billion dollar baby

Ash 81 has done an excellent summary of the TIS product, its market, the trials, partnership and sales, and profitability.

Having thought much more about the profitability angle, I think the future looks even brighter than Ash81 indicated. I believe I can conservatively justify EPS of US$4. Here are my thoughts:

The prospectus page 16 refers to the CURRENT ulcer market of US$14B, growing by 25% per annum.

At 25% compounding, this market grows to US$34B by 2015, which is close to the TIS Prospectus statement on page 17 that the market by the end of 2014 could potentially exceed US$30B.

I agree with ASH81 that the world best product for chronic ulcer treatment should be able to at least capture 25% of the total market within a reasonable time. If so, then this means that TIS and its partner will gross US$8.5B by 2015. Note that the Prospectus, page 17, only refers to a sales opportunity of US$1B, but this relates to the current market size, and would have had to be very conservative (<10% market capture) to gain ASIC approval for the Prospectus.

I believe that TIS will agree on a royalty rate in the region of 8 to 12%. There are few costs in a royalty model, so the margins on this should be at least 90% (not 50%).

In my opinion, any partner would want to pocket around 70% of gross sales revenue to cover their sales and marketing operations.

So if TIS retains control of manufacturing (outsourced to Eurogentec SA in Belgium), as it intends, the maximum gross revenue for the manufacturing fee would be 20% (100% less 70% for partner less 10% royalty), of which a significant proportion (half?) would go to Eurogentec SA, and a quarter in TIS costs, leaving a 25% margin for TIS. [This is the most rubbery of my estimates, as I do not have a strong feel for the likely manufacturing and other costs. However, I have been conservative, as I would not expect TIS to bother taking on the manufacturing risks for less than a 25% margin.]

Assuming only an 8% royalty, gross income to TIS would be US$680M. At a 90% margin, net income would be US$612M.

On top of this comes the manufacturing fee. At 20%, the gross amount would be US$1.7b, of which half (US$850M) goes to Eurogentec SA, and 25% (US$425M) to cover TIS costs, leaving net income to TIS of US$425M.

TIS EBIT would then be of the order of US$1000M.

Assuming no debt (note TIS should receive a sizable up-front payment and milestone payments from its partner) and a 30% tax rate, NPAT should be US$700M.

I assume TIS would reinvest at least 10% of this on research and development for other products and markets.

Assuming no further capital raisings and 171M shares on issue, this relates to EPS of US$4, compared to a present share price of under A$0.50. Of course any further capital raisings would dilute this, but I think further capital raisings are unlikely.

If this does eventuate, and TIS trades on a P/E of 10 (reasonable for a company with 25% growth and a world beating product), the share price would be around $40 and growing rapidly with 25% market growth and as TIS taps into other markets.

The upside is 100% if TIS and its partner can win 50% of the market; 42% if TIS can achieve a manufacturing margin of 50%; and 25% each year thereafter due to market growth.

Of course there is also downside, but I believe I have been conservative with the royalty rate, the market penetration and the manufacturing margin.

EPS of US$4 does not even take into account any upside from TIS breaking into hospital, pharmacy and consumer wound markets.

So hang in there guys, the upside is MUCH bigger than the downside. My main worry would be TIS being taken over before the rewards come. We would have to make sure that all TIS shareholders are aware of the potential rewards by 2015 if that happens, so they don't sell for any figure likely to be offered.

As to the likely date of a partnership deal, I think the reason that TIS is not giving us an update is that if it did, its bargaining position would be weakened (more pressure on TIS to meet its new target). Based on the above, does anyone really think a prospective partner will let the TIS product get away from them? I do not think there is too much to worry about there.

Even though I have only just joined Hot Copper, I have been an investor in TIS since 2006, and have followed it closely since then. However the immense scale of its potential is rapidly becoming clearer to me, and will become much clearer when the deal is announced.

Best wishes to all
Roy2U