Isn’t an efficient market supposed to discount back the value of a R&D company to the risk-adjusted NPV in order to put a price tag on their science?
It is fairly easy to calculate the valuation of biotech companies when they are at commercialization stage but it all gets a bit more complicated when they are at various development phases having said that there is a value for each and every stage during the process. Over $200 price tag on the company’s share price (as per some suggestions here) based on Immudonmedic's $21 billion deal for a developed drug (using real world evidence of comparable drugs as a reference) is the easy way to do it or we can consider many factors such as size of the targeted market, potential market share, price and net profit margin of the drug etc. etc. to come to that number.
Once a biotech starts their program the process goes through phases of research, testing, and FDA review, during any of those phases the drug can fail therefore analysts create a discounted cash flow and choose a probability discount rate to value the program, they call it the risk adjusted NPV which again includes two main factors projected cash flows and the probabilities for the failure/success.
The cash flow projection has two parts the development cost which is done by putting together a proforma budget analysis by the company the second part is the market revenues again the company needs to look at the prevalence of the condition, the potential market share, the geographic of targeted market, how many patients will actually take the drug for their condition, price of the drug, the gross margin, marketing expenses, SG&A, etc. to estimate the market revenues.
The probability scenario as per UCSD are for phase1, success probability of the stage is 65% and overall approval success is 15 %(90%x65%x40%x65%=15%) phase 2, 40% and 23%, phase 3, 65% and 59% and IND 90% (for approval and that stage).
Now when we have the projected cash flow and probability of success, we can do the risk-adjusted NPV, quite frankly there are few other factors which should be considered but let’s go with simple math so let’s say the RBC analyst and his market revenue projection is correct and Gilead did a decent job of calculating the projected cash flow therefore let’s use the price tag for the Immudonmedic's $21 billion deal as a reference and a share price of over $200 at the finish line then apply the 15% probability to the equation for company’s phase 1 trial, we end up with $30 share price for the phase1 trial now of course that would be the full value of a successful phase1 which could be several months from now but one would anticipate as the residual risks are decreasing with the progress of the phase 1 therefore some of that value should already has been ascribed , we could do the same exercise with NASH Phase 3….
This is the case for many other R&D biotech’s valuation which hasn’t been really the case for THTX. This is why the company needs to make more efforts and breakdown all these numbers and give it to the market in a silver platter. The company’s valuation is misunderstood and the company and only the company has to put it right. This is the job of the IR department with or without many years of experience.