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A few years ago, while working on a college project, I bumped into Ben Graham's amazing book on value investing, The Intelligent Investor. That was my first tryst with the mad world of stock markets and ever since, I have tried to identify potential undervalued investments from a fundamental... More
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  • Alimera Sciences: Iluvien's Commercialization Suggests 122% Upside

    With the world moving towards a predominantly ageing population as a result of declining fertility and lower mortality rate, newer opportunities have been created in the health care space that require health solutions that cater to the requirements of old age. Add to that the ever increasing cases of diabetes and diabetes-induced diseases, and you have a large market at hand to cater. One company that looks set to take advantage of the situation is Alimera Sciences (ALIM).

    About the company

    Alimera Sciences (ALIM), founded in 2003, is a biopharmaceutical company that specializes in the research, development, and commercialization of prescription ophthalmic pharmaceuticals. They are presently focused on diseases affecting the back of the eye, or retina, because these diseases are not well treated with current therapies and affects millions of people across the world.

    To date, Alimera has focused primarily on the following conditions:

    1. Diabetic macular edema (DME)
    2. Retinal vein occlusion (RVO)
    3. Age-related macular degeneration (AMD)

    Source: Company website

    A breakthrough product

    With no truly effective cure available for vision impairment caused by chronic diabetic macular edema, the company has come up with Iluvien, a product which has received marketing authorization in Austria, the United Kingdom, Portugal, France, Germany and Spain, and has been recommended for marketing authorization in Italy, for the treatment of vision impairment associated with chronic diabetic macular edema (DME) becoming the first ever product to be approved for the treatment of chronic DME.

    Notable latest quarter

    Iluvien is ALIM's only commercial product. The second quarter of 2013, saw the company generate revenue from sale of Iluvien for the first time. It is noteworthy that the third quarter of 2013 saw the company record a growth of 300% in revenue from the sale of Iluvien compared to the previous quarter.

    Although, the company does not expect to generate any significant cash flows until the end of 2014, the growth in revenue from Iluvien sales compared to the previous quarter highlights the drug's immense potential, and indicates the beginning of a favorable financial period for the company going forward.

    The company's management also highlighted the positive response of physicians and patients for Iluvien during the latest earnings conference. Following is an extract of the same:

    We are pleased with the progress we're making in Europe. We increased revenue by over 300% compared to the second quarter and expanded the number of physicians implanting ILUVIEN for their DME patients in Germany and the U.K. Despite a modest start, we're pleased with the quarter-to-quarter growth, as well as the monthly growth in the last quarter, as September sales outpaced those of July and August combined.

    Consistent with ILUVIEN's indication in the approved EU countries, physicians are identifying patients who are insufficiently responsive to currently available therapies. The initial response among physicians and patients has been very positive, with reports from physicians of significant improvements in the reduction of retinal thickness, as well as visual acuity gains. We're also hearing an increasing number of patients' stories where improvements are seen in their day-to-day lives. It's important to note that for many of these patients, they were not able to gain improvement in visions on other therapies.

    As a result of the early success, after being treated with ILUVIEN in one eye, some patients have proceeded to have the other eye treated with ILUVIEN as well. In Germany, as we continue to pursue contracts with health funds, a fundamental element process to this demonstrate clinical demand through submission of IRS, or individual request forms, for doctors. We believe we're making good progress, and this is consistent with the significant increase in the breadth of usage across Germany.


    Alimera is a growth company which is now getting into the commercialisation phase. Although it is difficult to estimate the total population of patients suffering from DME with precision, a ball park figure may be obtained by perusing through the population of patients suffering from diabetes.

    Since the company has received marketing authorization only in a couple of European nations so far, my valuation of the company will be based on statistics pertaining to these specific countries.

    The total population of patients suffering from diabetes in Europe stands at roughly 60 million, with roughly a third of these belonging to the 8 countries in which Alimera has received marketing authorizations to sell its product.

    Estimated population of patients suffering from diabetes (for these 8 countries) is ~20 million.

    Of the total patients suffering from diabetes in Europe, around 5.4% are expected to develop blurred or double vision as a result of chronic DME. This brings the total market base for ILUVIEN in these 8 countries to ~1.08 million patients.

    The cost of implant is expected to be around $7000-$8000, for my analysis I will use $7500 as the potential selling price.

    Expected market in revenue terms from these 8 countries comes out to approximately $8.1 billion.

    While the market is huge, different treatment alternatives exist, for example laser therapy and pharmacotherapy.

    Assuming the company is successful in leveraging its product to treat the said disease, and with many countries expected to help patients in partially or wholly meeting the treatment costs, I expect Alimera to grab at least 50% market share in the next few years.

    With potential sales of $4-$5 billion, applying the sector average price to sales multiple of 2.9 gives you a potential value in the range of $11-$14 billion. Moving on, in order to sustain the level of production to meet the sales target, the company has to adequately meet the capital requirements. For my analysis, I have assumed sales to capital ratio of 1.04, which represents the average for the pharma sector.

    To generate $5 billion in revenue, the company needs to infuse capital to the tune of $5.2 billion. Assuming the company employs all equity financing, the potential equity shares of the company should be around 2,600 million, which gives a per share value of $5.31, an upside of ~122%.


    Following are the triggers which in my opinion can spur this upside-

    1. A rising population of patients suffering from diabetes (382 million people globally suffer from diabetes, and the number is expected to grow significantly in the coming times)
    2. Approximately 14% of the patients suffering from diabetes worldwide are expected to develop chronic DME, creating a huge market for Iluvien.
    3. Iluvien's potential to address other ophthalmic diseases such as dry AMD, wet AMD and RVO.
    4. So far only 8 countries in Europe have permitted ALIM to market Iluvien, which leaves a lot of scope for growth as the company moves ahead, and receives permission from drug regulatory bodies across the globe.
    5. With existing treatment methodologies fairly ineffective in treating chronic DME, ALIM has the opportunity to grab a lion's share of the market in a relatively short time span.


    1. With the pharma sector having to operate in an environment of intense scrutiny and regulation, ALIM's inability to secure permission to market Iluvien in large markets of US or Europe may pose a significant challenge in achieving the revenue targets and sustaining long term growth. But as we have not considered any sales in the US markets, this risk does not effect our valuation of the company given above. On the other hand, if the company does succeed in securing marketing approval in the US (which I am positive it will), this will only add significantly to the existing market base, in which case the upside will be even greater.
    2. With the drug expected to be priced at ~$7000-$8000, company's inability to bring down the price so as to make the product a mass market offering may seriously hamper long term growth, especially in key emerging markets of India, China, and Latin America.
    3. If the company is unable to raise sufficient capital to finance further development, the company may find it challenging to achieve its operational targets.


    A breakthrough product impacting millions of lives, and unavailability of any viable alternative treatment methodology create a favorable environment for ALIM to cash in on. In view of the significant market potential for Iluvien, ALIM has a considerable growth potential going forward. In my opinion, the current market price of ALIM does not take into account the significant growth opportunity that exists for ALIM which creates immense upside potential for the stock.

    Considering the above factors, I believe, ALIM makes for an impressive long term value play.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: ALIM, long-ideas
    Dec 10 6:32 AM | Link | Comment!
  • A Bullish Case For Tesla With 50% Upside For The Risk Takers

    For a company which has experienced an unprecedented surge in stock prices in the last 12 months, Tesla Motors Inc (TSLA) has undoubtedly been one the biggest successes in the stock market in recent times.

    TSLA Chart

    TSLA data by YCharts

    Without mincing words, I will cut to chase and remark that, I believe, Tesla has an upside potential of ~50% in the coming 12 months, with a target price of $266.

    A brief history

    Tesla is an idea whose time has come. When Apple introduced the iPhone in 2007, the late Steve Jobs said, and I quote " Apple has reinvented the phone with iPhone."

    The last 30 years have seen the American technology sector deliver stellar products one after another, revolutionizing the way we live, interact, and communicate.

    Tesla came into being a decade ago, when a group of silicon valley engineers set out to make a difference in a bid to replace the traditional internal combustion engine (which is still the backbone of the global automobile sector) as the principal power train technology, to an alternative fuel powertrain technology.

    Sensing the opportunity, Tesla came up with its unique, powerful, and proprietary electricity run power train technology, to lead the next technological era of the automotive industry.

    In all fairness, I would like to point out that Tesla, in order to justify its current valuations, has to achieve revenue at par with any major auto player, and play at the margins of Porsche; sounds ridiculous, doesn't it?

    I'd say, no. And those of you who are interested in seeing this phenomenal opportunity at hand, are advised to read on, and find out for yourself.

    I don't agree with Bank of America's bearish outlook, oh wait, the grizzly bearish outlook of the stock, setting the 12 month target price at $45; and here's why-

    1. Robust government support from emerging and mature economies alike.
    2. Proprietary technology.
    3. Ahead of competition.
    4. Massive overseas expansion plans.
    5. Growing global market for EV's.
    6. A promising weapon to fight the dangers of climate change.
    7. A passionate leadership.
    8. Substantial growth in top line.
    9. Increasing Cash Pile.
    10. A well-managed capital deployment strategy.


    Before I dwell upon my valuations, I would like to elaborate upon the above mentioned factors to explain their potential to spur this upside.

    • Be it the $8.5 billion lending program of the US department of energy, to help car companies overhaul their existing setups to manufacture EV's, or China's $15 billion "New Energy Vehicles Program" (The two largest markets for EV's across the globe); both clearly showcase the strong intent of the governments' to support the growth of EV's in their respective countries.
    • From Toyota to Daimler, all major car companies are lining up to obtain Tesla's electric motor technology to drive up their EV ambitions; and trust me, it doesn't hurt when your competitors are your customers. A $100 million contract from Toyota to supply the hardware for its RAV 4 EV, or the featuring of Tesla's proprietary power train technology in the upcoming Mercedes B-class models, to be launched by Daimler in 2014, make a big statement about the inability of these players to come up with a viable alternative to Tesla's revolutionary solution to the EV puzzle.
    • Overseas expansion is firmly on the company's radar, as is evident with the company coming up with their first overseas manufacturing plant in Europe and plans to rapidly expand their Supercharger network across the continent, to enable cross country travel with ease, and offer a viable alternative to gasoline powered vehicles.

    • The above chart highlights the favorable environment for EV players across geographies, with governments providing attractive benefits to boost the market for EVs in their respective countries.
    • With rising concerns to tackle the threat of global warming, technologies that promote reduction in global carbon emissions will play a critical role in defining the next century. Tesla, in my opinion is one such firm which has really taken upon itself the task to lead the change, and build a better tomorrow which is evident from their massive investments in research and development to constantly improve upon their technologies.


    For Tesla to justify its high valuation, it has to multiply its revenue manifold. The first half of 2013 saw the company report a top line of ~$950 million, recording a robust growth of around 2000% from a year ago.

    While growing revenue will become challenging as the firm continues to expand, to analyze revenue we should first define the market.

    If we consider Tesla to be operating in the niche electric/hybrid car market, the size is relatively modest, and the potential growth in top line should reflect that. However, if we consider Tesla as an automobile company operating in the automotive industry, the size is mammoth and the revenue should be estimated accordingly.

    In my best case scenario, I will consider the latter to justify my valuations.

    Best case scenario

    (click to enlarge)

    On the valuation front, I have assumed the company's revenue to grow @ ~80% to reach $100 billion by FY 2023, considering the size of the global automobile market; and I am not considering EV as an altogether different sector, I consider it Automobile (after all its a car right!). Plus, the company has plans to come up with a new model (Model X) which will be aggressively priced to attract not just the rich, but the middle classes as well, giving the top line a further boost.

    Moving on, I expect the operating margin to be ~13% (it stands at the 95th percentile of all automakers). As far as the sales-to-capital ratio is concerned, I have considered the sector average of 2.25.

    Elon Musk, Chairman and CEO, Tesla Motors in a blog post on the company's website gave a peek into the company's long term (secret) strategy focused on generating wealth by offering leading products to the niche clientele, and applying the proceeds to develop a car which represents the masses, and can be afforded by all. This would enable the company to develop a huge customer base across segments, expanding its market size manifold, going forward.

    Base Case

    For a young growing company, there are various events which can trigger a collapse, and Tesla is no exception to it.

    As the base case scenario, I will consider the following major risk factors, which can trigger a negative mood for the company.

    1. Inability to rapidly expand its operations across the major EV markets.
    2. Inability to create inquisitiveness for its product amongst the masses.
    3. Inability to develop a car catering to the masses.
    4. Lack of sufficient investments in R&D to constantly improve the battery technology, and increase mileage along with engine durability.

    Moreover, BofA Merill Lynch came up with their recent report on Tesla and the news is not good. The analysts consider the company's stock to be vastly overvalued, and have set a price target of $45 based on 2015 expected enterprise value vs EBITDA of about 12 times.

    While there are serious downsides to any business, I believe, the upsides far exceed the downsides in the case of Tesla, and in my opinion the chances of these downsides occurring are fairly modest.


    In view of the strong fundamental standpoints that Tesla showcases, I expect the stock to outperform its peers and set a new benchmark in the global automotive industry.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: TSLA, long-ideas
    Oct 28 10:57 AM | Link | Comment!
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