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I was getting very bored with the constant repetition of price targets that are a million miles away from the current SP and wondered how there was such a difference. Now we know. TD are regulated professionals so there was no way they would be so far out with their current valuation. Plus Bein asked for my valuation and I took the bait!
So have I got that right Rah? You were using an 8.9 multiplier of a revenue we are a million miles away from and not adjusting it for the risks and costs of achieving those revenues to derive your current valuation?
“What about the rest of the pipeline? Try and value that!” Well there’s really no need as TD have already done that but the below should add context.
“A biotech company can have dozens or even hundreds of drugs in its developmental pipeline. However, that does not mean you should include them all in your valuation. Generally speaking, you should only include those drugs that are already in one of the three clinical trial stages with the U.S. Food and Drug Administration.1
As an investment, a drug that is in the discovery or pre-clinical stage is a very risky proposition. For every five to 10 thousand compounds that enter pre-clinical testing, only five to 10 will reach human trials.2 Therefore, drugs in the pre-clinical stage are usually assigned zero value by public market investors.”
Precision (yes, it’s preCISION: don’t give AF) is a delivery method so post the recent update a valuation could be attributable for the platform. TD have already done this in their note, along with the affimer platform and DX division so no need to reinvent the wheel.
So how can my DCF calculation suggest AVA6000 is worth 39p and TD’s rNPV calculation suggest it’s worth 23.2p but Rah’s suggest it’s 371p? Where to start. Let’s break it down
“Delta are still working off #AVCT receiving a royalty of AVA6000 sales (15%) rather than retaining full ownership.
That is quite ridiculous when @avacta changed their strategy long ago.
TD work off $1.5Bn sales, with a launch year in 2026.”
Avacta may go it alone, but no allowance is made for the extra cost and dilution that would be required to go it alone.
TD have assumed sales of $1.5bn but they’ve discounted by adding the present value of all future cash flows and subtracting the initial investments (NPV) and then adjusting for the estimated risk (rNPV: the industry standard).
“assume a 20% of #AVCT making it to market yet provide no financial modelling. This is a service we pay for.
If you take:
@Stifel’s 20% Chance of Success
- Trinity Delta’s peak sales (100% of $1.5Bn, not 15%)
- 8.9x industry multiplier”
The 8.9 industry multiplier is presumably from the article below. These multipliers are based on actual revenues currently being achieved, not revenues we aren’t currently achieving without factoring in the costs and risks of reaching those projected revenues.
In the article itself it even states
“we wanted to provide a statistical analysis of revenue multiples for public BioTech and Genomics companies as a means of comparison, given that multiples alone are not sufficient to substantiate a valuation and the appropriate risk assessment and due diligence of the individual company’s pipeline is still necessary.”
If this article is to be given any credence (it’s incredibly basic) then Avacta should be valued at 8.9 x current revenues. Those figures will look a bit less rampy!
BioTech & Genomics: 2022 Valuation Multiples | Finerva
Did all those recommending and liking posts really think TD, an FCA regulated entity, would attribute a value to AVA6000 of 23p when the real value (according to rudimentary workings) was over 16 times higher?
Trinity Delta using rNPV - which is the industry standard – attributed a value of 23.2p per share. TD assume lower peak sales not factoring in the significant dox market growth forecast. I have used generous cost and COS assumptions, otherwise the result is very similar.
Avacta-Update-221213.pdf (trinitydelta.org)
So having wasted an hour or so of my life, I’ve concluded that TD’s valuation is reasonable. Something I already knew before I started as it’s their fricking job.
Here is Rah’s methodology quoted from twitter (yes, you can see posts despite being blocked: just search without logging in, which makes the dramatic blocks rather pointless)
“Delta are still working off #AVCT receiving a royalty of AVA6000 sales (15%) rather than retaining full ownership.
That is quite ridiculous when @avacta changed their strategy long ago.
TD work off $1.5Bn sales, with a launch year in 2026.
RAH
@RAH00084
·
2 Mar
Meanwhile, our broker
@Stifel
assume a 20% of #AVCT making it to market yet provide no financial modelling. This is a service we pay for.
If you take:
@Stifel’s 20% Chance of Success
- Trinity Delta’s peak sales (100% of $1.5Bn, not 15%)
- 8.9x industry multiplier
RAH
@RAH00084
·
2 Mar
And you assume 300m shares in issues (max dilution under current financing)
You get $1.5Bn x 8.9 @ 20% = $2.67Bn
/ 300m shares in issue = 890p
Convert $>£
743p per share (20% success rate)
But we can’t do it alone… #AVCT need a partner…
RAH
@RAH00084
Assume #AVCT needs to partner with a major (manufacturing/distribution).
AVCT obviously needs to pay for that.
Let’s say it’s a huge hair cut. We have to forgo 50% for funding all this.
743p/2 = 371p
We sit at 140p”
Most accept that Avacta is a smaller biotech and does not have the resource to take AVA6000 to market so will ultimately license out regardless of what Dr Smith states. If we do go it alone there will be significant further dilution due to the capex required to get there, which adds further complexity / variables.
The royalty rate for P2 is lower but let’s use a generous 10%.
Source: Medtrack: Maximizing Royalty Rate Opportunities in Pharma Licensing: Analysis of Average Royalty Rates in Pharma by Phase and Therapy Area
Potential market size US$ 1,983.40 Million
Market penetration 100%
Royalty rate 10%
Peak sales revenue $198,340,000
“Drug patents usually last about 10 years.”
It will likely take time to reach peak sales.
“Taxation and working capital costs also need to be factored in. Investors should expect operating and capital costs to represent no less than 30% of the drug's royalty-based sales.”
“A drug approved for Phase I clinical trials has a 10.4% likelihood of eventually reaching FDA approval. If the drug moves to Phase II trials, the likelihood of approval rises to 16.2%”
As P1B is now a pseudo P2, let’s assume a generous 16.2%
Revenue Revenue - 30% costs Cashflow assuming 16.2% chance of approval Discounted cash flow value assuming 6.5% rate and 2026 approval
2026 $39,668,000.00 $27,767,600.00 $4,498,351.20 $3,723,955.96
2027 $79,336,000.00 $55,535,200.00 $8,996,702.40 $6,993,344.52
2028 $119,004,000.00 $83,302,800.00 $13,495,053.60 $9,849,781.01
2029 $158,672,000.00 $111,070,400.00 $17,993,404.80 $12,331,494.22
2030 $198,340,000.00 $138,838,000.00 $22,491,756.00 $14,473,584.77
2031 $198,340,000.00 $138,838,000.00 $22,491,756.00 $13,590,220.44
2032 $198,340,000.00 $138,838,000.00 $22,491,756.00 $12,760,770.37
2033 $198,340,000.00 $138,838,000.00 $22,491,756.00 $11,981,944.01
2034 $198,340,000.00 $138,838,000.00 $22,491,756.00 $11,250,651.65
2035 $198,340,000.00 $138,838,000.00 $22,491,756.00 $10,563,992.16
$107,519,739.09
Assumes approval in 2026, revenue grows and reaches peak sales in 2030. The values of those sales in today’s terms reduce due to the discount rate.
Revenues adjusted for costs (see above)
16.2% COS (see above)
Discounted to give current value using 6.5% bond coupon rate although equity raises likely required to fund TX pipeline. A license deal would of course be more favourable for existing SHs. Discounted value / (1+0.065)^years until realisation
DCF value is projected revenue adjusted for costs, chance of approval and 6.5% discount rate.
Assuming 1.2 conversion rate
$107,519,739.09 / 1.2 = £89,599,782.58
271m shares in issue although likely more following convertible bond dilution.
£89,599,782.58 / 271,000,000 = AVA6000 is worth 0.39p per share
Ok I admit that I’ve risen to the bait of providing my current valuation for AVA6000 and wasted a good hour of my life to prove something that I already knew.
Using discounted cash flow, an optimistic valuation of AVA6000 is 39p (I bet this post doesn’t get many recommendations compared with those predicting we should currently be trading at £10 per share!)
“Forecasting Sales Revenue
Forecasting the sales revenue from each of a biotech company's drugs is probably the most important estimate you can make about future cash flows, but it can also be the most difficult. The key is to determine what expected peak sales would be if—and this is a big "if"—a drug successfully makes it all the way through clinical trials. Normally, you will forecast sales for the first 10 years of the drug's life.”
“Market Potential
You need to start by making assumptions about the drug's market potential. Look at information provided by the company and market research reports to determine the size of the patient group that will use the drug. Analysts typically focus on market potential in the industrialized countries, where people will pay the market price for drugs.
When making assumptions about a drug's potential market penetration, you have to use your own best judgment. If there is a competitive drug market, with limited advantage offered by the new drug in terms of increased effectiveness or reduced side effects, the drug will probably not win substantial market share in its product category. You may assume that it will capture 10% of that total market, or even less. On the other hand, if no other drug addresses the same needs, you might assume the drug will enjoy market penetration of 50% or more.”
Source:Using DCF In Biotech Valuation (investopedia.com)
US$ 1,390.64 Million in 2022
US$ 1,983.40 Million by 2028
Source: Doxorubicin Market Revenue to Cross $1,983.40 million by (globenewswire.com)
Let’s assume AVA6000 concludes successful clinical trials, becomes SOC overnight and achieves an incredibly optimistic 100% market penetration.
“The biotech company won't necessarily receive all of this sales revenue. Many biotech firms—especially the smaller ones with little capital—do not have sales and marketing divisions capable of selling high volumes of drugs. They often license promising drugs to bigger pharmaceutical companies, which help pay for development and become responsible for making sales. In return, the biotech firm normally receives royalty on future sales.
According to Medtrack's analysis of royalty rates, the average rate for drugs in Phase I of clinical trials is 10%. As these firms move along the development pipeline, royalty rates generally get higher”
What does it matter Bein? You have Google don't you? - https://www.biostock.se/en/2022/09/investing-in-biotech-4-ways-of-estimating-a-biotech-company/#:~:text=An%20established%20way%20of%20estimating,the%20company%27s%20portfolio%20may%20generate. Take your pick and work the numbers through.
The ONLY valuation that matters is the value the market attributes. The ONLY value that matters on buyout is the value that big pharma and Avacta attribute.
As has been proven time again on this board - one slight alteration to an assumption and the final SP figure is wildly different. My point was that SB gave, for me, the most realistic target and he got jumped on like I did. There was no need. The fact the market thinks he has the closest valuation says it all. I made similar points on Twitter -
https://twitter.com/lukemor56389747/status/1569975693890527234?s=46&t=Gn6pbkInkL330_pN5XhFgw
I wouldn’t waste too much time SB. It’s clear to most that you’re the most knowledgeable poster contributing towards this thread. I pointed out to Rah on twitter what he was missing months ago, wasn’t rude, provided factual information and of course he blocked me. You make some good points and add a lot Rah but don't seem open to people challenging your perspective. For me the whole purpose of these boards and twitter is to exchange views to improve our collective understanding and make more informed decisions.
Before the AVA6000 updates I said I doubt that we would hit £3 per share and the reasons why, got jumped on like I was a deramper or team FUD (no idea what FUD is by the way). We of course didn’t even make it to £2 per share. There was a pole on twitter and the majority of voters suggested over £3 per share on release of results. One poster with significant followers even said that anyone who voted for it being less than £3 was "under researched", which aged like a glass of milk. Numerous suggesting we would gap up and people be "locked out". Again, the market proved them to be completely wrong but not one of them has had the humility to recognise the fact. What "team" are those people in?
Thanks for sharing Energy. Your contribution and others between the childish arguments, rampers pushing the cringy cos stats and blatant derampers and traders, helps makes the board worth scanning
I hope you're right CJ, obviously but that's a separate discussion and will depend on what happens between now and and the science day, and what is divulged at the science day. I was merely making the point that we wouldn't break £3 without efficacy data and got my head bitten off.
I know this board attracts a lot of bell ends and they need shooting down (fair play to all those that do that) but unfortunately it also prevents balanced discussion frustratingly, which is what a lot of people want from the board.
**** me don't mention £3 again. I said I didn't think we'd get over £3 / c.1bn mcap without efficacy data and /or a licencing deal the other night and got attacked as if I was some sort of de-ramper. Well we didn't even get over £2 ffs. I'm sure Rah and his fan boys will explain shortly why we didn't get over £3 accompanied with an apology..... I won't hold my breath.
No doubt it will be 'the market' not understanding. I mean to think that you know more than the collective group think of an entire market....... the level of arrogance makes Ophidian look humble
8.3million shares already traded. Assuming a conservative 155p average that's c.£13m worth of shares traded already. That isn't PI money obviously. A TR1 from an II or even better a major pharma would really put a rocket under this.
We really can't compare this news to the LFT potential. We reached a 600m mcap on the LFT news as many, including me, thought that Avacta were about to win a share of a government contract worth up to £8bn. This of course would have generated huge profits immediately.
The reality with AVA6k is that it's a while off being monetised (hopefully not that long with an FDA fast track but you get the point). Personally I'm happy to wait for the licencing deals/ buyout so it doesn't matter but the LFT argument is apples and oranges.
Absolutely fantastic RNS! Well worth the seemingly never ending wait. Just think how exciting it's going to be watching this story unfold throughout 2023! Congratulations all LTH. It's taken a lot of stomach to sit it out this long that's for sure
Well that wasn't my intention Bein. I was merely making the point that evaluating anti tumour activity (secondary objective of P1A) is measuring efficacy to an extent and trying to add to the conversation. Why the <£3 without efficacy data was controversial is beyond me but anyway we move on
So you criticise me for not providing an example, I provide a comparable one and you dismiss it without any reasoning. But you like the Clovis example where they got less than $50m upfront. Haha!
The echo chamber this place has become is laughable. LTH's know I've posted irregularly over a long period, particularly when the SP was in the 40p range to provide reassurance and context. At that point I don't recall a lot of today's regularly posters saying too much. I make one comment about the SP if Avacta don't provide sufficient efficacy data and get pounced on.
One final thing if you really want some balance : yes, other companies haven't been successful targeting FAP. What other oncology targets have you all looked at or is FAP the only game in town? If you haven't looked and are relying on posts here and on twitter then i'm afraid you may be in the echo chamber.
I don't disagree with anything there Rah but IMO I think we only get to those valuations with a buyout.
As I say I'll happily be wrong as anything close to those figures and I'll be a multi millionaire but this is a discussion board and i'm as welcome to share my opinion as anyone else
Apologies I've obviously rattled a couple of cages for not agreeing with a gazillion pound SP on P1 data.
Jones Richard and Bein, happy to engage as you are obviously open to reasoned debate and don't burst into an emotional tirade when someone doesn't suggest us all being billionaires in the morning. Jones Richard - have a look at Intensity. Their lead product injects chemo directly into the tumour and also triggers an immune response. They have released fantastic P2 data and were about to IPO until the macro environment changed. It's been delayed for months as a result and when they do IPO, guess what, it won't be for 10bn. They have a pipeline of similar treatments...... sound familiar?
Bein, I think that's a rhetorical question as you know the answer. A lot of the valuations thrown about are based on chances of success. Apply the same theory to any other biotech and compare it to their current mcap and you will see a similar 'value disconnect'. There are endless oncology drugs targeting huge markets e.g. immunotherapy. Many showing positive early efficacy data. The mcaps aren't anywhere near those discounted COS percentages based on trial stage because the world has changed.
By investing in a growth stock now you are choosing not to have > 4% p.a. from the US government risk free. The risk free rate of return has gone up exponentially and the equity risk premium is now much lower i.e. the extra return you can get from equities over government bonds. Rational investors recognise this hence why many people on here who 'don't get it' are scratching their heads all day.
Anyway I was merely making a passing comment about what to expect in the much anticipated Avacta RNS. Sorry if anyone's upset. Hope that helps