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The people surprised by the selloff post-positive FDA news in $TMDX and $NNOX must not have been shareholders in $MYOV over the past 4 months
Joking aside, there's a lesson to be learned here for some.
Joking aside, there's a lesson to be learned here for some.
With the big positive catalyst now absorbed by the market (whether you think it was properly priced in or not), it seems marginal shareholders now want to focus on cash flows.
All have enormous potential, but the first positive quarter
of FCF for each is currently projected to come in the following periods:
$NNOX: early 2023
$MYOV: late 2023
$TMDX: late 2022
of FCF for each is currently projected to come in the following periods:
$NNOX: early 2023
$MYOV: late 2023
$TMDX: late 2022
Accumulating shares in the interim should pay dividends (figuratively now but possibly literally down the line) provided the FCF expectations are met. Mechanically, as the positive FCF years approach, shares will rise sharply as that positive FCF is discounted less heavily.
A quick example showing this for $MYOV (name I know best of the 3 above) using Cowen's estimates (Current PT = $34, well below Evercore's street-high $55 PT):
Current EV: ~$1.25B
2025 FCF: $591M
2028 Peak FCF: $1.55B
Current EV: ~$1.25B
2025 FCF: $591M
2028 Peak FCF: $1.55B
Myovant faces the issue in that without a strong pipeline, drug maturity + patent expiration results in a terminal value close to 0
Nanox and TransMedics might face competition eventually, but their terminal value is certainly > 0 assuming FDA approval.
Nanox and TransMedics might face competition eventually, but their terminal value is certainly > 0 assuming FDA approval.
Quickly pulling an average FCF multiple for biotech stocks of ~13x (not the most accurate comps but good enough for this exercise for $MYOV) https://www.gurufocus.com/industry_overview.php?industry=Biotechnology®ion=USA
In 2025, $MYOV would trade at an EV of ~$8B
In 2028, using a 7x multiple to account for drug maturity, $11B
In 2025, $MYOV would trade at an EV of ~$8B
In 2028, using a 7x multiple to account for drug maturity, $11B
Should $MYOV be worth $8B now?
No, but as we approach 2025, assuming Relugolix gets approved for uterine fibroids in June (very likely) and endometriosis in late '21/early '22 (data looks good but less certain than uterine fibroids), shares should trend pretty sharply upward
No, but as we approach 2025, assuming Relugolix gets approved for uterine fibroids in June (very likely) and endometriosis in late '21/early '22 (data looks good but less certain than uterine fibroids), shares should trend pretty sharply upward
Similar arguments can be made for $NNOX, $TMDX, and really any other company with a large TAM that is investing/ burning cash now to generate those large out-year FCFs (SaaS companies are a great example of this).
The big risk in investing in these situations is that small changes in growth trajectory or timing of FCF down the line can drastically affect current valuations
Looking at Myovant again:
Looking at Myovant again:
If in 2025, it does $300M in FCF (simulates a 1 year delay in the current estimates) and gets a 5x multiple due to terminal value risk, then the EV becomes ~$1.9B, representing a 7.6% CAGR over 5 years, which given the risk, is not a great return to justify buying in here.
I know lots of my followers already know how to do these calculations, but this is a good exercise for those new to investing who want to get a sense for why their holdings might not be moving on good (or bad) news.
TAMs, growth, and 2025 estimates are fine, but discount rates, risks to the above estimates, and terminal value risk are examples of reasons why expectations might need to be tapered in the short-term
