phase 3 trial valuation

From Patersons June 09 research note (page 19):

Using 2009 as an example; the sum of the NPV of free cash flows ($229.8m) added to its continuing value ($110.6m), less debt provides a firm equity value of $337.4m. On a per share basis this equates to $1.00 using the shares on issue post the rights issue.

However, it is appropriate to consider the failure risk associated with phase III clinical trials. We look for milestones that serve to de-risk the ArTiMist proposition. Firstly, Phase III trials need to be successfully completed. Secondly, a national market license and/or WHO pre-qualification needs to be accepted (in the example below we use the failure rate of FDA approvals as a proxy).

A study by Czerepak et Ryser established a biotech failure rate of 74% (although we would make the observation that aspects of the treatment have been significantly de-risked, as a result of the currentwidespread use of Artmether in tablet form). This implies a risk adjusted value for Eastland of $0.26.

If phase III trials are successful and after other appropriate submissions, then Eastland valuation would rise to ~$1.50 on a derisked commercialised basis.