area, and well worth the time and trouble, IMHO. Good luck, Merritt