Tuesday, April 25, 2006

Discovey Partners: DPII
A Reader's Take on the Merger

A well informed reader emailed his take on the Discovery Partners/Infinity Pharmaceuticals merger. It is very insightful, and goes far deeper into the industry than your Cheap Stocks editor ever could. We are never afraid to admit our shortcomings here at CS.

Merger changes the essence of the investment. The acquiring company clearly needs a development team, and Discovery was unlikely to provide the return on the cash that the board was looking for, hence the merger. Since I suspect this is all a San Diego area bio deal, expect to see the company transformed into a biotech with a high burn rate. This will be a boom-bust investment, and there is no way to value the net asset value because any pipeline drug must be devalued by at least 90% until completion of phase II trials. Then you still have further development and marketing execution risk.

Whatever the future of the company holds, it is not a net asset value company anymore, as the cash will now be used to “develop” speculative compounds. A little like buying a company with a wad of cash and land, with unproven oil reserves, but in Texas, near where gushers were located. In my business, slow and steady just doesn’t excite enough people.

Thanks, reader. Please don't hesitate to offer any other views you may have. Such well thought out insights are few and far between these days.

If the reader's analysis is correct, and this merger goes through, your editor no longer own a cash play NCAV company, but rather a biotech, likely to burn cash at a high rate. This is new territory!

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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