Member Info for StarBright

LSE seems sometimes to be an arena into which people voluntarily throw themselves to wrestle, or boo and hiss from the safety of row Z. Which is fine, some obviously enjoy it as they contribute little else. But it does seem a bit more WWE than is necessary right now. Question the valuation lunatics and this boards frantic tag-team of 24/7 combatants - resplendent in glittery budgie smugglers and knee-high boots - take turns in smashing you over the head with folding chairs from the top turnbuckle.

@Luke1444 is not the first to provoke this knee-jerk response by asking the question “Do you really think biotech valuation is 8.9 x potential revenue, not taking into account risk, cost of capital, timeframe to reach those revenues and costs of achieving those revenues…?”.

Compared to @Luke1444, I am a valuation lunatic at 250p despite my protestations that this is easily justified without resorting to crazy multiples and assumptions. The principal difference between our figures is that Luke bases his calcs on a flat 10% royalty-rate licensing deal. My 250p illustrates the AVA6k is retained not licensed scenario, so is based on Avacta retaining all of the revenues albeit after issuing 150m new shares to get there. If Luke were to restate for 100% of the potential revenues (but with 150m new shares) his figure would be comparable to mine. We know that the risks and rewards of retaining vs licensing are v different; @Luke1444 shines a light on this.

It's always been my view that the primary utility of valuations lies in the journey not the destination. Considering/discussing inputs and assumptions (both explicit and implicit) makes for better analysis and understanding, which then drives better investment decision making. Forums like this are at their best when they provide a venue for different people (particularly those with professional experience) to engage in reasoned debate. Very very few people go from bean to cup, from experience of clinical trials to lived knowledge of valuation methods. Pooling constructively our collective knowledge is the key.

Thank you @Luke1444 for contributing as you have.

@ATHENA, I do not see any regulatory reason for the company to inform the market if they have started additional cohorts. It would be easy to argue that they are within the scope of existing disclosures. Especially as the company has said (17/1) that “…it will complete these additional cohorts during the first half of 2023.”

@Olderandwiser: Here's what I envisage as a central scenario IF (big if!) Avacta "goes it alone" with AVA6k:

Avacta retains AVA6k 100%, requiring it to invest significantly to get through all trials to approval and to access the required manufacturing and distribution capabilities. It takes four years and the issue of 150m additional shares to get to the point where £1bn pa of sales is a widely accepted reality/expectation.

1. Annual AVA6k sales of £1bn, visible in 4 years time
2. 5x prospective revenue multiple
3. 450m shares in issue

£1bn x 5 = £5bn / 450m shares = £11/share

To get to a valuation for TODAY we have to allow for the 4 years to £1bn pa revenue visibility, NPV10 (ie a 10% discount rate) for 4 years = 0.68

So £11 x 0.68 = £7.50/share assuming that AVA6k largely displaces Doxorubicin as used today.

It really does look as though the science is good, so I am inclined to assess the chance of commercial success (not just FDA approval) as 33%. This implies a current sp of £2.50, roughly twice where AVCT trades today.

But... there are many many potential upsides from this baseline:
- the addressable market for AVA6k could be multiples of the existing Dox market
- Avacta has other shots on goal alongside AVA6k, any or many of which might be transformational
- Avacta might find a "strategic buyer" willing to pay up sooner
- A licensing deal might be a better way forward, particularly if £££….
- etc etc

As holders we should (always!) have a grounded assessment of intrinsic value based upon evidenced industry norms for external variables like discount rates, revenue multiples etc. We should use information that the company provides on potential market size/share, hurdles/time/£££ to market and unit profitability. My strong view is that the company needs to unbutton its blouse (shirt if you prefer…) a little on these topics in order to attract meaningful attention from institutional investors. The science alone is (quite evidently) not enough.

What REALLY matters is what non-holders with £££ think of Avacta’s commercial prospects and the returns it might generate. Only when they see more value than the existing holders will they commit their capital to buying shares and driving the price up. The company has work to do to convince potential investors.

@MrRipley - it is very simple.

This thread was started by @RAH0084 repeating Myles McNulty's mistaken claim that the Pfizer/Seagen deal has a "...forward EV/Sales of 20x". As a result @RAH0084 asserts that his own preferred 8.9x multiplier is safe to use.

I disagreed, pointing out that Pfizer's $43bn valuation of Seagen is based upon future (not current) revenues - specifically the stated expectation that Seagen will reach $10bn in annual revenues. Thus 4.3x, not 8.9x and definitely not 20x...

For the back-of-an-envelope valuations referenced on this forum - all of which are based on forecast (ie future) revenues, 4-6x is the "industry average" range.

There is then a debate over what AVA6k's mature market share might be, and how long it will take to grow sales to this level. Some posters seem to think that AVA6k will take 100% market share immediately upon approval. Some (myself included) disagree with this as it ignores the practicalities of global authorisations, manufacturing, distribution, training etc all of which will take time and £££ to build. It's interesting that the Seagen deal envisages a 7-year build period.

@RAH0084 appears to tell us that 20x current year revenues is a reasonable basis for valuing Avacta. I disagree, pointing out that no-one is paying 20x revenues for a pharma company whilst risk-free T-bonds are yielding almost 5%. In particular, Pfizer with a WACC of 6.8% and ROCE of 14.5% wouldn't destroy equity value by buying at anything like a 20x CY revenue multiple.

@jive_turkey then points out that the total market size may be far far greater than the $1.5bn referenced by the company. This I agree with 100%.

So, in amidst the noise there is a sensible discussion here.

Sure. I'm here for the addressable market size being far greater than investors have yet understood. That's where the upside lies.

And there you have it...

@RAH0084 believes that pharma businesses might be valued at 20x their current annual revenues. If we make the heroic assumption that there are no costs associated with these revenues, that's an annualised return (yield) of no more than 5%.

Even after the gyrations of the last few days, US Treasuries trade at a similar yield. The very instrument underlying the risk-free rate.

No rational investor will accept the equity risk of a pharma company for a 5% yield when they can earn pretty much the same risk-free in USTs.

A total absence of any contextual understanding or relevant reference points. I don't think it is wilful misrepresentation, just an acute case of Dunning-Kruger.

Here's what matters:

The $43bn that Pfizer are paying represents 4.3x Seagen's expected future revenue, as stated in the press release. 4.3x is consistent with median industry multiples.

Pfizer is not paying $43bn (a 20x multiple) for $2.2bn pa of revenue. They are paying for the $10bn pa of revenues that they expect Seagen to generate in the future.

No business with a WACC of 6.8% and an ROCE of 14.5% invests $43bn for an annualised return <$2.2bn, or 5.1%. That would be a value-destroying acquisition; the cost of funding it would exceed the returns generated.

@MrRipley - you are getting there.... Only it is @RAH0084 who thinks historic multiples should be applied to the future revenues, not me. Seagen is a business building its revenues - as we all hope Avacta will be soon. Seagen has been valued by Pfizer on a multiple of its future revenue potential, not what it will generate this year. When the market gets onboard with the story, Avacta will be valued on its future revenue potential too.

I don't jump in on the medical science because I don't really know anything about it beyond what the company has said, and what I pick up here from the knowledgeable posters with relevant professional backgrounds.

I don't engage where I don't have requisite knowledge, if only others took the same approach. @RAH0084 (for example) clearly knows a lot about the science, but little about capital markets and valuation. His posts on the topic are riddled with naive misunderstandings. Anyone with capital markets experience would see through him in minutes. I assume fear of exposure is why he blocks/refuses to engage...

And I read the Myles McNulty tweet where he says :

"@pfizer to acquire ?@SeagenGlobal? for an enterprise value of $43bn.

$SGEN forecast to generate $2.2bn in sales in 2023. So the deal price is set on a forward EV/Sales of 20x."

If he said that to a room full of investment managers, they'd be falling off their chairs with laughter...

Interesting. Do you think any drug takes the whole market overnight? I think it might take some time to get there from a standing start, given the challenges of approvals, training, manufacturing , delivery etc across a global marketplace. Seagen are involved in that process today; they are expecting their revenues to grow substantially as they win market share. Pfizer are paying for their revenue generating potential, not for what they might book in year one.

@RAH0084 would have us believe that Pfizer - a business with a WACC* of 6.8% and an ROCE** of 14.5% is investing $43bn for an annualised return <$2.2bn, or 5.1%. That would be a value-destroying acquisition; the cost of funding it would exceed the returns generated. Clearly Pfizer have someone sharper than @RAH0084 in the CFO-seat...

*WACC = weighted average cost of capital
**ROCE = return on capital employed

@RAH0084, the $43bn that Pfizer are paying represents 4.3x Seagen's expected future revenue, as stated in the press release. 4.3x is consistent with median industry multiples.

You are trying to make the case that Pfizer is paying $43bn for $2.2bn pa of revenue. Clearly they are not. They are paying for the $10bn pa of revenues that they expect Seagen to generate in the future.

Let's assume Avacta gets AVA6k up and running, and has sales of $300m (a market share of 20%) at the end of its first year in commercialisation. At that point should a takeover of Avacta be priced on a multiple of its historic revenues, or a multiple of its future revenues?

Amateur hour. An absolutely unnecessary RNS demonstrating just how poorly advised this company is when it comes to corporate communication matters.

In the absence of any specific SVB connection that needed to be clarified, AVCT should have just stayed quiet like 99.999% of companies will. Will they put out an RNS confirming they are not involved every time an irrelevant bank on another continent goes under? What a precedent to set.

I have tried hard to understand your post(s) @Singhie, but your idiosyncratic style (capitalisation, punctuation, paragraph parsing etc) has proved too great a barrier to comprehension.

I took them directly from @Gallder’s post entitled “SAME INFO REVISED METHOD”. I haven’t changed anything other than rounding the figures to £m in order to make them easier to read/add up.

Why do you keep saying that ANGS has to fulfill contracted amounts? They don’t, as @Gallder and others have explained repeatedly in this thread. The outcome of the swaps is determined without any reference to ANGS production. It varies ONLY according to gas prices.

Separately, ANGS sells whatever gas it produces at market rate(s).

What matters (in the short term particularly) is whether ANGS cash inflows from gas sales exceed the net payments due for the swaps.

Could you re-read the thread with this in mind please?

@WG818, why do you say “They haven’t produced enough to fulfil the 2 combined contracts in either month.” ?

Using @Gallder’s figures for Jan and Feb posted earlier today:

JAN multiplier for swap1 1,788,452 x fixed price £0.5205 = £0.9m
JAN multiplier for swap2 290,625 x fixed price £4.3800 = £1.3m
FEB multiplier for swap1 1,615,375 x fixed price £0.5205 = £0.8m
FEB multiplier for swap2 262,500 x fixed price £4.3800 = £1.1m
—> Mercuria pays ANGS £4.1m

JAN multiplier for swap1 1,788,452 x floating price £1.5827 = £2.8m
JAN multiplier for swap2 290,625 x floating price £1.5827 = £0.5m
FEB multiplier for swap1 1,615,375 x floating price £1.3533 = £2.2m
FEB multiplier for swap 2 262,500 x floating price £1.3533 = £0.4m
—> ANGS pays Mercuria £5.9m

Net loss on swap contracts for Jan & Feb is £1.8m

ANGS sells gas:
JAN 1,908,520 therms for £3.0m
FEB 1,680,025 therms) for £2.2m
—> Total revenue from gas sales is £5.2m

Cash outflows from swap settlements = £1.8m
Cash inflows from gas sales = £5.2m
—> Net cash generated is £3.4m

No mention/request for "urgent action" in AS letter - those are your words. I think A understands that regulatory changes take time - this isn't about AVCT's immediate funding needs rather it is about getting the right framework in place.

I'm pleased to see this being taken forward.

I appreciate you may have approached this differently @VertizeaSun, but I think it's good that the Minister(s) have asked someone smart to take a proper look before diving in.

Dr Smith wrote a heartfelt letter to The Times highlighting the lack of domestic investment that is driving pioneering British businesses to turn to the US for scale-up funding. He attributed this to regulatory changes that have led to a paucity of expert analysts.

It looks like he has prompted a response,

"Ministers have called in a top City lawyer to oversee a review of the investment landscape today amid fears the UK’s capital markets are losing ground to international competitors.

In a speech to traders in the Square Mile, City minister Andrew Griffith said that Rachel Kent, a senior partner at Hogan Lovells, would oversee the Treasury-led investment review, announced in the so-called Edinburgh reforms in December, which aims to boost the quality and depth of investment research in the UK.

Among the areas set to be examined by Kent are EU-era MiFID II rules, which forced financial institutions to unbundle their analyst and execution fees in 2018, and have since sparked a rout in senior analysts and overall analyst numbers.

Griffith said today that Kent will now conduct a deep dive into the knock-on impact of the changes and outline measures to reinvigorate analyst research in the UK.

“The review will gather evidence on the impact that the UK’s investment research offering has on both public and private markets, recognising the role that research plays throughout a company’s life cycle,” Griffith said.

“While a lot broader in scope, Rachel will also look specifically at the impact of the MiFID unbundling rules when considering solutions.”"

I know Rachel Kent from working with her on some difficult situations. She's an extremely smart and experienced lawyer, with the ability to have a real impact here. She's also really well connected and thought of within the professional/institutional investment community, so will have ready access to real practitioners. Watch this with interest.

https://www.cityam.com/city-minister-griffith-calls-in-top-hogan-lovells-lawyer-to-boost-floundering-capital-markets/

Recent trial results have reduced the risk for Avacta holders, but it is still very much a high-risk investment.

My view is that Avacta’s chances (note plural) of commercial success are underestimated by the wider market. Given the potential for outsize rewards from category killing innovation, the risk is worth taking within the speculative compartment of a diversified portfolio.

Ok. Ask them in an email to confirm that the specific information they have published is correct, saying that you are a reasonable investor relying on it to support an investment decision. State that you will deem no response within 48hrs to be confirmation that published information is correct.

Remind them of their MAR obligation if you’re feeling punchy….

“ Reasonable investors base their investment decisions on information already available to them, that is to say, on ex ante available information. Therefore, the question whether, in making an investment decision, a reasonable investor would be likely to take into account a particular piece of information should be appraised on the basis of the ex ante available information. Such an assessment has to take into consideration the anticipated impact of the information in light of the totality of the related issuer’s activity, the reliability of the source of information and any other market variables likely to affect the financial instruments”

@Gallder - you look like the person who best understands this, can you ask the company directly? As the q is prompted by info in the public domain they shouldn't have a problem answering. I guess the most straightforward question is simply whether the info disclosed on the (apparently favourable) new hedges is correct...