We structure our research on companies broadly around scientific data, competition, market opportunity, cash on hand, management expertise, and buyout potential. Once, we assess these key drivers, we utilize the information to analyze the business as a whole, and its prospects from an investment perspective.
We delve deeply into the scientific data behind each of the key drugs of a firm, trying to assess the preclinical and clinical data underpinning the drugs, but also look at investigator sponsored literature on the science behind molecular targets. As there is ample such data available, we have to select the most credible. Based on our readings, we try to evaluate the potential of key drugs from a safety and efficacy perspective. In addition, we compare and contrast the available preclinical and clinical data linked to the company’s key drugs with that associated with competitive drugs (in market and under development), paying attention to differentiation, clinical efficacy, and adverse events profiles. If the technologies differ between the compounds, we also look at those, trying to identify which is superior.
With respect to competition, in addition to the clinical data associated with competitive drugs, we also consider the number of competitors and the size and influence each might have in the segment from a commercial and regulatory perspective. Furthermore, the resources the contenders might have from a financial and infrastructural standpoint are also noteworthy.
In regards to the market opportunity, we perform a thorough investigation into the addressable population available for the drugs and use detailed analyses to estimate the penetration rates. Based on peak revenues, earnings or revenue multiples, and risk rates, we value each drug/device on a per share basis, add all the per share values up with cash to determine our sum-of-the-parts valuation for the company. Our market opportunity models are very detailed scoping out the different scenarios for revenue generation and utilize the addressable population or scripts data as appropriate.
We also consider management expertise in the order of professional experience in segments the company’s drugs address, their scientific training, and academic background. With respect to buyout potential, we consider the clinical data and current stage of development of the drugs, the company’s current valuation, and evaluate the ongoing dynamics within potential acquirer companies and the industry. In addition, we look at the cash the company has on hand from a potential share dilution perspective. Reimbursement potential, particularly from an European stand-point is also important. Other elements that demand attention include patent expirations, partnerships, and platform technology or many shots at goal.
The method described above is broadly for initiation reports. However, once we launch, we continue to pay attention to the drug development, regulatory, financial, and competitive risks and benefits accruing to the story on an ongoing basis. We update our valuation models to account for increase/decrease in risk levels as the story unfolds but typically will not make dramatic changes to our revenue models.
However, all through our analysis, we never forget that our job is to find the right value for the company from an investment perspective. The data is only a way for us to determine how much risk and opportunity is associated with the enterprise, in order to value it accurately. Also, we look at the information honestly without any pre-conceptions regarding buy or sell ratings, and instead let the data lead us.