npat & valuation, page-6

My position is:
- Pete probably did or at least should have known an AG was coming
- DRL did know an AG was coming
- The AG helps protect the market from other competitors and allows ACL to take a 50% market share (30m+ NPAT)

Pete must have read that report and seen there is every chance an AG is coming. While he has previously said to many of us that he thought GSK would not release an AG on grounds it would 'canabolise' their own revenues, the report tells us such logic is incorrect. In fact it clearly says releasing an AG is the only way GSK can level the playing field and hope to retain 50% market share. The report clearly says:
- Brand retains about 25% market share where the Brand competes with ANDA
- Brand and AG combination retain about 50% of the market share where it competes with an ANDA

Now when I think back to all the emails with Pete, the analyst reports, the news articles, they all anticipated NPAT to ACL of 10s of millions of dollars, most mentioning the 30-40m range. Many of these expectations i assume would have come from discussions with Pete. While he has never committed himself to a target market share, the expectation of 30m NPAT goes hand in hand with a 50% market share of the current Arixtra market. So for those who had an expectation of 30m NPAT they would also have known that 30m NPAT comes from a market share of about 50% and that would only be possible where Fonda is competing against Arixtra and its AG.

Did Pete know this? Who knows. But i bet he didnt have to read the report twice to understand it like i did.

One thing is for sure though, DRL would have known it. Generics is their business and they would have had a very clear understanding that GSK would bring out an AG. If you believe that, like i do, it provides some confidence. DRL have been raising earnings forecasts on the back of Fonda and knowing they would be competing with a an AG. This is my very very strong belief anyway.

Maybe the contract provides an insight here. 60% return to ACL where we are the only ANDA, 50% where there are two (the AG is the second). That suggests DRL saw this coming. Well im drawing a line to this logic because it fits but it does fit pretty well....

So the good news is that expectations of getting about 30m in NPAT from Fonda is as realistic today as it was before news of the AG hit the market. We are still realistic in expecting a 50% market share and 30m+ in NPAT.

The funny thing is why on earth hasn't Pete or DRL set sales targets for Fonda based on the observations form the FTC report? I don't know but i find it interesting. All businesses i have worked with labour over setting sales targets and tracking performance. Not the case here. Maybe its a peculiarity about this industry that i don't understand.

Nevertheless, i regard ACL being oversold and a pretty good bargain. I have added about 50% to my holding since the FDA approval. Ill add more once the debt solution is announced.