I'm sure I am wasting my time with this, but here is what I consider a reasonable scenario and one that makes XOMA an excellent investment:
- DNA/XOMA gains approval for Raptiva as a psoriasis treatment - late Q4 2003,
- Raptiva gains 30% overall market share for 2004 - ($4.5 billion x 30%share X 30% margin x 25% XOMA share) = $100 million in gross margin for 2004. At 20X pretax earnings, Raptiva alone is worth $28/share -- XOMA is worth $35 - $40 per share.
- Share growth to 60% (assuming no growth in the psoriasis market) in 2005 = $140 million gross margin. Raptiva is worth $56 per share and XOMA is worth $70 - $80 per share.
This does not consider growth in the psoriasis market, or Raptiva/Osteoarthritis success.
Other events that are likely in this time frame as well include:
- Castello's retirement -- a non-event in my opinion,
- The emergence of at least one other successful drug in the XOMA pipeline/partnership array.
Good luck to all.
Still doesn't answer the question: What am I supposed to be copying?
I did answer your question on "discount rate for dilution" Since it makes no sense, I tried to answer what I thought your were trying to ask. This was my response in #52071
"These were very off the cuff estimates so I didn't look at EBITDA. Not only that, I'm not quite sure what you meant by discount rate for dilution. I assumed 5% growth in share capital to increase my shares outstanding for figuring EPS. To flesh it out a little - I think MLNM needs to purchase another $37.5mm in stock over the next 2 yrs (someone correct me if I'm wrong) at current prices of $4.50 or so that would be 8.3mn shares or zabout 12% more shares. But I doubt the shares will be issued before the stock reaches $8 - $10 (around fall '03 would be my guess)so my 5% estimate is reasonable. Also, don't forget that that additional cash would generate interest income (albeit at a 1% rate) offsetting the equity dilution some. Was that what you were referring to? "
To your next question on earnings leverage - it refers to the result that higher margins have on earnings and which is that high margins will magnify revenue growth when it comes down to the earnings line.
Yes I have an MBA and I am a CFA and I don't consider myself dumb, but I am dumbfounded as to why you consider the capital structure's impact (or not) on a company's growth rate relevant to this discussion. You use words and phrases like "discount rate", "dilution", "capital structure" and "growth rate" which are all important in financial analysis but you don't seem put them together well. Makes me think you don't really nkow what you're talking about.
You tell me. And let me copy (in quotations) your 'relevant' copycatting:
"Gross margins on drugs are significantly higher than 30% - I would've used 80%. Also, 10% sounds reasonable for marketing expenses, if Xoma must share in them.
However, the thought that this market could reach $4.5 billion in 2004 is very optimistic. So is Raptiva's chances of capturing 30% share in that time. It takes considerable time to educate doctors on new drugs and there will be a couple of competing products that achieved first mover advantage that needs to be overcome. (Though with the unpleasent side effects those drugs have becoming evident by the time Raptiva hits the market, getting doctors to try a new drug should be easier).
So my thinking is that Raptiva can achieve 20% share of a $750 million market in 2004 assuming a December (I know it could be earlier but lets not count on it) approval. That would imply $97.5mm in net proceeds to XOMA. Then trending FY02 expenses to grow 20%/yr (a conservative estimate in my opinion) results in $107mm in EBIT. Less $2mm in net interest expenses and assuming tax loss carry forwards results in 0% taxes. Assuming a 5% growth in share capital this would result in about $0.40 in EPS in 2004.
To value that, with significant growth ahead from a market growing from $750mm to about $5 billion and market share expected to grow along with that. Also given the high margins result in significant earnings leverage, a 20 p/e is very conservative. Even a 30 p/e is but lets assume that. Since mrakets are forward looking, we could expect a 30 p/e to be placed on 2004 EPS atthe end of 2003. That would result in a $12 target price for the end of the year. Of course, these are using highly conservative assumptions but there are a lot of risks to those estimates, the number one being approval, so that is a fair estimate for now in my opinion. But I'll take a triple ever year..."
So for the third time (I know you'll never win the Triple Crown), what discount rate are you using for "dilution"?
BTW, What the hell does this mean:
<<given the high margins result in significant earnings leverage>>
Apparently you haven't figured out that the Nobel Laureates Modigliani/Miller won a million bucks, give or take, for proving that the capital structure (debt or equity) of a company is agnostic to a growth rate.
Either you're one dumb MBA/CFA or what I suspect a "compliment" to rider846, the biggest virtual construct on this Board.
Finally gotta around to reading your "Wuthering Heights" missive, rider846.
Hey, it maybe snowing in the moors of Scotland (shush, don't tell anyone that XOMA (1999) IRELAND is alive and well) but Heathciffe, your good posting confidantes don't share the unassailability of <<your logic and numbers>>. Huh!?! You've never posted any.
There is not a scintilla of reasoned response to the copycatter. Educating dermatologists is not your forte so leave it to the DNA beavers.
Gee whiz or should I say Cheese Whiz, you ain't got much to offer besides a cheeky smile and a Proctor & Gamble dividend, do you?
Nonetheless, Glad (that's another P&G product) that you "agree" to support theft of intellectual property in your inevitable quest to oblivion on this Board.
Hint: Come back as the Prince of Tides.
Regardless of whose assumptions turn out to be correct the fundamentals for valuing the stock going forward seems solid. I too am hopeful that we do better than $12 by year end and actually think that once we have approval the fundamentals that we have been discussing will be the driver for even higher valuations. I am especially pleased with DNA's aggressive posture for driving for approval for psoriasis, and funding trials for other indications (osteoarthritis) that could really result in blockbuster sales for years to come.
Obviously, time will tell if any of this will come to pass, but regatrdless of what the stock does today or next week -- etc, I will continue to accumulate.
Thanks to all for helping define the fundamentals and the outlook for this investment.
Thanks for the compliment. I cannot disagree with you, but I think the visibility of your assumptions (and some of mine as well) are very low which is why I think a $12 target price, for now, is realistic. As time progresses and if your assumptions become more visible, the price (and outer year target) will rise.
Too little data to accurately predict, but while the costs of small molecules are significantly lower (and 90% - 95% margins are very common), margins are also determined by pricing which is why I think Raptiva can achieve significantly higher levels than 50%. If not, companies would not pursue biologics because the returns wouldn't justify the risks and expenses of developing them.
Solid analysis, Stockanalyst.
I agree with your logic and numbers. I personally susptect Raptiva will surprise on the upside, because DNA has already begun the process of educating dermatologists and have created the sales groundwork. And because I think the other options (Enbrel, Remicade, Humira, Amevive) all have grave downsides (in terms of health risks, but-- just as importantly, in attendant liability to the caregiver), I think Raptiva will gain a very large market share very quickly.
You can't give the competition the usual first-to-market advantage because I don't think that will withstand Raptiva's advantages. And I imagine DNA will be pushing those advantages hard. (Plus, none of the others have hit the market yet for psoriasis, so what we presumed would be their time first-to-market advantage is evaporating.)
Don't get me wrong; I'd be happy with $12 by year's end, too. But I wouldn't be surprised if we got more.