I've updated my discounted cash flow models for Vivus, and will present them in two parts. The first one, here, is my valuation of Qnexa for obesity. The second part will do the same thing for Qnexa for diabetes, and also for Avanafil. Theoretically, if you add these three valuations together, you should get a valuation for the stock (assuming Luramist and anything else is just gravy).
Discounted cash flow valuations in small pharma always seem to me to have an element of art (some would say magic) along with the science. First, there are technical reasons why uncertainty will always be high -- most of all, if you're looking at a drug that comes to market two, three or four years down the line, your model will be highly sensitive to the discount rate.
But more interestingly, and especially today, the past may not predict the future. When I took "Intro to Securities Modeling" or whatever we called it back in the day, someone would always argue for driving revenues, or margins, or something off their average growth rate of the past three or five years. That's fine, of course, except when next year turns out to be totally different for some reason.
Although I've been assuming a potential U.S. market of $10 billion for prescription obesity drugs, I'm increasingly mindful that by the time we reach the end of President Obama's first term, the landscape of payers and incentives may look very different. Not only may more Americans have greater access to health care, but also (perhaps through government incentives, or through regulation) there's every reason to hope for more spending on preventive care. Which is why I don't worry too much that insurers have refused to cover weight-loss treatments in the past.
However, for now I've left the input in the model at $10 billion. Here are the rest of the inputs I've plugged in. I have Qnexa launching in 2011 and eventually capturing 10% market share of a $10 billion market by 2014, going off-patent in 2020. I've picked 30% as a nice round number for royalties and given Qnexa a 67% chance of making it to market. Obviously, 67% of all late-stage drug candidates don't reach market, but I like Qnexa's chances. I've used an 18% discount rate. All these numbers, especially the last two, are judgment calls, but I also think they are all well within reason. I've also assumed no significant new share issues.
What we end up with is an expected value per share (if you're following the math, that's the NPV at 18% times the 67% chance of making it to market) of $4.38 for Qnexa for obesity. Pretty nice, considering the whole company has been trading under $4.00 since April 8 (it moved up April 30 on news that data from its previously presented 28-week Phase III dosing trial will be presented at the 17th annual European Congress on Obesity in Amsterdam).
Next post, we will look at Qnexa for diabetes, and avanafil, and add up all the parts.
For those who are gluttons for numeric punishment, I will include the complete DCF model output for Qnexa for obesity below:
|Download Qnexa Obesity Valuation|
The author does not own any stocks mentioned above, and evidently is so tech-challenged that it's taken her this long to upload a (now-required) pic to SA.