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No. of Recommendations: 2
I'm confused. Xerohype has asked that I submit the following for your initial perusal & consideration for the KARM port. The problem is that I really don't believe that biotech/pharmas can be true RM's, although they may be very good investments. Dominant Brand, Repeat Purchase, Convenience, Monopoly -- these are all square holes into which the round pegs of biotech/pharma just don't fit. There are too many diseases, too many therapeutic approaches, etc. I see topknotch BT/PHRM as on a mesa at best along with single KING OF THE HILL, TOP OF THE HEAP, BIG KAHUNA ala CSCO, MSFT, INTC or whatever. Nevertheless, here is an old (July) post about ELN, which I have some $$ in. I think it is an excellent LT investment, but not IMO a RM (but I don't think that PFE is a true RM either). I copied this direct from the biotech grads board, so please forgive any small inconsistencies. If this board feels that ELN would be a serious candidate for KARM, I'll do my best to do a KARM analysis. I just can't see it making it, based on reading through the qualitative criteria.

I'd like to nominate ELN for inclusion in our Tier 1 portfolio. I think that they occupy a sweet spot in the biotech hierarchy in that they are diversified, profitable, and do not have a large stake owned by bigger fish (like DNA & CHIR). I'm not totally up to date on ELN, especially post the Dura acquisition/merger. I know that the CCI is up around 6 or so. If the current team is interested in more info on ELN to solidify its place in our port, I'll try to provide more info, as time allows. To put out a feeler, I'm copying some info I posted on E7's board near the end of July:
I've been taking the RM seminar, and working up ELN along with the other RM candidates. To say that dissecting ELN's financial statements provides an extra challenge would be putting it mildly (i.e. "stocks" actually means "inventory", etc.). I think that I've gotten a pretty good handle on what they're trying to tell us, although TMF and MSN both have debt/equity of 0.8, which I've never been able to reproduce (my numbers are not as favorable).

I've tried to do the calculations on the quarterly statements as well as the yearly, but there's a lot less you can do with the quarterlies.

$millions FY98 FY99

Revenues 233 1008
Cost of Sales 47 211
Net Income 146 336
Current Assets 1185 1189
Cash&Equiv 869 867
LT Debt 1235 1551
ST Debt 233 436
Total Debt 1467 1987

%Inc Revenues 49
Gross Margin 79 79
Net Margin 22 33
Cash/Debt 0.8 0.6
Flow Ratio 0.26 0.21

Cash from activites 50 364
Plant,prop,equip 66 77

Cash Flow -15 288
Cash King margin -2 29

Please excuse the apparent small algebraic errors; I rounded after all operations.

With regard to quarterlies, Gross margins have held steady at around 79, while net margins have increased to 35.4 in Q200. Increase in revenues was 24% (Q100/Q199) and 30% (Q200/Q299).


1. Increase in revenues of 10% - 2 points
2. Gross margins of 50% - 2 points
3. Net margins of 10% - 2 points
4. Cash-to-Debt of 1.5 - 0 points (1 if you go with TMF/MSN)
5. Flow Ratio below 1.25 - 2 points
6. Cash King Margin of 10% - 2 points

RM Metric Score: 10-11 out of 12.

Since we have chosen AMGN as the pharmaceutical RM candidate, I'll use it for perspective/comparison.

Based on FY99:

%Revenue growth 23 49
Gross Margin 88 79
Net Margin 32.8 33.3
Cash/Debt 4.1 0.6
Flow Ratio 1.0 0.2
Cash King Margin 23 29

RM Metric Score: 11 out of 12 (Flow Ratio of 1.0 scores 1 out of 2)

Assuming my numbers on ELN's cash and debt are correct, I've been thinking a bit about their debt "problem". As incorporated into the flow ratio, most of this debt is long term. In their annual report, this debt is predominantly in the form of "Notes", which don't seem to require much in the way of short -term payback (although they will have to be paid off someday). Crunching some numbers in comparison to AMGN, I noticed the following:
          AMGN            ELN     

98Revenues 2718 677
99Revenues 3340 1008
% Increase 23 49

98R&D 663 145
99R&D 823 230
%Increase 24 59

So, while ELN probably could have payed down some of their debt with their increased revenues, they have elected instead to plow it into R&D. Although none of us likes to be in debt, I certainly can see this as a sign of strength on the part of ELN's management .

Now, for an attempt at Comparative Valuation (sort of a dirty phrase in RM land):

I used E7's "New-Merical" formula of 0.2PhaseI + 0.286PhaseII +
0.606Phase III for the Clinidex (CI).

Market Cap 80,100 13,600
99Revenues 3340 1008
Price/Rev 24 13.5
99R&D Spending 823 230
Phase I 2 2
Phase II 5 1
Phase III 4 5
Clinidex (CI) 4.25 3.72
R&D/CI 190 62
(Price/Rev)/CI 5.6 3.6
Sales/CI 786 271
PEG 2.3 0.98

Suggested conclusions:
1. AMGN & ELN both score very well, and nearly equivalently, on RM metrics.
2. While AMGN has the stronger pipeline, ELN was 3X as efficient in producing theirs.
3. ELN is a better "value" than AMGN at current prices, and stands to gain
considerably more from successful clinical trials.

Let me know what you think.


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