Pinned valuation:
2024
Valuation - 25 cents. I think the current market cap of 86 mil is an incredibly low valuation for a business with a drug of pentosan's potential (in OA). That said, the track record of capital management warrants such a low valuation. I'm buggered if I know what it's worth but I think if you've held this long you may as well see how the phase 3 trials play out. If they somehow get financing and make some progress on their phase 3 trials they could be completely re-rated and I will continue to keep an eye out.
How did I not have the business just takes a lot of capital and huge dilution to get close to phase 3 trial outcomes? Call it a learning experience for me! In the same scenario I would probably buy a placeholder stake to help me follow progress and stay out of cap raisings until the pivotal trial results are impending.
2022
PAR I believe is a difficult business to value (perhaps the genre of (essentially) pre - revenue biotechs are all difficult to value and yet if I'm going to hold it I need to value it so here goes:
I hold PAR based on the applications of 'zilosul' in OA (although there are many other research trails being pursued by the compant) and I see three broad futures in this regard:
1) The drug fails its phase 3 clinical trial due to safety or efficacy concerns (I think this is unlikely given the data already published and long safety record in other indications but to me this is a scenario where the business goes to zero)
2) The drug 'succeeds' in phase 3 trials but has poor uptake for one reason or another (used by 0.1% of the target market in US as the lar
3) The drug 'succeeds' in phase 3 trials for not only pain but also for disease modification and becomes a well recognised and mainstream option for the management of OA (~1% of OA patients use zilosul on an ongoing basis in the US as the largest target market).
Clearly there is a huge number of possible futures but I consider these as a basis for forming a valuation recognising how far from the mark they may be.
Earnings in 5 years:
1) The drug fails its phase 3 clinical trial due to safety or efficacy concerns (I think this is unlikely given the data already published and long safety record in other indications but to me this is a scenario where the business goes to zero)
2) The drug 'succeeds' in phase 3 trials but has poor uptake for one reason or another (used by 0.1% of the target market each year in 5 years)
3) The drug 'succeeds' in phase 3 trials for not only pain but also for disease modification and becomes a well recognised and mainstream option for the management of OA (~1% of the targeted OA patients use zilosul each year).
Clearly there is a huge number of possible futures but I consider these as a basis for forming a valuation recognising how far from the mark they may be.
Earnings in 5 years:
1) Zero. Things have not gone well. Money gone.
2) 175 mil revenue/year based on one treatment/year. Let's assume ongoing costs similar to current costs on R&D/trials etc. ~ 50 million/year. Not a well justified assumption but gross margins for pharma referenced in the literature are 70-80% so not completely unreasonable.
Spitballing perhaps earnings of 100mil/year? Obviously a guess. Let's assume 300 million shares (currently 236 mil prior to current cap raising)
At a PE of 20 this would result in a SP of 6.67 discounting back gives 3.94 as fair value now
3) At a PE of 20 this would result in a discounted share price of @124 at the current time...
Thoughts on Speculative Investments like PAR
Just thought I’d document the way I think about speculative investments (low or no revenue) like this to hopefully:
1) Clarify my thinking
2) Coax out more thoughtful / experienced views on this topic…
As always, looking to separate a) the business and b) the investment opportunity in my thinking to assess each separately before combining these to inform a decision.
Firstly, unless it has a very large potential (big market, big head start, genuine barriers to entry, etc) it’s not worth looking at due to poor risk reward trade off – i.e. high risk for insufficient potential reward.
Ditto if the business (or a very simple but realistic thesis for the opportunity) is too far outside my circle of competence – move onto something that isn’t.
Process
Having a Written Trackable Thesis for every investment is important but even more so for a high risk / pre-revenue style investment – so you can wait for thesis triggers to get hit / inflection points to emerge.
If you have an effective way of tracking your watchlist / bench, you may not need to take a small ‘research position’ in a business to track it over time.
That could be the best way to track more speculative businesses so you don’t clog up your portfolio with them, as they can be a distraction from the main game.
Real Options
Some of these speculative investments can be thought about as Real Options – and their equity treated as more like premiums on equity options than ordinary shares.
Aswath Damodaran has covered Real Options in his books and this lecture https://www.youtube.com/watch?v=DwouwkQZ7hg
With Slides here: https://pages.stern.nyu.edu/~adamodar/podcasts/valspr20/session22slides.pdf
Paradigm
Real Options is how I think about PAR. I took a very small position (that is now down > 40%) as their trials progressed and their financial situation deteriorated.
Best outcome here is that before they run out of money they have a great trial result or enter a testing / distribution partnership to de-risk the business BEFORE they raise funds via a SPP (they’ll want to announce something positive before they raise to minimise dilution). Then I can use my small stake (premium) to take up to $30k at a discounted (strike) price.
What are the odds of this? Don’t know but they’re not zero.
Downside for me is less than the impact of a 0.2% fall in my portfolio – a forgettable day in the market.
Upside is speccy equity upside – i.e. huge because this drug is a potential game changer in a massive market with no equivalent competition (yet).
Reality intervenes
I mentioned on SM previously that PAR is a reminder that you need more than a high potential product and pathway to market. You also need effective capital allocation to ensure that equity holders actually participate in eventual success, should it eventuate. Otherwise dilution or getting taken out cheap when vulnerable will see value accrue elsewhere.
In this instance it feels like PAR is now at the mercy at the market – and a lot will need to go right.
They're pretty vulnerable now and I think the odds of a SPP have fallen a lot - they need a big de-risking event that doesn't dilute current holders massively and the clock is ticking louder as each month passes without a breakthrough in trial results or non-dilutive partnership.
If they don't keep slashing their cash burn rate each quarter until their next R&D rebate hits, they'll be out of cash in about 6 months...
Held: 0.2% position
i learnt that lesson several times. Or rather I didn’t learn it several times and then did!
The risks with these types of companies is the potential downside. It’s a binary outcome and there is little way to accurately predict what the phase 3 will show.
I have avoided all biotech companies for about 10 years as a result of a string of bad outcomes, with complete or near complete loss of funds.
I guess it depends on what stage in life you are at, but whilst I am on the look out for a large upside potential I am very much looking at downside protection. Heads you win, tails you don’t lose, or don’t lose much.
Maybe if I had picked one low probability, huge upside winner I would have learnt the opposite lesson!
I am keenly awaiting the result of that phase 3. As are my knees.