If you’re familiar with poker, you may have heard of terms such as hand odds, pot odds and implied pot odds. I’d like to discuss these terms and apply them to Panacos Pharmaceuticals (OTC:PANC), and, more specifically, their lead compound bevirimat.

In poker, hand odds are the odds to make my hand and beat the house or my opponent. For example, if I start with two Jacks from a 52 card deck, I know that I have a 2/50, or reduced, a 1/25 chance to draw a third Jack. Let’s say that in the game I’m playing I need the third Jack to win. My odds of drawing the Jack and making my winning hand are 1/25.

With pot odds, I’m concerned with how much I have to bet compared to what my potential winnings are. For example, say I have $10 in the pot and I have to bet $1 for a chance to win. My pot odds are 10 to 1, or said another way, I’m spending $1 for a chance to win $10.

Now combine the two concepts; what I want is a hand that gives me greater odds to win than what I have to spend to win the pot. In the case above, my hand odds versus pot odds are terrible. I’d win 1 out of 25 times then I’d have to spend $25 for my $10 win (25 bets at $1 = $25 and the 1 win out of 25 tries gives me $10). This is a losing proposition and this is also why Vegas can build all those palatial casinos. If you ever go to Las Vegas, take a stroll through the Bellagio and you’ll see what I mean.

Taking pot odds a step further, I want to look at my implied odds. In poker, implied odds are not only what’s currently in the pot, but what will potentially be added to the pot by subsequent bettors. In the case of Panacos, the implied odds are equivalent to potential market appreciation. The market will bid up Panacos if bevirimat is approved and sold to the consumer.

Now that the poker terminology is out of the way, I will outline some numbers and attempt to obtain a future market value (implied odds) for Panacos if bevirimat goes to market and then I will look at the odds (hand odds) of bevirimat making it to market.

**Implied Odds (determining a future value of Panacos based on the approval of bevirimat) **

**Key stats:**

Shares outstanding = 53.15M

Cash on hand = 53M

Current share price = approximately $4.25 to $4.50

Panacos has enough cash for 2007 and likely part of 08, depending on their phase IIb requirements this year.

I’m going to assume they will need to tap into the equity markets sometime in 08 in the neighborhood of 15M shares, which at current prices would provide around 70M in cash. This will raise the outstanding share count to around 68M.

There will also be some options dilution to key executives, directors and the like, so I’ll approximate a share count of 70M.

I now have my share count and now I need to determine how much cash the drug, if successful, is going to generate.

These figures, from the World Health Organization, give me some idea of how large the market is:

About 40 million people worldwide, including 1 million Americans, are HIV positive. Each year, roughly 5 million people are infected with HIV and 3 million die from AIDS.

To gain an idea of treatment cost, the following article is very informative. According to the article, the average annual cost of care is around $25,200. The average HIV person will have a life expectancy of 24 years. The two decade plus cost of care is over $600,000.

Also cited in the article was the drug regimen and average monthly cost associated with medication. It stated that the cost for a typical regimen of the drugs efavirenz, tenofovir, and emtricitabine in 2004 was approximately $1140 per month.

The article also stated that only 55% of HIV patients are getting the anti-viral treatments they should be getting.

With these figures, I can begin to come up with a ballpark figure of the market size and annual treatment costs for bevirimat.

If I know the 3 drugs combined are $1200, I can figure the cost on an individual drug basis is around $400 per month.

The market in the US is 1M and if the article statistics are true, approximately half of the HIV people are seeking treatment. I come up with a potential market figure of roughly 500,000. Once approved, I reasonably expect 100,000 people to use bevirimat (this obviously won’t happen overnight, but rather will be a gradual build up over the course of a year or so). At a $4800 annual cost times the number of patients taking the drug, I end up with approximately $480 million in annual revenues. Using a 25% profit margin, I can reasonably expect around 120M or so in annual owner earnings.

At a 20 X multiple of the 120M, we arrive at a figure of $2.4 Billion in the year 2010 or 2011 (I’m assuming the drug is approved in late 09 or 2010). I use a 20x multiple, because I have no idea how fast the drug will be accepted into the market and 20 is a reasonable multiple for a biotech firm with an approved compound. I divide this 2.4B by the 70M in outstanding shares and I end up with $34/share. (The implied odds are astronomically higher if I account for the entire lifespan of the drug and increase the market size, but I’m keeping this to the next five years only and also trying to keep it reasonable).

So now I have my implied pot odds. $34 is the size of the pot, and I have to spend around $4.50 for a chance to win. My implied pot odds are 7.55 to 1.

**Hand Odds (the odds that bevirimat is approved) **

Now, the last thing I need to do is determine my hand odds. Currently, bevirimat is in Phase IIB. I can say in a general sense, based on past trials by other companies, I have a drug with a 50% chance of making it to market. My odds are 2 to 1 that I have a winning hand here. In poker, if I were to play a hand that gives me 2 to 1 odds for an implied pot of 7.55 to 1, over the long haul I’m going to win big.

Essentially, 1 out of every 2 times I’ll win $7.55 and after expenses I’ll walk away with $5.55. Remember, I have to spend the initial $2 (one win and one loss) to win $7.55. That’s a net gain of $5.55 on my $2 bet. Keep in mind, this is only in the poker world. In the case of bevirimat my win must come first, because if bevirimat fails(loses) first I’m essentially at $0.

From here, I can figure out my breakeven point on the implied odds versus my hand odds. Based on my figures, this point is $17. My implied pot odds in 2010 are 2 to 1 at $17 ($34 to $17) and my current hand odds are 2 to1. If I played this hand at the casino, I’d break even over time. If the share price of PANC exceeded $17, I’d be losing.

Keep in mind when looking this over, I have used a lot of assumptions in my calculation and my hand odds were calculated using past events. You may find the odds of bevirimat’s success much lower or higher. You may also find that the potential market size is much larger or much smaller.

*Disclosure: Author has a long position in PANC*

**PANC 1-yr chart**