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Affymax, Inc. Message Board

  • foggiafc foggiafc Jun 15, 2013 10:25 PM Flag

    Hypothetical question for Maxdad, Jagan or any other longs..

    Question is about PPS on announcement that O is coming back and Affy has elected to stay as a royalty company distributing royalties to shareholders every year or however it's structured. Say you have a lot of money that needs to be parked and Affy looks like a good candidate but you haven't bought in yet till the announcement. You are looking for a revenue stream for 10-15 years. You are hearing figures of 8-10 per share but could be more depending on sales. At what point would you say, the cost doesn't justify the pps. The reason I ask is because when long term dynamics come into play the equation changes. What might look like an expensive pps at 25 if the person only wants to hold for a short term, might be a cheap buy for the above mentioned scenario. Let's say you want to buy 50,000 shares, would your cut off point be 25 or 40?. I am sure there are probably quite a few on the sidelines just looking at this possibility.

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    • bump. Read the thorough explanations of a royalt set up if O comes back and this is the course.

    • Thanks to all for explaining it in terms that many novice investors are able to understand. Max thanks for a very detailed outline. Let's all hope this is resolved soon. GLTA

    • Royalty Trust Economics...One of the best questions yet and both easy and complex to answer...and I'm assuming you're referring to a Affymax as a PUBLICLY TRADED ROYALTY TRUST whose share price will vary over time:
      1. The closest examples of these would be REIT's (mostly public) and Oil and Gas Royalty Trusts (which are mostly private). You will see that while the share price definitely moves over time that they are generally more stable than more volatile equities like biotechs...But over time or based on major events (like the financial meltdown of '08-09, they still can move fairly dramatically).
      2. A few Pub.Trusts (like REITS) have pretty well fixed royalty payouts that may only be adjusted every few years...The YIELD on these is pretty well known and stable and they (the shareprice) begins to act more like a corporate bond moving up and down with the yield's on treasuries and other fixed income indices. Interest rates go up, yield on the trust stays flat, share price goes down to maintain comparable yields. Just like a fixed yield annuity.
      3. Most public trusts have either quarterly or annual payouts and adjustments to the distribution amounts and are more volatile (as information on how the underlying asset is doing is disclosed in quarterly reports and SEC docs.) as indicators of whether the future distributions are likely to go up or down...BUT are still interest rate sensitive because they in essence operate more like a variable annuity. So share price will be more volatile than a fixed yield (or semi-fixed yield like #2). Share price also move with the market (with Beta's typically well below 1.0, but definitely movements with markets and similar trusts, REIT's, etc.).
      4. To deduce the market (share price) value of these various types of Trust "annuities" one needs to not only calculate anticipated revenue flows, but revenue mix (carrying different royalty %'s and thresholds) and ultimately reduce it to it's DCF value.

      • 1 Reply to maxdad01
      • 4 (continued) But as effectively a variable annuity reduced to it's "fair market" DCF value, the various Royalty Holders (particularly the institutionals) will have varying yield objectives (effectively creating a yield curve) that will determine their participation rates based on all the factors above from 1% to 100% and being a function of how active or passive their position management is for any particular yield based portfolio.
        5. The mix of institutional holders is likely to change fairly significantly from those who are primarily pure/mixed equity (value, growth, risk/reward) players to those who are primarily yield players (who you'll find have REIT's and other variable annuities and other fixed assets in their portfolios). And each of them will have differing yield objectives.
        6. RISK--Once the Omontys return has occurred and has lead to some sort of Public Royalty option there will clearly be a major reduction in the anticipated risk coefficients (based on the results of the study, FDA opinions, EMA results, etc., but also based on the on-going physical outcomes and risks as Omontys is once again active in the marketplace. Just as the 3-5 fatalities and the response to them were unpredictable, if there were to be another "outbreak" it would carry a consequence to the share values of the public trust and also depend on the clinical response to such outbreaks. Remember, that in all likelihood Takeda will not only be sole $ distributor to this trust but most likely also a Trust holder as well, and will be responsible to the Trustee(s) of the trust. So these kind of events (bad and GOOD) will clearly affect share price.
        7. Pro-Forma RISK...which is probably the question most people would be interested if/when Affy should become a Publicly Traded Royalty Trust. First, there will be some risk based discount to the various DCF scenarios above based on the events of the past even if/when totally exonerated by study and affirmed by FDA...MORE

    • Jag and Mb, thanks for your intelligent responses. We should have Max chime in on this as he has had extensive experience in this field. Obviously he can't predict the pps movement but will give us an intelligent input as to what to expect rather then the wild scenarios others keep posting.

    • That's why you have to conduct a market research study, at least including SWOT, PEST, Porter's 5 Forces, to come up with rational estimates of all the assumptions regarding revenue growth, expenditures, corporate tax rate, and so on. With those assumptions, you can estimate future CFs used in DCF valuation model. From that, you will come up with your own estimated intrinsic value of PPS. Then you compare the PPS after the announcement with the PPS you calculated to make your investing decision. Often, market price exceeds the true value of the stock in the case of breakout, and vice versa. For example, I believe the current PPS is below the true value with BK possibility off-table. However, assumptions can change any time due to changes in any forces discussed in SWOT, PEST, and Porter's, resulting in a new intrinsic value of the share. I am answering your question from fundamental and academic perspective. I am sure Maxdad has better answer as he was the Director at GS.

    • Unsure how the Royalty Structure works out for drug companies who licensed their product, this might be entirely different.

      Due to this recall I would anticipate market will give a very very deep discount valuation. I would start with a 25% of the total valuation.

      Assume an avg sale of 1 BLN sales for the next 20 years. 20 BLN * 15% = 3 BLN (this is perpetual)

      Market will assign a immediate valuation of 750 MLN, that is my gustimate. Add 180 MLN of milestone payments. $900 MLN which is around $24 per share.

      The stock will touch near to 52 week high, that is what it is reasonably worth upon reintroduction, stock will surely climb to this level. Sell some for your cost and profit and the rest let it ride.

      Again it all depends on the EMA and Japanese approvals.


      Sentiment: Strong Buy

      • 1 Reply to jagan1961
      • Just make it simple. If we assume that the cash flow is $100M per year and this is perpetual. Assuming cost of capital or the discount rate is 18% (as small biotech is still risky), Market cap = $100M/18% = 555.56M. (assuming no long-term debt)

        Future PPS after the announcement = 555.56/ 41.24 (current mkt cap) * $1.10 (current PPS) = $14.82.

        I take the number $100M because AFFY had gross profit of ~$95M in 2012. After becoming a royalty trust, we can assume no more R&D and administrative expenses.

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