Blue Ocean Valuation

Dear Paradigm readers,

Apologies for not contributing much on this forum for the last few months.
Hopefully the below is informative rather than appearing preachy or definitive.

Ove the last few months, my biotech experience taught me that dealing with the FDA can be prickly. I was very pleasantly surprised that the FDA were working with Paradigm to reach a conclusion, and the delays were more due to their delays in their own internal processes.

I decided to make my own choices regarding paradigm and did not want to dilute the conviction of my decisions by reading too much about other people's opinions. As much as I think that our forum is extremely educated and contributive, I think it is sometimes important to drown out the noise around us (whether that is positive or negative noise). I increased my holding slightly during the delay at 1.85. It is times like those when you can really take advantage of information asymmetry versus sentiment trading. That's how you make real long-term wealth creation IMO. There are a fair amount of people that even sold out of their shares at $2.50 after positive news. Whilst I am not trying to be critical of their particular situation, those shares are precious if you want to be realising the tremendous future value, and to building a sizeable position that represents the value of the asset.

i) How would I be approaching long - term valuation vs short-term price fluctuations: The benefits of a target allocation

As a long-term holder I have a target allocation that I work with, and then use the rest to trade the shares when appropriate. For example, say someone has 400,000 shares and there target allocation is 500,000 - I would always keep 300,000 shares as a fixed allocation and use the 100k to average down the position and make money in the short-term if needed, and then have 100k shares on the side in the off chance there is a capital raise (which I do not foresee in the short-term at present) . The 300,000 should always be there in case of positive news flow (which can occur any time now ) and reduced the risks of being out of the stock when price sensitive news comes out. From a personal standpoint, I am being very disciplined around my target allocation for risk management purposes, while still having massive exposure to the upside. Once this runs, there is no turning back. We have seen the tremendous runs of companies on the ASX. This can happen any time, why be tentative around cents over dollars.

ii) Taking advantage of poor institutional understanding

Organisations like Morgans will play games and down ramp (I know for a fact they did not get the Paradigm corporate mandate - so have a vendetta against the company ever since). However, I do know people at Morgans who think objectively to their research department that ignore the biases of the information produced by their research department. Just remember that financial models can easily be manipulated and re-engineered to suit a particular narrative.

iii) Valuation
Biotech valuation in Australia is seldom seen in the Australian funds management space. We do not many, if any, specific biotech funds, that really have dedicated PHD, MBA's that understand the science and the economics behind the process. The valuation from brokerage houses (which have inherent biases) make up a large percentage of news flow around how to value the asset. Now that we are phase 3, I can really foresee more involvement from biotech funds overseas. I think all the marketing we have done in the US will be incredibly useful going forward.

Just remember to have your own assumptions are the following:

• Use a risk-adjusted NPV that takes into account the clinical trial expenditures, revenue/market phase that encapsulates pricing/margins/patients, adjusting for the cash flow curve when there are partnerships (which I do foresee at some point).
• Standard valuation multiples like EV/EBITDA or P/E are less relevant.
• Comparative valuation is not relevant given the idiosyncratic nature of paradigm and the fact we have data that skews more to tremendous upside than a competitor product.
• Have a probability of scenarios, use a tree diagram. The fact that the mechanism of action and target indications will expand has not been included in many of the valuation models I have seen.
• Think logically around whether a phase 3 asset at only a ~500m AUD valuation is correct. Short answer - it isn't. Think rationally about how prior to phase 3, traders pumped this to a market cap of $1bn. Having a target allocation reduces the chances of short-term irrationality.

Stay Safe, enjoy the freedoms we all now have.