Jan 11 2014, 11:31am CST | by Forbes
When thinking of mega millions winners, we usually think of people who purchased lucky lottery tickets. This week, we should count as mega millions winners another category: investors who purchased shares in a small biotechnology company, Intercept Pharmaceuticals, Inc., before the closing of Wall Street on Wednesday — at around $72 or better at the 52wk low of $30.38.
The stock climbed to $275.87 on Thursday, and to $497 during the trading time on Friday, valuing the company close to $9 billion.
Now, think of the company insiders who held roughly 43 percent of the 13.4m of outstanding shares; the institutions, who held another 26 percent; and the individuals who held a few thousand before Thursday.
You can do the math.
But does the potential market for the drug justify the company’s current valuation?
ICPT key statistics
|Market cap (intraday)||8.73B|
|%Held by insiders||42.7%|
|%Held by institutions||26.10%|
|Operating Cash Flow||-21.87M|
Obviously, investors buying shares on Friday believe so. I would be skeptical, however, for a number of reasons:
First, we are talking about a drug that performed well in a statistical trial, not a drug that has already received FDA approval. “Many experimental drugs fail to make it to the market, so Intercept’s OCA could stumble,” continues Peter Loftus. “But the clinical trial outcome raised investors’ expectations that the company could have a big-selling product on hands.”
Second, even if OCA receives an expedient FDA approval, marketing success is no guarantee. Investors have to look no further than the fate of Dendreon’s drug PROVENGE that received FDA approval a few years ago.
Third, even if OCA passes both the FDA and the market test, at the current market valuation, the company is valued at 10 percent of the value of Amgen Inc., which has been around for more than three decades and has several blockbuster stocks in the market.
Investors who have been around Wall Street long enough remember EntreMed Inc, another biotechnology company that displayed a similar performance in a short period. We all know what happened in that case.
Source: Forbes Business
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