It is very interesting to compare the valuation of Pharmaxis...

It is very interesting to compare the valuation of Pharmaxis with that of a typical microcap mining explorer. In the mining company you do not typically know what you have.

In Pharmaxis there is an excellent understanding of 'inferred and proven resource sizes' - in terms of getting patents, passing clinical trials and understanding the market. There is also a well defined pathway to commercialisation the analogue of mineral resource exploitation. Essentially Pharmaxis is a exploration Co that has just raised all of the capital needed to enter exploitation.

Further it has JV capabilities in that there are a number of large 'pharma brand managers' eg Pfizer, Merk, J&J etc who would love Pharmaxis's patent portfolio. These companies have a strategic need for more patents and molecules as their existing portfolio comes out of protection.

The key issue I see with the share price is that because Pharmaxis has the same risk profile of a mineral explorer; but is not in the minerals sector; Australian investors do not know what to do with it. On the other hand if it were on NASDAQ or LSE where analysts understand Pharma stocks and option value then it would have a much better home.

This stock is likely to go nowhere for a long time and then people will suddenly "get" the story and it will significantly increase in price. This is true in all option based stocks.

The risks for me are very right skewed- the probability this goes from $1.00 to $0.01 is much much lower than the probability it goes from $1.00 to $3.00. The news flow that will kick off a substantial price rise could come at any time. This is the same skew as is apparent in mining explorers but unlike the miners we have a much better understanding of "what is under the ground".

Another telling feature is that Pharmaxis's market cap is around the same as its share capital- i.e. Pharmaxis is worth approximately the capital that has been invested in it to build it to its current state. This means you have the ability to buy into a partially (substantially?) complete business that has been re-risked to a large extent at around the same price it took to build the business to its current position.

i.e. There is no premium associated with passing earlier (riskier) stages of development. This in turn means that if you can assume Pharmaxis has been efficient in its expenditure, it is trading at a substantial discount to where it should be fairly priced for its state of development.


I for one will be taking 100% of the rights issue (unless the price tanks and I can buy on market cheaper!)


And by the way - the market has already factored in the downside from the rights issue dilution....