pxs share price, page-24

I did a simple CapitalIQ screen of all ASX companies by name, market cap and sector and industry. Of the 1,848 ASX listed companies, 494 have market caps between $49m and $501m- which is where I would classify as a broad range of interest for small-mid caps.

Of these there are only 6 are pharmaceuticals including Pharmaxis. In comparison there are 153 miners (Materials Sector). The total market capitalisation of small cap miners is $24.0bn whereas the total Market Cap of Pharma Companies is $1.5bn.

While it may be oversimplifying to say "nobody understands the market"- what I am referring to is that around 1 in three small-mid cap stocks are miners. This market has sufficient depth to fund a competitive market of specialist wholesale and institutional researchers.

The 6 stocks comprising the small-mid market for Pharma stocks in Australia is too thin to support anywhere near the depth of specialist researchers needed for comparable coverage - bearing in mind just how thinly traded stocks outside of the ASX200 really are.

Additionally in Australia you do not have the ability to build statistically significant Pharma comparables tables for transactions or trading comps because the number of pharma companies is too small and M&A activity too infrequent. Therefore there is no way to build a direct market-based assessment of value for Australian Pharma stocks in the same way that you can for miners. You need to use proxies or do global comparables and adjust for australian macro conditions etc.

For these reasons, [which essentially comes down to a lack of information - ether from analysts and actual trading data] that the typical institutional attitude is to avoid Pharma unless they are necessary for index weighting or diversification. In which case the decision to trade is more based on technical factors rather than the same levels of rigour going into fundamental valuations of miners.

This may be why in comparison there are specific resource centric funds with the capability to assess fundamental value drivers such as EPCs and Geologist reports in order to generate alpha returns in small and mid market miners.



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On other interesting things:

Failure of trials: The question then becomes one of quantification of the valuation impacts of failing trials -given the potential to reapply as circumstances change. This is hard to do without options analysis.

Stock Movements: Cortinaboy swapped the base of the percentage on the down leg from $1.00 to $0.01 to argue a 10,000% increase is greater than a 200% increase. This is an invalid comparison- what is relevant is whether the upside risk is greater than the downside- On my assessment the probability of losing my investment (ie going to 1c) is lower than the probability of doubling or trebling it.