Mighty Mouse in the Market
Donald L. Drakeman, President and CEO, Medarex
My company, Medarex, develops and commercializes antibody-based therapeutic products to treat cancer, autoimmune diseases and other debilitating and life-threatening conditions. Our core technologies include a transgenic mouse system that creates high-affinity, fully human antibodies; bispecific antibodies that enhance and direct the human body's own immune system; and immunotoxin technology.
We started the company in 1987, and launched an IPO in 1991. During the 1990s we moved our products toward clinical trials while the stock rode the Wall Street roller coaster. Then, it went from a low of $3 a share to a high of $206 in the past year, though it's now trading at around $80.
Over the last year, Wall Street finally recognized that genomics is providing the kinds of opportunities for the pharmaceutical industry that the Internet did for communications, and companies like Medarex are positioned to be the first beneficiaries. As a result, our stock rose over 4000 percent, we raised $400 million and achieved Forbes 500 status. That increase in market value got us tagged the "biggest one-year mover" for 1999.
Strategic Plan for Partnership
Our value has increased dramatically over the last year, from about $150 million to a high of $6 billion, partly because biotech became a "hot" sector. But much of our increase in value came from a strategic plan we put in place over three years ago.
We believed that the human genome project would create thousands of new opportunities for biotech-based drugs. In anticipation of this tremendous opportunity, we acquired a private company that put us in a position to build the technological bridge between the genomic discoveries and new treatments for cancer and other diseases. A total of 19 partnerships with other companies has driven our expansion since 1997, bringing us revenues from licensing fees, milestone payments and manufacturing, plus royalties on commercial sales.
Statistical Models for Success
Technology is the very stuff of our business, but of course some of our assets are intangible: accumulated genetic and biological information, scientists' laboratory techniques and experience, computer programs, patents on our HuMAb-Mouse technology. We value the technology by applying statistical probabilities to the success of our products and model these out as projections for at least a decade. Complex software helps "probabilize" our models.
The traditional method analysts still use to value research-and-development-stage biotech companies is to do a discounted cash-flow (DCF) analysis based on two assumptions: (1) that the company's products will be approved by the FDA and successfully commercialized, and (2) that the likelihood of the first assumption being true is low enough to warrant using a large (25 to 40 percent) discount rate. Unfortunately, it is very difficult to compensate for the binary risk of product failure by using a discount rate. As a result, we are encouraging analysts to apply "probabilization" analysis, in which we assume—on the basis of a statistical analysis of the industry—that only about 30 percent of potential products will succeed.
With that degree of realism built into the model, it is appropriate to calculate the DCF by using a fairly low "cost-of-capital" discount rate. In reviewing the range of "probabilization possibilities," we rely on a variety of simulation analyses, including Monte Carlo and Latin Hypercube.
Since virtually all biotech companies have no profits and scant few revenues, it appears that stock in the industry often trades "as a whole," on the basis of general investor sentiment about the sector. If there's a breakthrough in somebody's lab, everyone's expectations soar, and if one company happens to sneeze as a result of a disappointing clinical trial, the entire sector catches cold.
At Medarex, we are working hard to educate investors. We want to demonstrate that we have the technology, expertise and capital to create the research-and-development leverage that will lead to a higher likelihood of success, with lower risk, than most other biotech companies can project. Backing up the buzz with solid statistics is one way to do that.
People, Products and Persistence
Having a multitalented management team also contributes to the value of the company. Our board of directors includes several M.D.s, scientists and professors, but our founding chairman was formerly the president of a venture capital firm. Another director used to be vice-president for business development, licensing and strategic planning at a major pharmaceutical company.
Our CFO, who's both a CPA and a lawyer, hired me into Essex Chemical years ago and taught me all about business; he joined us when Medarex went public in 1991 and we needed a high-powered financial executive. Now he has grown beyond finance, doing major corporate partnerships around the world and running our most valuable business. My wife, who is head of business development, is also president and CEO of a biotech company. As for me, I have a background in both law and the humanities—and occasionally I teach constitutional law on the side.
As I explained on CNBC's "Power Lunch" a few months ago, we are trying to take our "supermice" and put them in the hands of everybody who can develop products with them. We're also working with other companies that are developing new genomic research targets and mixing those targets with our mice to develop proprietary products of our own. Thanks to a process that brings them through the pipeline very quickly, we're going to be able to put a lot of products into clinical trials in the next few years. Treating human patients will really drive both revenues and the psychological profit we all get from this research.
My last word to entrepreneurs who dream of driving their companies' growth: Keep pushing toward a sensible business goal, even if it is out of fashion with Wall Street. If you have a new or complex product, try to educate the market about its potential. And if you demonstrate to investors that you have the technology, expertise and capital to turn your research and development efforts into good products, your stock is more likely to perform in the long run.