Faron Pharmaceuticals - Innovative Medical Solutions (Part 1)

[Johanne_s]

It’s difficult to say what the market consensus is for a partnership and an upfront payment, but if 600 million came as an upfront payment and there are 117 million shares, then that 600 million hitting the cash register would alone boost the share price to 5 euros, simply by calculating 600 / 117 = 5.128 €/share.

Add the current value of 2.3 € to this, and we’re around 7.5 €/share. But the current value includes some part of the future upfront payment, but who can say how much.

In any case, something along these lines could be roughly estimated. My own estimate for the upfront payment is considerably more modest, and I think Inderes also has it under 100 million, but it could very well be something else, I just threw that out from memory.

Edit: I probably read what I wanted to read, but the message was about a partnership deal, not an upfront payment. I could delete the whole message, but I’ll leave it as my pillar of shame.

[Yamarin]

And for that reason, one can very well question whether a company like Faron should have a target price at all. But these matters are in the hands of analysts.

[MagnificRat]

Therefore, that price is estimated based on potential future cash flows, and all probabilities of success and when those cash flows might potentially occur are calculated. Now that the can has been kicked significantly further down the road, the target price naturally decreased for the time being.

[MagnificRat]

A 600m advance payment sounds very steep. I myself assume that the partner will cover the Phase Three expenses. It may be that Faron will still have to seek additional funding to cover salaries etc. that these expensive hired individuals are consuming. If all goes well, the partner will pay for those too, but we will operate at break-even until the drug receives approval.

[Yamarin]

With this logic, when we found out that Bex’s patent would continue until 2040 instead of 2037, the target price should have been raised, but this did not happen.

Edit: It’s just that there’s no trace of logic in Inderes’ target price changes and recommendations, without taking a stand on the absolute target price.

[MagnificRat]

I don’t believe that an analyst adjusts the target price for every minor fluctuation. They always look at the big picture in connection with the company’s report, and this patent delay has been baked into the current target price.

[Koodinikkari]

Faron probably doesn’t have enough resources (focus on the scientific/research side) nor the knowledge/expertise in partnership deals, which is why an investment banker was brought in to negotiate the deals. Thinking positively, there might now be so many different deal providers that top-tier professionals are needed, among other things, to define Faron’s wishes/requirements in relation to what is actually available on the market.

[Antti_Siltanen]

@Yamarin

With this logic, when we found out that Bex’s patent would continue until 2040 instead of 2037, the target price should have been raised, but this did not happen.

Edit: Yes, it is indeed the case that there is no hint of logic in Inderes’ target price changes and recommendations, without taking a stand on the absolute target price.

If you want to discuss, ask questions about, or criticize the analysis, a good starting point would be to read the analysis first. Then it would at least theoretically be possible to talk about the same thing. For example, the patent issue has been discussed in the analyses. In today’s update and in previous news comments.

Secondly, if someone finds the analysis useless, I recommend simply not reading it. Don’t like target prices? Skip it! The analyst doesn’t understand anything about medicine/growth companies/valuation/risks/potential/only looks in the rearview mirror and is always pessimistic? Skip it! Why spend your valuable time on something that has no value to you? I also try to keep the bar high for what I spend my time on and what I read, basic stuff.

[Rushimato]

I will return to the idea of why bex is more valuable in Farma’s pocket than it is as Faron’s own, and consequently, it may be reasonable to pay more for it as an acquisition than what a Faron licensing deal-aware LoA-adjusted DCF shows as a justified future fair share price.

For example, Gilead’s WACC, as mentioned by Juho, is significantly lower than Faron’s, and additionally, Faron faces a very significant company risk, and rightly so when viewed historically, so if the owner of that asset changes, its WACC correspondingly decreases, and the company risk can be removed, so the DCF value increases quite considerably, meaning the acquisition itself creates value.

This is, of course, keeping all other parameters the same. I also argue that some Big Pharma companies would get this out faster than Faron, thereby creating value. Others are even slower, such as MSD, about which a senior-level manager who worked on clinical pipeline development there once told me that MSD’s name comes from the words “Make Simple Difficult”.

Then we can speculate with industrial logic, but now that enough water has flowed in the Aura River that the patents for those PD-1 inhibitors are starting to expire, I no longer give any weight to that myself.

[Pasimus]

Well, you know, a partnership is coming! Management couldn’t make it any clearer!

[Yamarin]

What was the reason the target price did not change when it became known that Bex’s patent extends to 2040 instead of 2037?

[Yamarin]

Target prices in themselves are irrelevant from the overall perspective, but it’s nice to just challenge the analyst a bit, and at the same time bring out the things on which these target prices are based, which unfortunately guide the investment behavior of some people.

[Debentuuri]

The CEO really couldn’t express much more clearly that a partnership is coming. It’s another matter entirely whether it’s good or bad. We probably won’t have to wait much longer.

[_TeemuHinkula]

@Yamarin if you have Inderes Premium, the answers to your questions can be found in the report.

If not, I took the liberty of putting Inderes’ DCF model here, which shows how the target price was reached in that regard. It answers a couple of your questions, e.g., how revenues are thought to start forming in 2029, and also shows how they are thought to come in the years 2038-2040.

I won’t comment on the numbers themselves, but I hope this helps in your considerations.

[PeaceOfMind]

@Yamarin

What’s the point of including cash flows in the target price of a company like Faron, where sales start in 2028? None. Instead, I would include in the 12-month target price what happens and with what probabilities WITHIN THE NEXT 12 MONTHS.

Valuation should not be done incorrectly. When I buy a stock, I buy the expectation of an eternal cash flow, but the further into the future we go, the closer to zero the present value becomes.

[Jummijammi2]

I’m on the same page. A valuation range is probably the best way to express Faron’s view. A target price is a utopia, whose basic parameters are based on subjective assessment. At best, it’s a beacon in the fog.
With everything being so uncertain and volatility at its peak, analysts have a rather (too) great impact on market value from day to day, as has been seen again now.
Everything can change in a day, one way or another… It’s good to live in hope and good to die in faith. Go Faron Go

[Kettu63]

It’s an impossible task to give a single number as a target price for a multi-variable company like Faron. In my opinion, Antti_SiltanenAnalyst @ Inderes has, however, succeeded astonishingly well in this. Did the change in the target price cause a dip in the stock price? Certainly not. I followed the stock’s development in real-time at the same time as Faron held its half-year review. The stock price dropped sharply around the time of Juho’s speech. The same has happened before in connection with Faron’s live reviews. According to my interpretation, Juho’s speech did not contain anything that could be interpreted as having caused such a stock price drop. Rather, some parties who owned Faron had a plan to wait for a stock price increase until the beginning of the meeting and then start offloading shares on the selling side.
The change in the target price then came the next day, and its impact on the stock price was not significant, in my opinion. Of course, it reinforced the pessimistic mood that the already ongoing stock price drop had created. Generally speaking, Inderes seems to be the only analysis firm that boldly gives a single figure as a target price, while others paint with a broader brush. Antti has also commented on this. In any case, the target price is the analyst’s crystallization of the current situation, i.e., his own personal view. Everyone, for example, following this forum, surely has their own view, which either aligns with Antti’s view or not. Ultimately, however, the results determine the stock price development, and the target price follows along, not the other way around.

[Vino_Pino]

Juho stated in a webcast that the PD-1+Bex combination study (at Royal Marsden in London) for melanoma and NSCLC has been delayed due to agreements with Gilead. It should, however, start by the end of the year. This is a small trial, primarily investigating how adding Bex activates the patient’s immune system so that PD-1 works again. Proof of concept. Investigator-initiated, meaning no major costs. Based on the findings, larger basket studies in various solid tumors would follow. Significant costs.

Let’s recap that Gilead is the company that acquired the previous macrophage-targeting drug, magrolimab, which had significant expectations, for USD 4.9 billion. It turned out to be a disappointment.

Let’s recap again what this Gilead anti-PD-1 asset is. Zimberelimab Faron Pharmaceuticals - Innovatiivisia lääketieteen ratkaisuja (Osa 1) - #6761 käyttäjältä Vino_Pino
Gilead’s strategy is not to bring the tenth ‘me-too’ drug to market, e.g., because patents for blockbusters are expiring and prices are falling. Instead, in solid tumors, it combines its own PD-1 with various other drugs. One of them is Bex. This way, it can gain a significant share of the PD-1 market if efficacy can be demonstrated beyond PD-1 drugs. Either by aiming for better efficacy directly in the first line, or at least initially when PD-1 is not effective or stops being effective, as is usually the case.

For the aforementioned reasons, Faron has the opportunity to become Gilead’s combination partner, but agreements will likely involve negotiations, e.g., precisely on these exclusivity clauses. Other PD-1 manufacturers ‘may’ also be interested in a deal if efficacy is shown in preliminary results. Especially those who already have market share and have demonstrated efficacy in various indications.

The biggest market for Bex could be as its own drug product on the market, allowing everyone to combine it with their own drugs. The problem is that as a monotherapy, i.e., as a standalone drug, no demonstration of efficacy as a first-line drug is expected for some time. Another contractual point is how Faron can proceed if Zimbe proves to be poor; can it get out of the agreements? It’s understandable that Juho’s mind is racing to the point of sleep difficulties.

Ralph Hughes is building the business case with his market analyses, and an investment bank will organize an auction/discussions with pharma without Faron being undervalued in negotiations.

[Tuul1puku]

After the recent news stream, I’ve been thinking even more about that loan repayment in cash. What reasons could there be for that? Common sense would suggest one should be quite certain that the cash won’t be needed for anything else, if the payment is made in cash?

On the other hand, there can’t be any binding agreement, because it should have been announced – and this makes me, like Juho, wonder what it was all about? Is it about “reckless” risk-taking or some calculated decision with some kind of certainty in the background? E.g., an indicative offer on the table, and certain conditions in the offer?

Perhaps now that the Central European holidays are over and the month turns to September, things will start happening? It’s probably more wishful thinking, but it’s good to live in hope (as long as investments are not based on hope).

[Jummijammi2]

Good introduction to the topic, that the highest bid is not necessarily the best partner offer for Faron as a producer of lifetime value. Considering Faron’s potential, a monotherapy strategy (as a general booster), which even I as a layman understand, would indeed be a great goal. But how? Hopefully, Juho gets enough sleep so that a clear vision and corresponding actions get their seal of approval - also in the real world. Sooner the better–