PEB - Pacific Edge Ltd

[winner69]

Whipmoney, your comments re probabilistic expectations

Agree, but what do you apply the probabilities to?

Wouldn't be DCF valuations under different scenarios / assumptions would it?

[skid]

Not at all, that particular two year period is typically representative of the time between these products first leaving the lab, first commercial sales, and Medicare coverage being achieved.

During that period biotech companies increase their inherent value as they successfully complete clinical trials, commercially launch, and achieve coverage.

I'm comfortable with my $1.85 valuation on PEB, it hasn't changed over the last two years just due to the short term sentiment or squiggly line obsessions of others.

The intrinsic value within the company and within their products and pipeline increases more every month that ticks by, every patent adds value, as does every Cxbladder test processed as it add’s to the CMS clinical utility evidence dossier.

I do agree that the NASDAQ would probably have better recognised the value in PEB thus far in a less volatile way.

Biotech companies are not well understood in NZ, you can see that from many of the posts on this thread alone, but the value within the company remains all the same, who knows what catalyst will trigger that recognition on the NZX.

DISC: There’s lot’s of products in the queue behind this one in the pipeline, I'm a content long term holder, and happy to be so for a few years yet.

If the point of your post was to say that once Medicare is achieved ,it will increase the value of the SP .then everything before that is just noise-why clutter things up with all the other factors--thats the danger of using statistics and timelines (of course we dont know what other factors have come into play after Medicare coverage with these companies as well,so its a difficult correlation to make)

Its hard to imagine that Medicare acceptance would not have a benefit in the long run-but my main argument was that investors would still have time to jump on board if things finally looked like they were ''lining up''--Even with Medicare achievement,it has to translate into meaningful sales.--Do you jump in 'boots and all'' or wait for more of a confirmation that things are on track--That is the decision that investors have to make,one way or the other according to their investing strategy,risk,etc

A poster once made the statement a year or so back--''you cant afford not to invest in this stock''---I dont think that is the case at this point in time --Its steady as she goes (no reason to either panic and sell ,or buy)

[Minerbarejet]

Yes MCap is a function of share-price multiplied by the no. of shares outstanding, but the value of each specific share is a function of what I have outlined above.

Well thank goodness I got that bit right.
Think we have to remember here that we dont know in most cases whom we are dealing with on these threads, you may be a top financier or an accountant of some repute or you could be an investor yet to make an investment. We are allowed to participate within reason and if somebody asks a question I will do my best to answer it. It deserved an answer but nobody else seemed interested.
Ill always give it a go, mate, nothing to lose and we all learn one way or another.

[Whipmoney]

Whipmoney, your comments re probabilistic expectations

Agree, but what do you apply the probabilities to?

Wouldn't be DCF valuations under different scenarios / assumptions would it?

Again, it all comes back to assumptions (as in the case of all forms of valuation) however if I were to entertain undertaking DCF analysis on PEB I would probably build 'expected value' tables to calculate revenue for each of the years leading up to the terminal value year (i.e. where long-run growth assumptions kick-in).

The expected values are the sum of the of possible revenue outcomes for a given year (e.g. 2015: $3.6m, $3.7m.. $4.0m... $5.0m) multiplied by the probability of each outcome occurring. In this case the probability for each revenue outcome is a bit of a guess, however assumptions can be made using comparisons from the growth trajectories of equivalent companies (who are further down the track of market penetration).

I would make the model dynamic so that the Expected Values feed directly into the annual revenues that derive the DCF value, and then you can tweak the probabilities (or revenue ranges) to get a spectrum of DCF values. It's a lot of work of course!

[Whipmoney]

Well thank goodness I got that bit right.
Think we have to remember here that we dont know in most cases whom we are dealing with on these threads, you may be a top financier or an accountant of some repute or you could be an investor yet to make an investment. We are allowed to participate within reason and if somebody asks a question I will do my best to answer it. It deserved an answer but nobody else seemed interested.
Ill always give it a go, mate, nothing to lose and we all learn one way or another.

I didn't mean to discourage you Miner and you're views are probably worth more than mine. If your interested in corporate finance valuations then anything from Aswath Damodaran (Professor at Stern NYU) is worth a read. He has a great blog too.

It's an interesting concept however, your a 100% right that mathematically the Market Cap is simply derived from multiplying the No. of Shares outstanding x the share price.

However essentially this is a chicken egg argument. Given that the no. of shares outstanding is essentially fixed, is the market cap simply a function of the share price, or are the shares priced as a function of their market cap. I.e. if an individual (or collective) of investors thought that the equity valuation for PEB was $250m max, with 318,615,921 shares on issue, then will they progressively push the price up to their limit of $0.78c. Food for thought.

[MAC]

Companies have intrinsic value Whipmoney, recognised over time, that value has very little to do with short term random moves in share price or sentiment. And also very little to do with the magnitude of very early revenues, but I would agree that the timing of the foot of a revenue curve is indicative and predictive.

Over the long term it’s about the markets expectation of forward business case efficacy, at the end of the day, and the profits the market expects that efficacy to ultimately return to shareholders.

Molecular diagnostic biotech revenue curves are usually roughly in step with coverage as can be seen in this example for OncotypeDX.

When companies achieve Medicare coverage the insurers and other organisations tend to come on board incrementally after that, over a period of around five years, sometimes four years, sometimes six years.

It’s typically though a five year adoption process of coverage for these types of test products and the typical sales curves are thus also typically five years.

And, that is why Pacific Edge have adopted a five year plan as an indicative goal.

DCF sensitivity analysis is important sure, as is the market research and expectation level of the primary business base case, and the business model being applied by Pacific Edge has been well proven by others whom have gone before.

OncotypeDX Coverage vs Sales Chart

Attachment 7239

[NT001]

As an investor with a longterm time horizon, who understands little or nothing about the technicalities of TA, but who takes a deep interest in the companies he is investing in, I would disagree that "A Long-term investment horizon is simply the aggregate of many smaller short-term horizons."

Looking at companies like PEB, BLT, ATM or even CRP, for example, short term horizons seem to have little relevance, partly because they are all building towards a long term horizon themselves, and doing so in highly volatile market and regulatory conditions.

For the same reason I believe early stage revenues are not that important. I note that in this interesting discussion it is agreed that however you go about valuing a company in this kind of investment sector, the result will depend on a lot of assumptions. There is truth in Whipmoney's contention that speculation and news-flow will be important drivers in forming people's views. But in my case and I think in many others, investors will be motivated by informed hunch and even an element of faith, albeit based on research. They are not working to an investment plan that has to yield returns year by year to put food on the table. Of course, you need to be investing money that you can afford to lose, or at least take a semi-calculated gamble that the successes, over time, will outweigh the losses. I've absorbed writeoffs or losses on Botry Zen and CRP for example, but am still ahead of the game and very confident about PEB and ATM.

The difficulty in all this is to know how much of the market cap in any company is controlled by TA investors, FA investors and straight-out gamblers, and what methodologies and motivations are driving them.

[Minerbarejet]

Agree its a chicken, egg argument.

From that can we say the collective thought at the time of 1.70 was that PEB was worthy of a 6-700m mcap and deserved ranking at about 35 on the top50?

Or euphoria, speculation, call it what you will and a total disregard for mcap?

Will be watching that much more closely in future. Thanks

[skid]

[QUOTE=Minerbarejet;565379]Agree its a chicken, egg argument.

From that can we say the collective thought at the time of 1.70 was that PEB was worthy of a 6-700m mcap and deserved ranking at about 35 on the top50?

Or euphoria, speculation, call it what you will and a total disregard for mcap?

I think in retrospect we would have to say a definite no it was not worthy of a 700mil market cap

Im just looking at another biotec that has a market cap of 457mil (last report) with sales of 14.3 million hy15 and a profit of 1.2 mil.

PEB has a way to go before having a market cap of even half that 700mil ($1.85 SP ?.....I dont think so)

[Whipmoney]

[QUOTE=MAC;565367]Companies have intrinsic value Whipmoney, recognised over time, that value has very little to do with short term random moves in share price or sentiment. And also very little to do with the magnitude of very early revenues, but I would agree that the timing of the foot of a revenue curve is indicative and predictive. [Quote]

I agree that all company's have some form of intrinsic value, and that their intrinsic value will vary over the life of the company. Without going over the whole FA vs TA argument, it is fairly evident that not all companies trade closely (in terms of Market Cap) to their respective intrinsic values. The market frequently under/over shoots.

I disagree that early revenues are important as they are a key indicator that penetration (market acceptance) is possible. I would be more concerned if PEB generated zero revenue in its first three years of commercialization than I am about whether they generate $100m or $110m in year 5,6 or whatever. Because the is a causal link between the former and latter, i.e. the company will never reach $100m revenue if it fails to reach $1m in revenue.

Over the long term it’s about the markets expectation of forward business case efficacy, at the end of the day, and the profits the market expects that efficacy to ultimately return to shareholders.

This is your perspective, and therefore doesn't represent the perspective of the market participants as an aggregate. There will invariably traders/speculators who are taking positions now with respect to perceived gains from potential news-flow (i.e. adoption of CMS coverage).

Molecular diagnostic biotech revenue curves are usually roughly in step with coverage as can be seen in this example for OncotypeDX.

When companies achieve Medicare coverage the insurers and other organizations tend to come on board incrementally after that, over a period of around five years, sometimes four years, sometimes six years.

It’s typically though a five year adoption process of coverage for these types of test products and the typical sales curves are thus also typically five years.

And, that is why Pacific Edge have adopted a five year plan as an indicative goal.

DCF sensitivity analysis is important sure, as is the market research and expectation level of the primary business base case, and the business model being applied by Pacific Edge has been well proven by others whom have gone before.

OncotypeDX Coverage vs Sales Chart

Attachment 7239

I am well aware of Genomic Health's growth/share-price trajectory and it's obvious that PEB have used them as a base case / proxy for their sales growth. Genomic are proof of concept however they are not the same company, and started their commercialization (without any relevant competitors) in 2004 and their success may have zero relevance to PEB's.