good on any construction??, page-57

FONDA

i have thoughts on oncology that i will post later.

There are no mid term risks that mean its reasonable to assume fonda earnings will stop in three years. To suggest so is fiction. Please Tony, explain to me the business scenario that brings this conclusion.

The key risk is oral competition, which would impact retail wholesale sales to some extent and hospital wholesales to less of an extent. But injectable fonda will always have a strong market, particularly in hospitals. Its also good to note physicians are cautious about switching from the anti coag they know and trust to anything new and unproven by years of use. Its taken Arixtra 10 years to build a 500m market. Its a very conservative market and we can expect the switch to oral to be somwhat conservative also.

Another risk is a second generic entering the market. Lets say there is a 50% chance of this happening in 3 years from now.

Im not addressing the risk posed by the new process for manufacturing fonda as outlined in the article next week. There are many steps between process design and commercial business.

Then countering the risks we have opportunities.

The key opportunity is Arixtra indication for ACS. While they will get a 3 year exclusivity period (i think its 3 years) we can expect off label sales during this period. Then once the exclusivity period ends, we can address that market.

The only other opportunity i see is the reduction in opex which seems to be driven by reduced cost of goods and improvements in a couple of the final steps in the process. This is key and something Tewk and i mentioned yesterday. This will not only improve margins in key markets like the US but maybe open new markets where GSK cant operate because they cant maintain profitable margins.

In my view the risks and opportunities cancel each other out. Any increase in sales for ACS would be countered partially by another generic. Improvements in margins will be countered by orals. Etc.

Also, i think the only variable above is the second generic. I think everything above will happen, but second generic might not. So i look at fonda earnins as being in one of three states:
1 - US (25-30m npat)
2 - US & EU (35-40m npat)
3 - US & EU with SECOND GENERIC (22-27m npat)

ACLs share price will reflect this fonda value. My DCF valuation for the third scenario above is about 65c. When i change it to assume something happens to wipe out 80% of the terminal value after 5 years the value is still 40c.

Personally i think ACLs fonda value will sit at about 5 or 6 times EPS. My EPS valuations for the three scenarios above are:
1 - 10c
2 - 15c
3 - 9c

But there is a more interesting question. Is it better to buy more ACL shares now or wait and buy oncology shares on market post split. Ill post on that later today.

P.S. Pete mentioned in the call the call that the yearly burn for supporting VAST is 1m.