Biopharma Stock Pitch for L/S HF Interview
I am a biotech M&A associate and have my first interview with a life sciences HF. Nonetheless, I have an interview next week and I would like to pitch a small-cap biotech stock--I chose a company with a mcap of ~$300mm+ with one primary asset.. The qualitative aspect of the pitch is easy for me, along with reinforcing a thesis with drivers/catalysts; however, my only weakness is putting together the valuation.
I just finished a short DCF -- is there anyone on this forum willing to share their thoughts or comments if I share it. Let me know and I will PM you.
Biotech HF analyst here. this is how I think about modeling:
- I would focus on a thoughtful risk-adjusted NPV, and maybe put some comps together but I honestly don't think anyone on the biotech buy side cares too much about those
- start with a thoughtful market build made with using only primary sources - so scientific review for epidemiology and assume drug pricing for the drug in question from precedent drug approvals (if the asset is for HER2+ breast cancer, how much do the approved treatments for HER2+ breast cancer charge per month), etc
- plug said revenue into a DCF
- For COGS, something like 10% for a biologic and 5% for a small molecule. Look out for any royalties the company may have to pay for a third party
-Forecast SG&A using two components (sales rep based S&M which is (# of sales reps)*(annual cost per rep) and variable S&M which could be a % of revenue). Forecast R&D as increasing yearly from last years R&D as the drug gets into later stage clinical studies then zero out.
- Working capital: you can probably just make WC = 10% of (this years revenue - last years rev.)
- You can probably assume D&A = Capex
- Probability-adjust FCFF. I usually have one input that is probability of success through approval, then have the probabilities of success for the phase 2 or phase 1 years a min formula driven by that end year probability that doesn't allow me to have a PoS Greater than one. So PoS (phase 2->Phase 3) = MIN(1,(PoS(Phase 3->approval))*1.5), and PoS(Phase 1->Phase 2)=MIN(1,PoS (phase 2->Phase 3)) - or something like that. You want Cumulative PoS to decrease as you go from probability of getting to Phase 1 to 2 to 3
- The key difference from a normal DCF is you should assume no terminal value. Forecast revenues through loss of patent exclusivity. I believe this is defensible, especially for single asset biotechs who will face a massive patent cliff. If you assume no terminal value like I do, It's key you don't forecast any R&D expenses after the drugs approval, as you're assuming the COmpany makes no ongoing re-investment in themselves - hence no TV
- Last step would be comparing all of your assumptions / PT with a few consensus models. Outside of having no TV (which undoubtedly most sell side models will include to jack up PTs), understand what drivers of your revenue build are driving a difference in peak sales
Feel free to PM if you'd like. Happy to help
Thank you for that, it was helpful--I was looking at mine while reading your notes just now and it appears to have some/most of what you mentioned.
How do I PM you as your "anonymous" on here, I tried clicking on your profile-- I'd like to reach out and touch base
Glad I could help. Dropping username here in case you still want to PM
Also, my estimated share price is in line (within range) with recent analyst estimates that just came out recently +/- $2 - $4
Understood--I appreciate the comment about assigning a 3-4x peak valuation to peak sales. With that said, do you think going in with a stock pitch for a small- or microcap biotech without a model would be okay during an interview? Specifically, assuming you're providing a verbal stock pitch on a pre-revenue small- or micro-cap public biotech, would there be any further mentioning on the valuation side of things when structuring your pitch? (e.g., recommendation --> overview/science --> catalysts --> risks, etc)?
Nonetheless, I agree and most of my thesis is more basic fundamentals in the sense re: clinical trial design, the strength of trial results, (i.e., primary/secondary endpoints vs placebo and competition etc), competition/risks, cash runway, pipeline potential, patent strength, recent changes in leadership/BOD/financings, etc. IMO, the valuation aspect is just one part of the thesis--I like the science more tbh, so I'm hoping my case beyond just the financial valuation for a small-cap stock pitch is enough. I didn't want to play out a long, multi-asset pipeline case to screw myself over.
I purposefully chose a more straightforward (simple) scenario given the HF focuses on L/S and catalyst-driven events (albeit maybe not this speculative), but that was my point.
If the interviewer asks about why 3-4x peak sales, or 5x, justify by
1. acquisition comps of similar biotech/drug classes.
2. reverse engineer the dcf math and you can prove the equity valuation at 3-4x or whatever sales multiple is the same as what the DCF pumps out.
Wow there is actually good stuff put in this discussion
Pragmatically, one point you should be aware of: does the stock have enough liquidity to be even worth trading for the fund ?
I agree--I chose a small-cap with a decent share price, strong pipeline potential and cash runway given the fund's preference for small/micro. Nano-cap is a different story; moreover, I avoided public Biotech that didn't have an upcoming Phase III readout. I was looking for a catalyst-driven event, along with the other features mentioned to keep it simple which took me a while to find.
Just curious - how did you approach your qualitative assessment?
Qualitatively:
1. Company website - I briefly skim its asset pipeline and leadership/BOD. Once I have a sense of the Company's direction, and goals (i.e., focused on a particular indication vs multiple indications; in-licensing assets vs platform play with one asset, etc);
2. 10-K / 10-Q / SEC filings - imo, these provide the best description of all that you need to know and more than what you could find -- I want to know everything ranging from overview, ongoing development, recent financings, financials, competition, risks, patent estate, regulatory strategy, mfg, etc
3. Recent Press Releases / Related News / Analyst's perspectives - I enjoy reading news straight from the source or other analysts because it provides context as to clinical trial readouts/timelines, and maybe provides some more clarity (especially in layman's terms) on what's going on, especially if it's complicated -- e.g., oncology, etc. I have a strong science background, but at times, I rely on other analysts to dumb it down to speed up my understanding
4. Clinicaltrial.gov / GlobalData - I will use these to confirm certain aspects of the trial and/or market landscape
briefly, that's sort of how I approached it.. I care about cash, patent estate strength, leadership/BOD, and pipeline potential (trial design strength/results) at the end of the day--and during the process, you may find information that's highly relevant to your future valuation (e.g., market size, # of patients annually, cost of potential treatment, thereby allowing you to estimate annual revenues, etc--which I used to confirm my annual expected revenues in my model)
This is great thanks!
Biotech ER associate here. Happy to review the pitch and model if you want. Other comments are good advice.
I focus on therapeutic smids on a biopharma team; completely agree with GenericUsername119. I don't recall the last time I did a DCF since my IB days - it's a waste of time to focus on modeling assuming you are looking at a binary, clinical stage company; practically I'll slap on a multiple on risk adj. peak sales and call it a day (and just pull a few figs from sellside) but you can do a quick and dirty DCF if your interviewer really, really requires you to check the box on it.
Unless your pitch has a specific view about non-clinical/scientific related events (i.e., an IP event, a RIF), your interviewer's likely to focus on the technical discussion around the clinical/pre-clinical catalyst in question.
How do you justify the Probability of Success?
Hope you don't just use Sell-side assumptions.
It's either 100% or 0% and the whole point is to be able to make that call.
30% or 70% PoS doesn't say much and is hardly actionable on the portfolio level.
Focus on justifying the Probability of Success if it's a drug development company.
Project out the clinical trial hazard ratio and go into detail about the baseline patient demographic assumptions.
Lots of meta-analyses, and review papers on PubMed to get a sense of experimental arm controls.
DCF is textbook stuff and not the main driver of a thesis.
Whether a drug works or not is what drives the stock.
Et quia accusantium porro perspiciatis sed est. Pariatur dicta necessitatibus minima et. Ab beatae aut ullam et quia. Accusantium autem omnis distinctio distinctio.
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