Looking Inside the Biotech Black Box (Part 4)

Information – some of the free sources 

In most cases, you will be assessing a company, a product or a technology. The valuation of the stream of expenses and revenues for the development and commercialization of a product or a service is the simplest situation. If you are valuing a company, you are valuing its portfolio of products and technologies. In most cases, the current and potential future value of a single product, which is usually the lead product, probably accounts for the majority of the value of a biotech company.

Valuing a technology can be more difficult. Many companies claim to have a platform technology, which can be used to develop multiple products, potentially with multiple partners in multiple therapeutic areas. When a technology has a portfolio of products and partners, there is diversification and reduction of the risk associated with the failure of a single product. However, technology development can come with increased financial risk from the expense of developing multiple products simultaneously. If you want to take a simple and conservative approach to the valuation of a technology, do a valuation of the most important product in that portfolio, which is often the most advanced product.

Therefore, you are probably valuing a product and I am going to assume it is a novel drug. In order to generate substantial revenues, that drug will have to be approved by the U.S. regulatory agency (Food and Drug Administration or FDA) since the U.S. is the largest single pharma market. The U.S. and EU markets still account for about 75% of worldwide pharma sales.

What questions do you need to ask?

Where can you get free information which helps you both formulate and answer the questions?

The first source of information is the company web site. The quality and quantity of information from this source is quite variable but this should be your starting point. If the company is public, another source of information is their regulatory filings.

• •  The source for Canadian regulatory filings is http://www.sedar.com. The most concise sources of information are the AIFs (Annual Information Forms) and Annual Reports.
• •  The source for U.S. regulatory filings is http://www.sec.gov. The most informative source for foreign issuers, including Canadian companies is the 20-F filing. The equivalent annual filing for U.S. issuers is the 10-K annual report.

Information on potential competitors is a second source of information. The first step is to find the competitive products, which could be both approved drugs and candidates still in clinical development. Once you have a list of potential competitors, company web sites and regulatory filings are the best free information sources.

The U.S. FDA web site, http://www.fda.gov, is a third source of information. There is a series of tabs near the top of this page, one for each of the areas subject to FDA regulation, including ‘Drugs’. If you want to look for information on drugs approved by the FDA, there is an easy-to-search system (http://www.accessdata.fda.gov/scripts/cder/drugsatfda/index.cfm).

If you don’t know the names of the approved drugs, then there are disease-associated web sites which can be very useful. Since there are more drugs under development for the treatment of cancers than any other disease group, I will point out two extremely useful web sites for these diseases. The American Cancer Society web site (http://www.cancer.org/) has guides on numerous types of cancer under the ‘Learn About Cancer’ tab. If you are more interested in the statistics about cancer (such as for market analysis), http://www.cancer.org/research/cancerfactsstatistics/index has many ‘Facts and Figures’ publications. Another source of information is the National Cancer Institute of the U.S. National Institutes of Health (http://www.cancer.gov/).

Another service of the U.S. National Institutes of Health is https://clinicaltrials.gov/ which allows you to search a database of over 30,000 clinical trials. If you enter ‘breast cancer’ in the search subject area, almost 6,500 clinical trials are listed. There is an ‘Advanced Search’ function which can narrow the scope of the search, such as only active trials, Phase 3 and industry sponsor.

Even if you used all of these sources to gather information on a novel drug candidate, you would now have to assess that information by asking a series of questions. One of the first questions which must be asked is:

“WHAT IS THE PATH TO REGULATORY APPROVAL?”

Case studies are an excellent way to see how companies have asked and answered this question. The first case study which we will assess over the course of several blogs is Theratechnologies Inc. (TSX: TH), whose lead product, EGRIFTA® (tesamorelin for injection), is approved by the U.S. FDA to reduce excess abdominal fat in HIV-infected patients with lipodystrophy.

[The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog. Past share price performance may not be an indicator of future share price performance. This blog does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.]

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