Sunday, January 14, 2007

Biotech Valuation Indices

A brief summary of the indices used in the analysis of biotech stocks.

Updated - the date any update to this analysis is done

Company - Stock code of company

Price($) - Market price of stock at date of analysis

NTA ($) - Net Tangible Assets = Total Assets - Intellectual property and other intangibles.

P/NTA - Ratio of Price to NTA - a value of 3 or below is considered underpriced and worth buying. A value of 9 or above is definitely not worth buying.

Team - the quality of management is represented by this index. It is based on a points system that rates the directors on their qualifications. (see key below) - over 5.0 is good.

BurnPeriod - the number of quarters left before cash runs out, based on the previous quarters cash burn rate. Over 4 quarters is fair. Over 8 quarters is worth investing.

ProductPipe - the stage of the product development ranging from pre-clinical tests to commercialization. Over a value of 5.0 is a good sign.

ForeignMarket - Companies with products that sell internationally are more highly rated. (see key below). Over a value of 3 is a good sign.

Cash:Debt - the ratio of cash to debt of the company.

Key to Index Ratings
Phase 1 = 1
Phase 2 = 2
Phase 3 = 3
Market Approved = 4
In Market =5

Prof = 1.5
PhD = 1.0
Master = 0.8
Hons = 0.7
MBA = 0.6
Biotech Exp (10year) = 0.5

Foreign Market Penetration
Plan to Enter = 0.5
Just Entered = 0.9
1-3 years = 1.5
Over3 years = 2.0

The indices listed above are aimed to highlight the fundamentals of the company and is used to reach a decision on whether to buy a certain stock. The philosophy is not to determine a numerical value for the company but rather a decision whether to buy a certain stock or not. It does not explicitly provide a sell decision because we implicitly assume that when we buy a biotech stock, we will not sell it until it doubles in price at the very least.

The Team index is scored based on scientific qualifications, since this analysis is focussed on biotech stocks. MBA is also recognized here. Note that this scheme of rating is not accurate as there are those which contribute significantly to their companies even though they do not have high scientific qualifications. However, this rating is adopted because this analysis rates the management without personally meeting the management team.

Not all biotech companies develop drugs which need to go through the whole clinical testing phase. In such cases, the Product index is still used but with each product judged in terms of their development and their timeframe to commercialization.

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