undervalued?

Just because a share price has gone up lots it doesn’t mean that the price is high, just as when some stocks have fallen lots it doesn’t mean that they are cheap.

Personally I feel that neu is still well undervalued. And I’ll suggest why. I’ll keep the explanations and figures simple.

If nnz2256 proves to be a successful treatment for Retts Syndrome and FragileX, then it has been suggested that it could reap sales of $3b and $5b respectively. Success in one indication will probably mean success in the other, although this is not a given of course.

However I’m expecting success to eventually give neu a profit of $1.6b per year. I’m aware that we may be sharing with partners here, but nnz2256 is fairly cheap to manufacture and would have a very very high profit margin.

You may think that a profit of $1.6b is too high, but the next part of this valuation should balance things up for you.

I’m going to work with a p/e of only 10 (as opposed to the usual range for such biotechnology/pharma stocks of 30 to 100). So if you don’t like a $1.6b profit and a p/e of 10, then think of a $400m profit and a p/e of 40).

It’s worth noting that any clinical success will add value to nnz2256’s portfolio as it will suddenly be the most promising drug in the world for other Autism spectrum disorders, as well being a great candidate for other neural disorders. So a p/e of 100 is possible.

Anyhow, let’s go with the old $1.6b profit and p/e of 10 (or $400m profit and a p/e of 40) and we get a valuation of $16b. This is about 100 times neu’s current fully diluted value.

Now I would suggest here that if nnz2256 is successful in the phase 2 trial then the drug will make it to market. Now I’m aware that that is not the norm, as some drugs fail to show efficacy in their phase 3 trial, or they have safety issues, or there is not enough clinical benefit or they are not commercially viable.

But our patients are very unlikely to be effected by the placebo effect, and the phase 2 trial has very definite (non subjective) efficacy parameters. So success in our phase 2 trial is highly likely to be replicated in a phase 3 trial.

Nnz2256 is human derived and has been through a number of trials with no safety (or even side effect) problems at all.

This is no competition and all, no treatment at all for Retts or FragileX and a very lucrative market.

So, as I stated, I feel that success in the phase 2 will lead to our product being commercial.

So if success could mean a value of $16b down the track and the current price is $160m (fully diluted), then the market is suggesting that neu’s chance of success is 1%

Now I’m aware that many drugs fail the all important phase 2 stage. I’m not sure what the current figure is, but I’m aware that there was a 22% success rate a few years ago.

22% average compared to neu being valued at a 1% chance of success.

But I feel that nnz2256 has a much higher chance of success than the average. Just as one could argue that most cars cannot get around the Nurburgring in Germany in less than 10 minutes, but the latest supercharged Porsche 911 with all its bells and whistles has a much better chance than the average.

So why is nnz2256 so special?

Well for a start it is human derived. In fact it already does in healthy humans what we want it to do in brains of our test participants. This doesn’t automatically mean that it will be effective in the clinical trials, but it’s a big advantage.

Compare this to most drug discovery, where random substances are tested against random indications. Now sticking slices of cucumber on to your John Thomas may fix your erectile dysfunction, but it probably won’t!

This is why the company has stated that evolution is their drug discovery program.

Like all drugs in phase 2, nnz2256 went through laboratory and animal testing. Now not only did nnz2256 perform as hoped and expected, we have been told the animal results are among the best ever seen.

Many drugs fail the phase 2 trial because of safety or side effect issues. Well this isn’t much of a risk with nnz2256. It is human derived and has shown no safety or side issue concerns at all.

So as I said, the average success rate is 22% but:
* Nnz2256 is human derived – most drugs aren’t.
* Nnz2256 already does in healthy humans what we want it to do in trials – most drugs don’t.
* Nnz2256 had among the best animal testing results seen – most drugs didn't.
* Nnz2256 has a perfect safety and side issue record – most drugs don’t.

So I suggest that nnz2256’s chances of clinical success are higher than the average (just like that Porsche 911’s chances). I won’t tell you my figure, but as I have stated before that I believe we have a great than 50% chance of success.

But despite this the market is pricing in a 1% chance of success (or a 4% chance if you like, if you think my valuation is too high).

Once the phase 2 trial began I expected that if efficacy is being clearly demonstrated, then we would start to see parents clearly noticing a change in their children and that some would campaign for their child to remain on the drug. This too seems to be happening.

That’s a lot of ticked boxes.

cheers