Mack Evaluation

MACK is a biotech company with a number of new drug products in various stages of research and development. It has negative profit margin, EPS, and diluted EPS right now. MACK also has no dividends or expected dividends. So we can't use discount EPS model, discount RE model and discount dividends model.

Based on the research report of JPM, we can get an adjusted expectation of future EPS, which is also negative and was adjusted to a lower number since MACK has delayed its major project in the recent presentations. But based on that, we could use Abnormal Earnings Growth valuation to evaluate the approximately value of MACK

This valuation measures value added from forecasts of abnormal earning growth. The key equation used is:

Value of equity = Capitalized forward earnings + Extra value for abnormal cum-dividend earnings growth

2012A 2013E 2014E 2015E

EPS (1.26) (1.39) (1.41) (0.72)

normal earnings

(1.5985) (1.6215)

AEG

0.1885 0.9015

CV 8.5233

PV of CV 4.4867

capitalization rate 15%

value 29.9133

If we input the data based on the major assumptions raised from JPM report, we could get a very huge value. Because this model is extremely sensitive with the input, and apparently we assumed a high abnormal earnings growth rate.

For example, If we use the data from yahoo finance, which also forecast a negative EPS in next two years but not assume a recover of EPS in 2015.

2012A 2013E 2014E

EPS -1.26 -1.22 -1.17

AEG 0.24 0.23

CV 2.1745

PV of CV 1.8530

capitalization rate 15%

value 3.9531

The value of this stock is pretty low, even lower than the price right now.

Recall from the report of JPM, they didn't use a discount rate model to get their target price--$9. They use the expected return of the projects to reach that number. However, the probability they used is quite doubtful, there is no way to prove or confirm these assumptions. If the probability of success of MM121 drops from 60% to 30%, we can get...