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

To: Anaxagoras who wrote (166)	5/20/1999 8:12:00 PM
From: Anaxagoras	Respond to of 190

There are various models that one can apply when trying to find a "fair value" for a stock on a fundamental basis. With a research and development company, specifically a biotech, one naturally has fewer options. Applying a multiple to earnings or book value or even sales don't make too much sense. As an alternative, one could use what Michael Murphy has called an M Score, which is computed by dividing the market cap by the last five years of R&D. Now COCN has spent roughly $85 M in R&D over the past five years, and using a current market cap of about $5 M, this gives them an M Score less than 0.1 . That compares to a typical M Score of 10-12. IOW, this is very, very undervalued on this score. Did I emphasize "very"? Another way to approach this is to make a relative valuation to other R&D companies by dividing market cap by the number of employees; using the market cap of roughly $5 million and dividing by the 57 employees I believe remain (91 reported in the 3/31/99 10K, 34 laid off in the recent restructuring) we have each employee valued at $87,719. That's again ridiculously cheap when compared even to some of the most undervalued biotechs. Here's also something you don't see every day. Sometimes it's worth while to compute how much a stock is trading at when compared to its cash position and short term investments (which are easily turned into cash). Whereas it is typical for a biotech, or any company for that matter, to trade at price much higher than this, in the case of COCN it's cash and short term investments (which stood at close to $9 M as of 3/31/99) are almost double it's market cap. But now for something completely different, which is in fact the reason for my present post....Well, actually, it's the reason for my next post. Anaxagoras

To: Anaxagoras who wrote (166)	5/20/1999 8:19:00 PM
From: Anaxagoras	Read Replies (3) \| Respond to of 190

So now..., to continue, how about a more refined model, something a little more involved since other metrics show that this is way undervalued? Let's dig a little deeper. Jay Abella (former biotech analyst at Westergaard's site and sometime SI poster) published an article called "Investment Banking Model of Biotech Valuation" a year or so ago. In that article he sketched a model for evaluating a biotech that I have tried to apply to COCN. As I've mentioned, I already believe it's ridiculously undervalued, but I wanted to look at this in some other ways in order to practice working with some new concepts. According to the model Abella sketched, when assigning a value to a biotech what you basically do is look at the various compounds in both the clinical and nonclinical pipeline and then attach a value to each by first looking at the market size for the targeted indications, then making a guess as to first year penetration, and finally discounting the value according to each stage of clinical development using the following scale. A. Preclinical- $5 million B. Clinical- Phase I- multiply market share penetration by 0.3 C. Clinical- Phase II- multiply market share penetration by 0.4 D. Clinical- Phase III- multiply market share penetration by 0.5 E. NDA submitted- multiply market share penetration by 0.8 The next step is to total these and then add in a value for the patent portfolio by taking each patent at $0.5 million. The result is in effect a crude valuation of the company's technology, discounted according to development risk. The model then proceeds to take into account things like long term debt, current assets, and a value assigned to management. In the next post, which I'll put up tomorrow, I'll run through the numbers I came up with for this company. It will also be helpful to see the model in action, a kind of case study. Anaxagoras