cancer breakthrough , page-42

How true Sassy. Ill try to summarise without giving all the detail and boring Brad to death...

When the price was around 60-80c it was assumed ACLs Fondaparinux would be the only drug to compete with GSKs Arixtra in the 340m US market.

In this environment ACLs revenues were to be calculated on the following parameters:
- ACL receives 60% of after costs profits from Dr Reddys
- Fonda takes 40%+ market share from Arixtra at a 20% price discount

Unfortunately, GSK released whats called an authorised generic (non branded version of their own Arixtra) to compete with both Arixtra and Fonda.

Accordingly ACLs revenue parameters changed to be:
- ACL receives 50% of after costs profits from Dr Reddys
- Fonda takes 40% market share from Arixtra at a 30% price discount

Does the current share price accurately reflect Fonda earnings? My DCF valuation suggests fair value for Fonda at 60c and that includes a massive 50% discount to terminal value to account for another generic entering the market. If i remove that discount the fair value is 102c.

So why is the share price so low when earnings are guaranteed? ACL has a working capital shortfall. It will run out of money before it starts receiving cash from Fonda sales. To cover that they need to raise money from somewhere. The concern that doing so will mean dilution it keeping the share price low. Who wants to buy now when they might be able to buy cheaper in a matter of days or weeks. This issue will be sorted out soon. When it is the real value of fonda will be factored into the share price.

As we monitor fonda revenues there will be some key indicators to keep an eye on.
- Arixtra's (and its 2 generics) increase in share of the anticoagulant market
- Fonda's market share performance against Arixtra and the authorised generic
- pricing (though im not sure we will get any detail on this)

I think thats about it for fonda.

The next thing is the oncology stuff. It will take too long to explain this. But i will say management are very very confident about it and they have the trial results so far to back it up. I calculate DCF fair value at 120c for their lead compound HA-Irinotecan assuming 120m revenue and an 80% discount on terminal value to allow for generic competition after patent expiry. But we cant expect to see all of that 120c factored into the share price now. The drug is in phase III trial so there is still risk. Normal practice is to allocate 60% of the DCF valuation to a drug in phase III trial. So thats about 72c.

In summary i think ACL is cheap. Once the funding issue is sorted out i expect the share price to start to reflect the combined value of Fonda and HA-Irinotecan: a minimum target of 132c.

Jeez Sassy, that didn't turn out at all how i thought it would... thats 40 minutes im never getting back.