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Alder Biopharmaceuticals – Modeling The Risk/Reward

Summary

Alder is a stock with no revenue and only losses, but with a promising new drug for migraine headaches.

I present a model with an expected rate of return versus a win/lose scenario.

Biotechs are inherently risky, and a cost/benefit model is the prudent way to speculate.

I wanted to take an impartial look at Alder Biopharmaceuticals (ALDR) and see if, at the current price of $17.85 and a market of $1.21 billion, it makes sense to take a risk on the stock. Some would say investing in an early stage biotech stock is akin to gambling. I don’t necessarily agree with that assumption. If you can quantify the payoff versus the risk, a rational investment decision can be made. This is a difficult prospect, but with a little guesswork and market size estimates, a rudimentary financial model can be created.

The first hurdle we must tackle is the product itself. It makes little sense to examine multiples of revenue or EPS. Revenue is pretty much zero, and earnings are simply negative development costs and expenses, divided by shares outstanding. There is no rational PE multiple one can place. For now, we just need to know that there is adequate cash to get to the finish line. In this case, with $341 million in cash and short-term investments, as of September 30, 2017, and the ability to continue to sell shares, it should have no problem making it to 2020.

What Drug is it working on, and what market is it targeted towards?

Alder is clinical-stage biopharmaceutical company that seeks to commercialize therapeutic antibodies to transform current treatment methods. It has its own proprietary antibody technology platform coupled with, in its words –

A deliberate approach to design and select candidates with properties that we believe optimize the therapeutic potential for patients and commercial competitiveness.

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Alder Biopharmaceuticals – Modeling The Risk/Reward

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