Biota Analysis and Valuation

Valuing a company is like juding the beauty of a person wearing a maskValuing a company has parrellels to judging the beauty of a person wearing a mask. A lot is visible, but some will always be unknown. So a range of values is used to account for the unknown.  Like beauty valuations are also subjective, a combination of art and science. My range of values for Biota range from $53M – $215M, with per share $0.70 – $1.20 looking like fair value and $0.30 as downside value. Keep in mind price can deviate considerably from value, including to the downside. Little has changed since my first quick valuation, 12 cent risk for 30-80cent reward with further possible upside and several possible catalysts. In the 2008 annual report Note 12 it is worth noting directors have stated “F2009 net cash inflow of approximately $12 million”.

Over the the last four posts in this series on Biota (BTA.AX) I’ve shown my methodology and results. Investing is not about arriving at a fixed decision and sticking to it. You need to constantly update your thesis, valuation, risks and rewards. Without updates how can you compare current holding to all the prospective homes for your funds. Not remaining current places you at a disadvantage, you become the patsy at the table.

A quick recap

Article One: Biota Analysis and Valuation Part 1
Quick look through recent filing, quick present value analysis, share buy back, employee options, CEO briefing, 2008 Annual report. My initial conclusion:

Markets hate uncertainty and Relenza provides it in spades. This could be an excellent opportunity. Downside very low due to cash. Say maximum* loss of 15 cents with upside of $1.15. That’s a preliminary risk to reward of 1/7.5. Over twice as good as I normally seek, but hey these are exceptional times and there are plenty of bargains to choose between. My valuation spreadsheet shows a risk/reward ratio of 1:1 to 1:5.

2: Biota Analysis and Valuation Part 2
Closer at the downside and upside with probabilities and initial look at catalysts.

3: Biota 2008 AGM
My notes from the meeting. It was a great fast introduction to the company’s history and major players.

4: Biota under the microscope
A closer look at the pipeline and management.

What now?

Biota has passed every step thus far. A couple issues require clarification and risks have been identified. Time for a more detailed valuation. I’ll run through a more detailed net present valuation and a liquidation valuation including Graham’s net-net working capital. It all easy once you’ve done it a few times. However, I will issue a Numbers Warning, beware boredom is possible beyond this point.

Net present value attempts to calculate the present value of future cash flows. The problem is future cash flows are uncertain. To compensate for the uncertainty we’ll aim for a value range. Let’s start with my valuation  spreadsheet which I started in step one. I’ll start a new sheet called valuation two. A quick update and I see $120M-215M in value or $0.70-$1.20 a share. At prices around $0.40 there is an acceptable margin of safety.   Checking latest price I note Monday was up 0.090 (27.27%) to $0.42 with volume 60% above daily average. Is Hunter Hall buying more shares or maybe Biota buying them on market to hold in trust for the Peter Cook’s voted down 2008 options? All I know is that anyone selling at $0.33 either had to for some reason, has information that I don’t have, or has no idea of value. I could be wrong, but the odds seem stacked in my favour.

Liquidation Value attempts to value the company as if the company is to be wound up. For this we use the balance sheet.

Total Current Assets $64M
Total Current Liabilities $19M
Deferred Revenue $6M
Non Current Liabilities $7M
Non Current Assets PPE $7.5 DTA $5

Net working capital (WC): 64-19+6 = $51M. Current assets minus current liabilities plus deferred revenue. Cash is generally worth face value and liabilities always are.
Net-Net working capital: 51-7 = $44M. Net WC minus non-current liabilities.
Liquidation value: 44+6+3 = $53M Net-net plus realisable value of non-current assets.
More conservation details at each valuation step are possible.

Biota is a going concern, so liquidation value is not a lot of use, but it does show what how much you’re paying for the future cash flows, IP and other intangible assets. It provides an accurate base which is more useful than simply taking cash value. Still if you’re in a hurry, net cash is a OK first place to start.

Conclusion

  • Four products in advanced clinical pipeline.
  • Excellent at partnering.
  • Multiple possible catalysts/risks include; good Relenza royalties, LANI PIII results, HRV PIIa and RSV PI results.

What’s Next
Review of History and Management. Has value been created over the years? Have management delivered on promises? Law suit review starting
with reasons

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