Roth just rated IMU a buy, page-124

ricmond88 , jbcascade

Thanks for pointing out the maths discrepancy.

With any modelling of this nature the outcome produced is only going to be accurate if the inputs are accurate.

I have looked over some of the variable inputs that Roth have used and it just seems across the board they have chosen to be conservative. Why? Because It is still very early days and without trial data to gauge how these products stack up against existing competitor drugs it makes sense to start small and expand later as meaningful data allows more accurate inputs to be used. Starting with a big target valuation upfront, and getting it horribly wrong wouldn’t serve the analyst any favours or credibility.

Lets examine the variables and see how conservative they are.

1. As already mentioned earlier in the thread, all revenue Royalties have been based off 15%.
We have seen plenty BigPharma deals that share future revenues 50/50.
A 15% royalty rate used could also explain why they have not allocated any costs to Imugene.
If the Big Pharma wears all the commercialisation costs, eg Ph3 trial, with no cost to Imu 15% might be considered normal. If you wanted to inflate the NPV a 50% royalty and no costs would do it.

2. They have not included any upfront licensing fees and milestones payments to Imugene. Across the 3 products modelled that’s missing out anywhere from $1 billion to $2 billion in early stage payments.

3. They have only forecast revenues for a 5 year period. The patents all go to 2037, so if sales start in 2026, they could easily include an additional 6 years sales royalty income and future growth across all three products.

4. They assume very low market penetration and market share growth across all three products.
starting at 2%, 4%, 6%, 8%, 10% market share for first 5 years.
If those figures were assumed to start at 5% in year 1, then grow to 10, 15, 20, 25% share over the next 4 years, the royalty figures would be substantially higher. Exponentially higher using a 50% royalty. Without any trial data to compare these products to existing drugs, any sales forecasts are open to debate. Many financial models use a low, medium, high scenario to come up with a range of figures. It would appear Roth just uses a very low number to be safe.
Looking at the sales figures for drugs like Keytruda, Opdivo, Herceptin etc , the forecasts used are not really indicative of new drugs that are going to make inroads into existing market leaders. If trials confirm we have a considerably more effective drug, with far fewer side effects, and no toxicity , the assumption could easily be made starting market share would be considerably higher than what Roth have modelled.

5. The discount rate used is 35%. The discount rate is considered a proxy for the cost of capital and a margin for risk. In a world of almost zero percent official interest rates, and Big Pharma most certainly able to access capital at well below 10% via the bond market or bank lending, 35% is just over the top. Using a high discount rate in modelling may be useful to determine how robust a project might be in voltatile financial times, but for now interest rate volatility upwards is not on the radar.

So changing the modelling inputs or starting assumptions marginally results in very different outcomes.

A. Using 17.5% discount rate , without altering any of the variables in 1-4 above would send the NPV share price over 20c.
B. Doubling of initial market share % on sales, and using 17.5% discount rate would send the NPV over 40c .
C. Increasing the royalty rate to 50%, including $2 billion in upfront licensing fees across three products , increasing initial market share and using 17.5% discount rate pushes the NPV per share towards $1 or more.