Comments on: Fusion Investing Portfolio Buys Biota

By: Dean Morel

Dean Morel — Mon, 21 Sep 2009 03:42:41 +0000

does the market eventually catches up to an ‘intrinsic’ valuation of the company more often than not? The price moves around peoples view of the intrinsic value, above, below and occasionally at. Invariably a company will be at intrinsic value at some point in the future, the danger is the intrinsic value may haven fallen to intersect the price.

I haven’t sold any Biota. Below IV, cash cow, plus multiple near term catalysts. Do you have a better investment?

By: Alex

Alex — Sun, 20 Sep 2009 14:51:20 +0000

Dean,

Thanks for the comments. What your measure of conservatism and my earlier blue sky analysis valuing Biota at A$2.59 a share imply is that the Friday close of $2.56 nearly fully values the company.

(i) Have you sold down at least half your inital position? I entered at A$1.90 and have now sold my entire position at A$2.50.

(ii) In your long years of investing do you tend to find that the market eventually catches up to an ‘intrinsic’ valuation of the company more often than not?

By: Dean Morel

Dean Morel — Thu, 30 Jul 2009 04:20:17 +0000

Hi Alex
For someone new to investing, you’re clearly a fast learner and it’s good to see you working through the numbers. There are a couple small, but important mistakes in your calculations.
1. Avoid assumptions. You’ve assumed 15M courses for the $8.9M courses. GSK weren’t yet up to the 60M annual production. Biota get 7% of royalties on worldwide sales and 10% on Australian. GSK sell a course of Relenza for around A$25, so Biota get around $1.75 a course. So for CY 2010 Biota could get $333M in royalties (190M*$1.75).
2. Be conservative. While GSK has said they’re going to increase production to 190M and it looks likely they will do that next year, you should be conservative with your estimates. i.e. they’re unlikely to do 190M every years until 2014.

I continue to see Biota as one of the best investments around, but as I always say this is for entertainment purposes only and you’d be crazy to act on anything some guy on the internet says!

The other side is to look at the downside. While most people enjoy thinking about possible gains, it is possible losses you should be most concerned about.

By: Alex

Alex — Wed, 29 Jul 2009 23:35:45 +0000

30 Jul 2009

New to all of this and enjoying the learning process. Does this make sense?

The thinking:

BTA got A$8.9m in royalties for Q2 from GSK under the current production target of 60m courses per year.

GSK announced it is to increase production to 190m courses by year end (i.e. 3x increase) so A$26.7m per Q in royalties.

Patent coverage lasts till 2014.

Assume you only get royalty payments at the end of the year:

2010 2011 2012 2013 2014
Courses cumulative 380 570 760 950 1,140
Royalties 160.2 106.8 106.8 106.8 106.8
Discount rate 13% 13% 13% 13% 13%
Years from today 1.5 2.5 3.5 4.5 5.5
Present value 133.4 78.7 69.6 61.6 54.5

Net present value of royalty stream = A$397.8m (A$2.59 per share)

Market cap today = A$333m (A$1.91 per share). No debt. Cash A$55m (sensible burn rate, enough to run). Enterprise value = A$285.

The market is ignoring 2013 and 2014, factoring that generics will come online, 760m courses will cover 12% of the world human population etc.

With a few other developments well advanced in the pipeline. Does BTA still look worth a roll of the dice?

By: PazzoMundo

PazzoMundo — Mon, 20 Jul 2009 06:24:48 +0000

Dean,

Maybe I’m a nervous nelly…I exited BTA today. While their cash asset backing must be creeping up towards $1.00 (?), all this talk about having a vaccine by the middle of next week must ultimately undermine their upside from here. Having said that – by joining a few dots on their chart I could easily see the price at $2.00…