No. of Recommendations: 8
WARNING: Long post ahead; numbers not guaranteed.

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'll take all the help I can get on this one, so here's the link to ELN's IR page:

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:

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.

IMPORTANT CAVEAT: All analysis to date has been quantitative only.
There has been no assessment of the quality of either the pipelines of the
respective companies or their management. I plan to try to evaluate the
management a la Bart Janssen, but I'm not sure how I will handle the pipeline.
I also don't know if I have it in me to do the patent/PCT thing , due to ELN's large number of foreign patents.

Any and all suggestions/help/constructive criticisms are welcome.



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