back of the envelope valuation

Valuing a company like PYC is hard. I wonder whether we couldn't still safely say that the company is significantly undervalued by running a conservative valuation of it's assets. The process will necessarily be somewhat crude but that is the nature of valuation at the best of times. We do these things not because they are easy but because they are hard (ha).

What are the company's assets?
1) the four existing R&D collaborations (Janssen, MedImmune, Roche and Pfizer)
2) the IP library
3) the company patent involved in the rapid screening process developed by Cambridge University
4) cash
5) LMB cosmeceutical deal
6) internal candidates that have not yet been the subject of R&D collaborations
7) prospective deals
8) intangibles - the people

Let's start with (4) because that is the easiest. We'll exclude the prospective cash raised under the convertible note so that we can work with a defined issued capital at the end. The company has approximately $1m in cash, is entitled to a $1.9m R&D tax credit, is nearly half-way through FY13 (thereby entitling it to a further $1m R&D tax credit next year) and we'll say they have contractual entitlements to a further $1m in funding for existing agreements. That means they have roughly $5m in cash or cash entitlements.

Now let's take a harder one requiring broad assumptions - the Phenomica patent. The patent involves the use of the phylomer library in the rapid screening process but is not the screening process itself. The incorporation of Phenomica may well lead to increased interest in phylomers by pharma but we are going to exclude any value attributable to that aspect of the joint venture because we are running a conservative valuation and those revenue streams are too uncertain to include. It is rough at best but we'll call the Phenomica contributory patent a $1.5m asset given that it is key to the screening process but does not extend to the screening process itself.

The 4 existing collaborations are a bit easier. Let's assume that 50% of the existing deals progress to the licensing phase. Once that happens we know that any given drug candidate has a roughly 5% chance of making it all the way through the clinical trial process. If we take the median milestone payment amount (roughly $120m) and double it for the two successfully converted candidates (Ignoring the fact that some deals involve multiple candidates) and discount this by the chance of success for each candidate we arrive at a figure of $12m (2 candidates x 5% chance of success x $120m milestones). We will ignore the royalty payments for now because we can't estimate penetration nor timing of revenue streams with any accuracy at all.

The LMB deal is relatively straightforward. Phosphagenics are generating over $1m from their JV with LMB annually I believe so let's say PYC get half of that and that it starts soon enough not to have to discount the cash flows. Using a perpetual revenue stream net present value calculation with a discount rate of 10% the $500k annually continuing indefinitely would have an NPV of $5m.

Internal candidates that haven't yet been the subject of R&D collaborations primarily revolve around CD40L. I think PYC received grant funding and have invested approx $5m in researching this peptide - let's assume they get it back at cost so that it is a $5m contributor.

We'll give the prospective deals a zero valuation again on the basis that it is too uncertain to contribute.

The elephant in the room is the IP library but the value of that will largely be dependent on the conversion rate of existing candidates in addition to new deal flow. Let's just call it indeterminate for now.

Lastly for the people. I don't think there is any doubt that there are some brilliant scientific minds involved at PYC but because this is both an intangible asset and inherently more difficult to quantify than the other intangible assets of the company (excluding the IP library which is also very hard) we won't ascribe any value to this asset at all.

A lot of assumptions but I think it's fair to say that they are all consistent with a fairly harsh critique of the company and therefore in keeping with a low range estimate of value.

That gives us a rough valuation of $28.5m (excluding the IP). With 467m shares on issue that equates to a share price of 6.1 cents per share, again, before you include the value of the company's key asset.

If you add the fact that the company gets 30-40 cents of every research dollar spent back as a tax credit (over and above the existing entitlements we have included in the valuation) then I think it makes for an attractive entry opportunity. In fact, the two key reasons I like the stock (management and the IP) are not even included in that assessment.

Interested to hear everyone's thoughts on this to see if we can refine the valuation?