Bathwater Baby Bottoms
It’s hard to establish buying thresholds when the entire stock market seems to be on the verge of falling back off the cliff it climbed in 2009 and 2010. But in the last decline, those who came out the best were the ones who had the courage to buy in the darkest part of the tunnel. So I’m going to see if I can identify a few small pharmas and biotechs that are most likely to survive the current downturn and outperform in the recovery. Of course, since I don’t know whether the S&P will bottom at 1100 or at 700 I can’t really recommend a buy-in point for these stocks. But I might use my cash reserves to establish positions in these stocks in a staggered fashion if the broad market continues to drop.
Salix Pharmaceuticals (SLXP) – market cap 1610M, share price 27.26. Cash 477M, debt 332M, quarterly profit 0 – 24M. Not much has changed in the six weeks since I green thumbed the stock at 29. Product revenues were up to 133M, following sequential quarters of 94M, 81M, 118M, and 106M. Quarterly profit was 19M, following sequential quarters of -24M, -3M, 24M, and 0. Furthermore, the company guided to a 32M profit on 140M revenue in the next quarter. The company projects 520M in revenue and upwards of 80M in profit for 2011, which indicates 141M in revenue and 29M in profit for Q4. That’s two more quarters of solid earnings in the future, which provides a pleasant security blanket for the next six months of generalized market instability. An sNDA for subcu Relistor in non-cancer opioid-induced constipation has been accepted with a PDUFA of 4/27/12, and topline data from a phase III trial of oral Relistor is expected by early 2012. The share price recently dropped below 26, and if that level is breached again I may buy 500 shares. Salix is my top buy in the category of profitable mid-cap pharmas.
Emergent Biosolutions (EBS) – market cap 560M, share price 15.61. Cash 127M, debt 39M, quarterly burn/profit 21M burn – 26M profit. It’s a little hard to know what to make of this strange mix of vaccines and therapeutics for hematologic malignancies. Quarterly profits are all over the map as well, affected dramatically by obscure factors such as internal processes of redeployment and fermentation yields. The stock hasn’t fared well in the broad decline, at least partially due to disappointment from a downward revision in 2011 earnings. The revision doesn’t reflect a drop in demand, but rather below average production of BioThrax due to an annual fermentation yield at the low end of range. Management has been emphatic that the low yield simply represents stochastic variation and is not a sign of a developing trend. Meanwhile, the company is on the verge of finalizing a BARDA contract for 45M BioThrax doses over five years, which will account for maximal yields of 9M doses per year. In the last CC, management was a little fuzzy in the Q&A over what would happen if they were unable to produce maximal capacity, but it seems more than likely that the contract would carry on until the full 45M doses were delivered. This makes the issue of annual yield less critical. The new contract dwarfs the original 15M dose contract that has already generated substantial revenues, and should provide substantial financial security for the five year duration of the contract. In addition, the company has been making steady progress in the development of a TB vaccine and in oncologic compounds acquired from Trubion and TenX pharma, although their commercial potential is difficult to assess at this time. The share price was recently as low as 15 and I would consider establishing a position if it stabilizes below that level.
Vanda Pharmaceuticals (VNDA) – market cap 144M, share price 5.13. Cash 188M, debt 0, quarterly cash burn 3-6M. This represents a completely different strategy from the revenue/profit security I see in Salix and Emergent Biosolutions. I don’t expect Vanda to book any significant revenues at all, nor do I expect them to use up much cash. I’ve rated Vanda on CAPS about 12 times since the surprise approval of Fanapt, and scored each time as the market cap oscillated between 90% and 120% of cash reserves. The broad decline has now dropped the cap down to 77% of cash, and this is the first time the share price has been below 6 since Fanapt was approved. Vanda has shown no intention of blowing their cash hoard on a questionable acquisition, and I expect they will hunker down with it until the storm clouds pass. Recently, stocks like Orexigen and Transcept whose cap has dropped well below cash have shown their potential for massive rebounds disproportionate to the significance of catalysts. If Vanda’s share price stabilizes below 5, I may become a shareholder for the first time.