Monday, May 14, 2007

A trip into ASPV's 10Q

Let's see what if we want to liquidate this company today.

Let's focus on balance sheet.

Total Assets 354,008k
total liability 32,701k

so total shareholder equity: 321,307k

Different from most other companies, in ASPV's asset part, most of the assets are readily liquidable, there are very little property and equipment and deferred income tax we need to discount if we are going to liquidate it today.

We still end up with about 315,000k current shareholder equity.

So that is if we close ASPV right here right now, with outstanding shares: 35,172,657
we end up with $8.95 /share, which means what we are paying now for its future cash flow is
$19.39-$8.95=$10.44/s

So if we buy today at close, we are paying $10.44/s for ASPV's future earnings.

Let's assume there will be no new partner and new deals.

What does this mean, this means CellCept will be the only drug which ASPV has to generate revenue. and it will face generic competition as early as end of May 2009

In this scenario, let's totally discount ASPV's future earning after 2009 Q2 (end of June)

To construct the earning flow. let's first have a look at the previous earnings.
last 4 quarter's earning:
0.78, 0.71, 0.73, 1.03

The last one $1.03 is the quarter ends March 31st 2007.
as we can see it is actually much better than previous ones on increased revenue and also due to they came to the end of Phase III trial on lupus (thus less trial spending)

Because of the simple business model: the next 9 quarters until our cutoff date can be very easy to estimate, let's use $1.05 per quarter as base, and assume the growth rate is very moderate and equal to the interest rate.

So we have DCF earning estimation of 1.05*9=9.45.

So you can see this highly discounted number is just $1 shy of what we are going to pay today.
That's why I thinkif ASPV dropped to <18.3, it has very minimal downside risk assuming all the above assumptions hold.

Why this number is highly discounted and super conservative:

1. we totally ignored the possiblity of getting a new Partner/Deal. If they are getting a deal, it will totally change the course, and that is the huge upside potential.

2. we totally discounted the earning ability after the patent expiry in U.S, in Europe it expires later, and the manufacturing patent which expires even later can also be a protection, even the most pessimistic analyst estimation in that scenario is sth like: earning will fall after 2010, and disappear after 2014. We did it even more radical, simply cut it off. So this part provided us margin of safety.

3. We estimated the sales on off-lable usage to remain slow growth (as slow as interest rate), which is a very conservative estimation according to previous earning data.

So we have a nice asset play, and very good margin of safety (I would say 20% at least), also great upside potential (if we have new deals), then what is the catch.

If you read my previous post, you will see the catch is actually the incoming Phase III on treating Lupus nephritis, that is the major part of their current off-label revenue.

If it is good, we are looking at boosting the usage of CellCept in lupus nephritis from current 14% to at least 50% in short term, which is a quick 3-4x. our next 9 quarter revenue will be sth like
$1.05, $1.35, $1.9, $2.4, ...

If it is bad, this part of revenue will diminish, and our next 9 quarter calulation will need to revise to sth like $1.05, $1, $0.9, $0.8 ...

So the real downside risk is actually the incoming trial result. If it is good, ASPV should at least worth 28-30 if not more, even if we don't have a new deal coming along at all.

If it is bad, and stands no chance for FDA approval, then ASPV is a sinking ship, will probably settle down in the range of $13-$14.

Another very important implication of the success of the trial: it will significantly boost the possibility of ASPV getting a new partnership/deal, since it shows ASPV's ability to fulfill their responsibility and generate great outcome.

I would say let's watch the trial result, once it is announced to be good, I will rate ASPV strong buy up to 24-25. For now, let's just patiently wait.

2 comments:

Anonymous said...

en...good VIC style...hehe

Taikonaut said...

My calc:
$9/share equity (pretty much cash), net earnings $1/Q for the next 9 Qs, then -10%/Q (~-40% annually) afterwards. Discount CFs with %15 annual yield. Then ASPV's value is 9 + 7.5 + 4.6 ~ 21. Assuming -20%/Q (~-80% annually) after the first 9 Qs, then it's about $19.

I feel comfortable to hold ASPV even when I am on vacation in China.