By Jake King
SciClone Pharmaceuticals (SCLN) issued 2013 financial guidance earlier this week around the JP Morgan Healthcare Conference in San Francisco, with its earnings outlook anticipated to be slightly better than 2012's performance, despite a slight downtick in sales. Given that SCLN shares reacted positively to the news, with the shares breaking through a key resistance level, we believe the modest EPS growth for 2013 was expected and is priced into the stock.
The company guided for 2013 adjusted EPS in a range of $0.66-$0.72 on a sales range of $150M-$155M. This compares to 2012 anticipated EPS of $0.62-$0.68, on sales of $152M-$157M. While 2013 will be a year to clean up certain operating issues from 2012, investors should come back to the stock as it becomes clear that SCLN is way too cheap to remain at current levels. Demonstrating the company's cash generating power, management expects to grow its cash balance by 13% in 2013 to $105 million (or cash of $1.90 per share). Stripping out anticipated cash, it becomes clear that investors are only paying a bit more than 1x sales for SCLN, with a current enterprise value of ~$170 million.
Typically, pharmaceutical company's trade in the 3-4x sales range on the low end, and can fetch acquisition prices of 5x or more, suggesting that SCLN is a bargain and can rise significantly from current prices. SciClone's primary value driver is Zadaxin, which is sold in China and used to stimulate the immune system to fight diseases like hepatitis and certain cancers. SciClone also distributes drugs made by other pharmaceutical companies given its strong distribution network in China and other parts of Asia. As a result, a strong balance sheet, over $150 million in annual sales, the ability to generate significant cash, and a valuable distribution platform make SCLN an attractive asset. We believe interest in SCLN by both investors and potential acquirers of emerging pharma companies will rise as the year unfolds.
Guidance supports strong cash flow outlook. Most importantly, with CEO Freidhelm Blobel residing in China for the last several months to ensure the company's business remains intact (see prior story), the new guidance was taken as positive news, a key indication that the business remains stable and can begin to grow again after Zadaxin inventories are worked out of the channel and ordering patterns normalize. The financial guidance continues to support that shares of SCLN are extremely cheap, trading at ~4x operating cash flow. With cash flow multiples in the 8x to 10x range for pharmaceutical companies that are considered "cheap" in terms of their valuations, SCLN could easily be trading at double the level that it is today, without appearing overvalued.
Because this U.S.-headquartered company does its business in Asia (primarily China), and because SCLN missed expectations in 3Q, the discount on the stock is extraordinary. For investors wishing to have exposure to growth in China and a stock that is about as cheap as they come, SCLN is a good bet. There are several catalysts that can get the stock moving in the next several weeks, and either the stock will start to realistically reflect the company's intrinsic value or SCLN may end up the subject of a take out by an opportunistic private equity fund or a larger drug company wishing to obtain the company's cash flow and distribution infrastructure in China. In fact, in late November, Chinese private equity fund GL Capital Group filed a 13D indicating it had increased its ownership in SCLN to approximately 6% (see prior story). Expect shares to work back into the $7.00+ range as the updated 2013 guidance is reassuring that SCLN will continue to generate cash flow that currently makes the stock a steal.
Both fundamentals and technicals look good for SCLN. Events that could put some momentum behind the stock include:
- Renewal of distribution agreements with partners like Pfizer (PFE), Sanofi (SNY), and Baxter (BAX), potentially for better economics, expected this quarter.
- Additional China distribution deals with major drug companies.
- 4Q 2012 results (anticipated earnings release in early-March) demonstrating that 2013 guidance is solid and that the company has a firm grasp on the prior issues related to Zadaxin sales in China.
- Acceleration or an increase of the company's stock repurchase program.
- Potential for GL Capital Group to increase its ownership.
We note that based on the press release for the recent guidance, the company bought back $6 million worth of SCLN stock in 4Q12, suggesting that the company truly believes that its shares are significantly undervalued and are the best use of funds. In addition to these fundamental drivers, the technical trends for SCLN are also shaping up. After the company missed 3Q12 estimates and announced that the business had to work through some distribution channel and end-user demand issues, shares of SCLN were stuck in a range and had trouble breaking through the $4.50 level. Interestingly, SCLN recently broke through this key resistance level and the chart looks strong. The next level of resistance is at $5.20, and breaking through this price could take the shares to the mid-$5 range. With opportunities to expand cash flow further from new potential China distribution deals with other larger drug companies, drug pipeline advancement, and keeping a tight rein on costs, it's hard to imagine that SCLN will remain at this low valuation for long.
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