Guys,
There’s been a lot happening with PAR of late – capital raising, impending release of 008 results, etc. Most of us entertain high hopes for the stock – huge market, significant unmet need of OA etc, however, there has been few (if any) posts which look at what the current share price should be. So, the objectives of this post are:
1. Present a view of what the share price should be
2. Generate debate and facilitate the sharing of views around the future of PAR
3. Have a little fun
(Note that none of this post is financial advice – the analysis is based on a number of key assumptions, any one of which could be materially wrong. In addition, arithmetic is not my strong point…).
There are a wide variety of views in this forum – from cynical Gan_Gans through to the evangelistic Mozz. I hold what for me is a significant investment in PAR, but welcome all views – PAR’s HC threads are generally constructive, but no-one should be emotionally attached to a stock. I aim to be objective, whilst erring on being conservative.
There are a number of approaches which can be taken to valuing PAR. Mine is by no means conventional, however, I’ld argue that it is a reasonable approach, which importantly lays out key assumptions. My aim is to provide a framework which help structure future debate. Hopefully my assumptions will be critiqued in a constructive manner. Any feedback is welcome, especially where people believe I’ve made some unreasonable assumptions….
Key Assumptions:
1. Non-OA indications hold no value (nb part of being conservative, however, also note my assumptions around future capital raisings). This is reasonable, given the early stage the company is at in bringing these indications on line.
2. Discount rate: 20%. I could easily use the CAPM to derive a rate of ~ 12% (Beta for Pharma stocks is ~ .99 according to Stern University, the historical return for the ASX 200 ~ 8.5%, 10 year government bond yield ~ 3.5%), however, PAR is a highly speculative stock, and my personal target for a speculative stock is 20% pa
3. Valuation date: 1 January 2023
4. Number of shares on issue - 285 million (ie post capital raise)
5. Current share price ~ $1.30 (ie price of rights issue)
6. There is no further capital raise required. This is a big assumption, as the company is only funded to H1 CY 2024. My view is that the company will do two marketing deals over the next 2 years – firstly, a deal for MPS next year which will get them through to 2025, and secondly a larger marketing deal post 002 read-out (end 2025/2026), which will see them through to NDA and commercialisation. This is certainly a key assumption!
7. Royalty generated on marketing deal: 20% (net royalty payable to Bene). Generous, but I want to keep the numbers simple!
8. Long term USD/AUD exchange rate: .77 USD/AUD (average rate 2000 to 2021)
9. Probability of gaining NDA – 60% (ClinicalTrial Success Rates by Phase and Therapeutic Area | American Council on Scienceand Health (acsh.org). Overall probability of success for phase three, excluding Oncology 63%. I’ve rounded down
10. PAR will not win disease modifying status. This is a prudent assumption, given the difficulty in obtaining this label
11. Price per treatment – USD 1,500. Bottom end of company guidance. Refer assumption 10 above
12. Annual costs post NDA $35 million (operating cash costs as per most recent quarterly $32 million. Could argue that this is inflated by R&D costs – but I’ll use $35 m, as it’s the best estimate available to me)
13. P/E multiple 30 x (nb CSL ~ 40x, Cochlear ~ 50x, Resmed ~ 40x)
Methodology/Valuation:
Step One: Estimate time taken to NDA approval. Company guidance is 2025. Based on their past forecasting performance, I’ll add two years…..NDA to be awarded end 2027 (5 years).
Step Two: Estimate the year in which PAR will first achieve annual sales $1 billion sales pa (USD)
· My simplistic approach is to use Humira as a precedent. Humira received FDA approval in 2002, and achieved over USD 4.5 billion in annual sales in 2008, the sixth year of sales. (TheStory of Humira® | HEAT: Health Evaluations + applied Therapeutics(heatinformatics.com)Twodecades and $200 billion: AbbVie's Humira monopoly nears its end | BioPharmaDive . Cost per treatment in year of launch was USD 5,600. Assuming constant cost of treatment (a key/bold assumption), then $4.5 billion of revenue in 2008 implies 803,000 patients.
· Rather than focus on Humira $ revenue, I’ve focussed on the implied number of Humira patients. The equivalent 803,000 patients (after 6 years) @ $1,500 per treatment for PAR would generate USD 1.2 billion
· Is this realistic? In the US, the number of OA sufferers appears to be ~ 20 x the number suffering from rheumatoid arthritis (What'sthe Difference Between Rheumatoid Arthritis and Osteoarthritis?(healthline.com)), so 800k patients for PAR’s OA treatment appears achievable, especially at a significantly lower cost for iPPS relative to Humira
· PAR presentations put total number of US/EU/AUS OA sufferers at 72 million. Assuming 50% of these relate to knee OA, then total knee OA sufferers is ~ 36 million. 800k patients represents less than 2.5% of the market – it’s a large number of patients, but a small penetration of the potential market
· Hence we’ll assume that PAR will achieve USD 1.2 billion in annual sales 6 years after approval ie 2034. Note that for valuation purposes we will estimate PAR’s future market cap at the COMMENCEMENT of 2034 ie we will apply a multiple to the expected revenue/earnings in 2033, and discount this 11 years to get the current value (ie value as at Jan 2023)
Step Three: Estimate the future value/market cap of PAR for the above year
· With annual iPPS sales of $1.2 billion, PARs share of revenues will be $240k USD, or ~ $310 k AUD
· Revenue less forecast costs ($35 million) - $275 million
· Assuming a P/E multiple of 30, PAR future market cap ~ $8.25 billion ($28.95 per share based on post rights shares on issue) (nb PAR would not be paying tax at this point of time)
Step Four: Discount the value calculated in step three above back to Jan 2023 to get the current valuation.
· Probability of successful registration 60%
· $8.25 billion in Jan 2034, multiplied by 60% and discounted back to Jan 2023 ~ $1.11 billion
· Shares on issue post rights: 285 million shares
· Implied value per share: $2.34.
· Based on my method of valuation, we are materially undervalued.
Comments/Risks
· Trial unsuccessful. Given PAR’s safety record and previous results, I’m not overly concerned about this
· PAR taken over prior to commercialisation. This is a huge risk, and a cause for concern. Lets hope it never happens
· Exchange rate – likely to be lower, implying a higher valuation
· Earnings multiple of 30 x. Initial instinct was to use 20x, but with the anticipated levels of growth, 30 x is more realistic. Still conservative if compared with CSL
Cheers
(20min delay)