These types of companies are fascinating.  When they're in clinical trials, the price runs on hope.  You could say that investors are estimating future cash flows from unapproved products, then discounting those cash flows and adjusting them by the probability of clinical trial and approval success, but I think the probability of success is largely guesswork, so that's why I'm saying the price runs mostly on hope.

However, once drugs are approved and ramping up, the price starts running on fundamentals; that is, discounted estimated future earnings and cash flow.  There's still a lot of estimating/guesstimating to do, but still I think the "fundamentals" argument is sound.

In terms of MPH, we can start to see some of its potential being realized and I think the price has responded accordingly.  One can now estimate value and get a feel for future potential.  For example, my rough calcs yield a fully diluted and fully taxable eps increase of something north of $.04 cents/share for each 1% market share gain.  I'm using a p/e of 16 for now (given the amount of debt), so you can get an idea of how much each 1% increase in market share might add to the fair value of the company.  You can add that to whatever you think the company is worth now based on current underlying earnings.

Regardless, here are few points which I took from the latest conference call:

- Q3 is reflective of a long term trend
- the number of hospital customers is growing
- Aggrastat now has a 3-4% market share (vs. the 2% share of last year). Aggrastat is in third place in the US but first internationally
- expect significant growth going forward in Aggrastat sales
- patent protection now goes out to 2023
- the company has commenced a study to compare Aggrastat against the number one US competitor

If I've missed anything important, please let me know; I was trying to write and ask questions at the same time.


A few comments from me:

- given the high gross margin percentage, the company could get away without a fund raise if it can collect accounts receivable within a reasonable time frame because each new quarter's dramatically increasing revenue doesn't cost that much to produce.
- when looking at the income statement, one has to back out $200k of expenses which are non-cash and relate only to the fair value adjustment on the estimated royalty obligation.  If I understand it correctly, that obligation arose out of a prior debt settlement and therefore got reported as a balance sheet item.  When each quarter's statements are prepared, it must be adjusted upward or downward depending on estimated future royalty payments.  That adjustment gets reflected as an expense on the income statement but it's really meaningless.  (Someone correct me if I'm wrong here, but that's my take on it.)  So, underlying pre-tax net income was more like $287k rather than the $87k reported for the quarter.
- there are significant unused tax loss carry forwards
- the pipe is interesting

It was the significant jump in revenue, high gross margin, controlled costs and future potential that got me interested in the company.

Regards to all,

i22