earnings analysis and forecast

Two things have recently prompted me to look at the valuation in more detail:
1. Posts suggesting fonda cogs has crept up to 50%
2. Two sets of data that dont seem to reconcile with each other: IMS and Bloomberg

The below is a long and detailed analysis that in my view dispels point 1 above and helps connect the two data sets mentioned in point 2.

The key outcome to this analysis is my belief that the market volume (units sold) has grown by 26% and thats driving high revenues for Fonda.

I might be wrong but ill share the details of my analysis so you can try and find the holes in my logic should you have the time. Ill take no issue with harsh criticism.

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1. Establish Arixtra Price and Unit Volumes
I converted the 340m market into units with nominal unit prices of 100 per unit. So a 340m dollar market becomes a 3.4m unit market where each unit is priced at 100 dollars. I then allocated a COGS of 45%. We dont have this information but we know Arixtra costs are greater than Fondas so 45% is a best guess effort. I then increased or decreased the Arixtra price for each market (retial / hospital) to allow 70% of PROFITS to flow from retail as per our understanding of the profitability of the retail market. At this point i have a detailed model for Arixtra that leverages what we know (340m market size, 70% earnings from Retail) and what we need to assume (COGS at 45%).

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2. Validate the Arixtra model by pluggin in the pre AG Fonda numbers
Using the above i modeled Fonda by using the commonly anticipated parameters pre AG: market share 40%, retail discount 18% and hospital 25%, 60% profit to ACL, COGS 35%, 70% profits form retail. The outcomes are in line with pre AG Fonda earnings - Fonda records weekly sales of 2.07m and ACL takes about 40m in revenue pa.

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At this point im happy that the model is about right.

3. Forecast Fonda earnings in todays post AG world.
We need to make some changes to the model first: 1) ACL revenue now 50% of profits, discount to retail price now 25% and hospital 40%.
Now weekly sales are 1.81m and ACL 28m in revenue pa.

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But then i noticed something. If i enter the current market share into the model the weekly sales volume doesn't reconcile with the numbers provided by Bloomberg. I was expecting 22.5% market share to give weekly revenue in line with the Bloomberg numbers ie, about 1.5m/week. (The 22.5% market share is for the period ending March 31 and while we dont have a Bloomberg Data weekly revenue number that speaks to that same period we have the 1.4m number from Feb and the 1.61 from beginning May so we know the actual Bloomberg Data figure for end March must be somewhere between those two numbers... 1.5 for argument sake). But the model give me revenue of 1.27m/week

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There are only two ways to explain the disparity. One, the discounts i have allocated to Fonda are too severe. But i dont really think thats the case as I have used discounts that are in line with the FTC report and that seems the best guide other than simply guessing. Two, the market size has increased in volume ie, people are switching to Fonda on price. This seems to me to be the best explanation.

So what does that mean for our valuation. I looked at it this way. I want to change the volume of Fonda DRL are selling so it gives me revenue that reconciles with Bloomberg Data. So i increased the size of the market (the number of units DRL sell) by 25%. When i did that i notice the revenues match up with Bloomberg Data: 1.61m/week or about 83m pa. See below.

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So now i have a model that hangs together pretty well. It even helps me draw a line between the two different sets of data we get from the market: Bloomberg Data and IMS market share.

4. Re-forecasting future revenues
Assuming the market share stops growing and DRL get the 40% market share in each market then the revenues should be 2.26/week or about 36m for ACL (US only of course). See below. If the market share increased to 50% retail and 50% hospital ACL revenues increase 44m.

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