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The Public Biotechnology Markets in North America
Presented by TD Securities
Sidney Himmel
June 19, 2002
2
Biotechnology: Public Equity Markets
• North American markets are not strongly receptive to biotechnology stocks at the present
time.
• Issues which are getting done are occurring in:
– Well-sponsored companies with various products in the pipeline and with a solid
management track record.
– Companies with revenues and earnings.
– Diagnostics companies with revenues.
3
60%
70%
80%
90%
100%
110%
120%
28-Sep-2001 16-Nov-2001 8-Jan-2002 26-Feb-2002 17-Apr-2002 6-Jun-2002
IndexedPrice
NASDAQ Biotech / S&P 500 NASDAQ Biotech / NASDAQ NASDAQ Biotech / DJIA TSE Pharm & Biotech / S&P TSX
Biotechnology Market OverviewBiotechnology Public Market Overview
The Good…..
The Bad…..
And the Ugly.
4
The NASDAQ Since 1996
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-96 Jun-96 Dec-96 Jun-97 Nov-97 May-98 Nov-98 Apr-99 Oct-99 Apr-00 Oct-00 Mar-01 Sep-01 Mar-02
Price
5
Public Investor Concerns
• Capital losses
• Factors:
– Overvaluation? Are stocks too expensive? (Fed Model?)
– Confidence in management: a question of trust (“Never do business with anyone
you can’t trust” - J.P. Morgan).
– Accounting Issues: Relates to valuation and management issues (Enron: Arthur
Andersen).
– Research Analysts: Can they be trusted? (Merrill Lynch settlement with the New
York attorney general’s office).
• Why?
– From 1996 to 2000, investors and issuers underwent a paradigm shift which was
predictably not sustainable.
6
Hysteresis Curve of the Markets
1999 – Mid 2000
NASDAQ: 2000 5000
Annual Biotech Issues: 100
Interest Rates: 5.5%
Nortel $15.00 $80.00
Industrial Production: 126
2000 – Year-end
NASDAQ: 2470
Annualized Biotech Issues: 110 ~
Interest Rates: 4.0%
Nortel $32.00
Industrial Production: 120
1995 - 1998
NASDAQ: 1000 2000
Annual Biotech Issues: 80
Interest Rates: 5.0%
Nortel $7.00!!!
Industrial Production: 117
“Irrational Exuberance”
1994
NASDAQ: 800
Annual Biotech Issues: 49
Interest Rates: 4.0%
Nortel $5.00
Industrial Production: 100
Beginning 1994
2001 – 3rd Week of Sept 2001
NASDAQ: Bottoms at 1420
Annualized Biotech Issues: 53
Interest Rates: 2.0%
Industrial Production: 120 ~
Y2K LIQUIDITYBOOM
FIBER OPTICSCRAZE
DOT COMCRAZE
INTERNETCRAZEBEGINS
DOT COMCRASH BEGINS
FIBER OPTICSSLOWDOWN
RECESSION
7
Confidence in Management
• Sunday New York Times (June 9, 2002):
“There may be only one type of job in which somebody can commit a felony and,
after being fired as a result, still receives a severance package with many years of
salary. The job is chief executive officer of a large corporation.”
• Enron: CEO leaves.
• Tyco: CEO leaves.
• Imclone: CEO leaves.
9
Accounting Issues
• Investors/analysts ignored write-downs and valuation adjustments
– AOL-Time Warner: $54 billion charge.
– Quest: expecting $30 billion charge.
– Vivendi: $14 billion charge.
– JDS Uniphase: $50 billion charge.
• Misleading revenues/expenses and off-balance sheet debt:
– Enron
– Elan
– Microsoft
– Xerox
– Tyco
– Computer Associates International
– Adelphia Communications
• Rules are being applied more rigorously now.
• May affect private companies financed by venture capital as well.
10
Research Analysts
• Enron analysts interviewed by Congress.
• Henry Blodget: Internet Analyst.
– No. 1 ranked Internet analyst.
– Amazon.com target = $400.
– Merrill Lynch settles with New York state attorney general for $100 million.
• Investigations focusing on analysts and analyst compensation around the world.
• Compensation being decoupled from corporate finance around the world.
• Other investor lawsuits against brokerage houses are pending.
11
Valuations
• Must consider:– Dividends– Earnings– Earnings Growth– Discounting of Dividends:
• Warren Buffett
versus• “You just don’t get it.”
• Means
• Standard deviations
• Risk aversion
12
Valuation: The Fed Model
10-year note 5.07% (A)
Projected Earnings $52.00 (B)
S&P estimate (B/A) 1025
Actual 1027
Fairly Valued?
14
A Historical Perspective on Valuations
Date P/E Dividend P/Book P/Sales 10-yr Rate EPS Growth6/13/49 5.4 7.6% 0.89 0.43 - 12.00%
10/22/57 12 4.4% 1.43 0.75 3.90% -0.08%10/25/60 16.3 3.6% 1.64 0.93 3.89% -0.05%6/26/62 14.9 3.9% 1.54 0.85 3.91% 12.00%1/3/67 14.9 3.5% 1.85 0.93 4.58% 9.00%5/26/70 12.9 4.4% 1.45 0.66 7.91% -0.09%12/6/74 7.5 5.1% 1.07 0.38 7.43% 17.50%2/28/78 8.3 5.3% 1.14 0.40 8.03% 7.00%4/21/80 6.8 5.7% 1.08 0.34 11.47% -0.08%8/12/82 7.9 6.3% 0.97 0.33 13.06% -0.14%7/24/84 9.4 4.4% 1.36 0.44 13.36% 3.00%
10/19/87 12.7 3.4% 1.92 0.58 9.52% 2.00%10/11/90 13.9 3.6% 2.24 0.60 8.72% -0.1%Average 11.0 4.7% 1.43 0.59 7.4% 4.8%
12/31/01 29-55 1.2% 5.80 1.64 5.09% 10.0%
Bear BottomsS&P Industrials
Average long-term S&P Earnings Growth 4.0 %
Sources: ISI Group; Federal Reserve Bank; Princeton University Press.
15
Earnings Model with Growth and Dividend Discount Model Valuations
CONCLUSIONS:
1. Variability.
2. Valuations may well be sustainable, with anticipated share price growth, if growth assumptions are acceptable.
* We used a 6% discount rate and assumed a 16x multiple in 5 years.
2003 EPS
Estimated 5-yr EPS Growth
Rate
2003 Dividends
Estimated Value - Discounted Fed Model or DDM
Current Stock Price
Forest Labs 2.75$ 25% Nil $37.20 71.00$ Merck 3.45$ 10% 1.51$ $40-66.00 52.00$ GlaxoSmithKline 1.20$ 15% 1.27$ $28-40.00 39.50$ Wyeth 3.00$ 15% 0.96$ $30-62.00 53.00$ Pfizer 1.85$ 18% 0.60$ $21-50.00 35.00$ Bristol-Myers Squibb 1.90$ 5% 1.14$ $23-29.00 49.00$
Average $38.25 49.91$
1.30x
17
Fund Flows: Affect on Valuation
1. Euro versus U.S. dollar.
2. War on Terror.
3. European, Asian, and Middle East Funds Flows.
4. Free Trade: Steel
Food
Lumber
18
Biotechnology
• Stock valuations depend on:
1. Market
2. Sector
3. Company
• Declining valuations decrease institutional investor interest due to market capitalization
cut-offs.
• Worsening momentum decreases proclivity to invest in sector.
• But: YM Biosciences raised funds.
19
Positive Independent View on the Market
• Harry Dent: Demographer and Market Technician.
• Pat McKeough: Successful investor - next big move should be up but be well-
diversified.
• Value Line: Expects moderate economic growth over the next 12 to 18 months. Should
underpin a rebound in corporate earnings.
– Middle East, accounting, earnings warnings, so still proceed with caution.
20
Most Recent Biotechnology Financings in CanadaBiotechnology Public Market Overview
Closing Date Issuer Final Size (C$mm)
% of Invested Capital
News
Jan-18-2002 PanGeo Pharma Inc. $ 27.60 17% Management track record and profitable business model. Accretive acquisitions.
Jan-31-2002 Medicure Inc. $ 10.00 67% FDA approval to proceed with Phase II for lead product, MC-1. Since issue, has begun enrollment - results expected by end 2002.
Mar-08-2002 Cardiome Pharma Corp. $ 30.91 86% Issue concurrent with acquisition of Paralex, which owns several IP rights relating to cardiovascular applications of xanthine oxidase inhibitors.
Mar-21-2002 Axcan Pharma Inc. $ 90.85 13% Market expected strong growth even without acquisitions. Part of proceeds to pay balance of Enteris acquisition. One week post-issue, announced acquisition of Lacteol.
Mar-28-2002 Hemosol $ 22.05 12% FDA approval to proceed with Phase II for Hemolink (a week after Health Canada's rejection).
April-05-2002 Cytovax Biotechnologies Inc.
$ 5.35 17% Initiated Phase I trial of lead product CytovaxineTM (received Health Canada approval to proceed in January)
April-09-2002 Aeterna Laboratories Inc. $ 57.00 25% Private placement to SGF Sante, Solidarity Fund and Acqua Wellington: $35 million for acquisitions, $20 million for Neovastat development and $2 million general.
May-24-2002 Vasogen Inc. $ 17.00 8% Positive results from CHF feasibility clinical trial - first time immunotherapeutic approach had beneficial impact on morbidity and mortality. Also completed a feasibility clinical trial in moderate to severe psoriasis.
Jun-12-2002 YM Biosciences $ 15.00 29% Flotation of Preferred shares automatically convertible into commons one year post-issue if commons are listed. Amount raised was in the lower end of the range (C$15-40mm). Required distribution on both London Stock Exchange AIM and TSE.
TOTAL $275.76
22
Most Recent Biotechnology Financings in the U.S.Biotechnology Public Market Overview
Closing Date Issuer Final Size (US$mm)
% of Invested Capital
News
Feb-4-2002 SangStat Medical Corp. $77.63 22% Achieved profitability for the first time in Q4 2001. Earnings were exceeded analyst expectations. Continues to gain U.S. market share for its two main products.
Feb-11-2002 Amylin Pharmaceuticals Inc.
$96.60 18% Initiation of third Phase III pivotal trial of AC2993 (synthetic exendin-4) in type 2 diabetes.
Feb-13-2002 Array BioPharma Inc. $34.50 15% Drug discovery collaborations agreement with Japan Tobacco.
Feb-14-2002 Cygnus Inc. $14.00 12% Glucose monitoring devices business insulated company from biotech sector devaluation.
Feb-27-2002 Orchid BioSciences Inc. $22.50 23% Restructuring.
Jan-11-2002 Antigenics Inc. $60.00 14% Six technologies, five products in clinic.
Jan-31-2002 Zymogenetics Inc. $120.00 28% 20 years operating history, 9 protein drug candidates in the pipeline, and US$52mm collaboration with Serono.
Mar-07-2002 InterMune Inc. $111.00 11% Three marketed products and advanced-stage clinical programs
Mar-08-2002 Salix Pharmaceuticals $61.50 28% 60-person sales force focused on high-prescribing U.S. gastroenterologists.
Apr-12-2002 Ribapharm Inc. $260.00 22% IPO priced significantly below initial price talk.
Apr-24-2002 DOV Pharmaceutical $65.00 50% IPO - Alleged misleading financial statements
May-7-2002 Quinton Cardiology $32.20 63% IPO - 48 year operating history providing stress-test systems; introduced 3 new PC-based products last year (2 non-invasive); well-positioned to address aging population.
May-22-2002 EON Labs $147.00 30% IPO - Major supplier of generic pharmacetucials offering over 190 products; history of success in obtaining FDA approvals (e.g. 24 approvals in 2000-2001).
TOTAL $1,101.93