Today I wanted to talk about a measure of stock value that is often used in the equity research groups but is used only sparingly with amateur traders: enterprise value/revenues.
For those who haven't heard of this measure of stock value let me provide a quick introduction.
Enterprise value is most intuitively thought of as the dollar amount at which a company can theoretically be purchased. You might think that number is just the market cap, and usually it is, but keep in mind that you would obtain the company's cash and assume the company's debt, so these figures are 'factored in' for the enterprise value. The long equation for the value is as follows:
Enterprise value = common equity at market value + debt at market value + minority interest at market value, if any – associate company at market value, if any + preferred equity at market value – cash and cash-equivalents.
By comparing the enterprise value to the revenues of a company, you get the dollar value needed to purchase those revenues. It's very similar to a simple price/earnings ratio but works better for companies that aren't yet profitable - like small biotechs. It's also especially appropriate as smaller companies tend to be fairly common acquisition targets and a low EV/Rev ratio should yield especially good acquisition targets.
With that, I'd like to examine five companies that have especially low EV/Rev ratios, with some are even trading below their cash value! While these companies may be selling at a bargain price and may be good acquisition targets, there's usually good reason their ratios are so low.
As a clarification of my methods, the EV/Rev ratios are determined using the trailing twelve month revenues and cash values (including cash equivalents and short term investments) are based on the last reported 10Q reports.
Vanda Pharmaceuticals (VNDA)
EV/Rev = -1.31
Current share price: $6.15
Vanda is one of the few biotechs I follow that is actually trading below it's cash value. Vanda's primary product is fanapt - an atypical treatment for schizophrenia. Vanda has a licencing agreement with Novartis (NVS) for the sales of Fanapt. Vanda is fresh of a 52-week low of $6.20 and Fanapt sales have been, well, abysmal. The company reported only 4,000 total prescriptions of the schizophrenia drug in June - but it was only launched in January and they are hoping for further increases in sales. Vanda's revenue has largely come in the form of milestone payments from Novartis with Fanapt's royalties reaching only $1.5 million for the quarter.
Along with a potential increase in Fanapt sales, whether or not Vanda is a good buy relies largely on revenues realized from it's pipeline. Vanda is currently developing an injectable formulation of Fanapt that may add to their bottom line. Vanda is also developing Tasimelteon for the treatment of Non-24-Hour Sleep/Wake Disorder in blind individuals. Tasimelteon has reported positive phase III trials for improvement of sleep onset in this patient population. The company expects to file a new drug application (NDA) for Tasimelteon with the FDA in 2011.
Vanda is covered by three research analysts with an average 'buy' rating and an average one year price target of $13.50/share.
EV/Rev = 0.07
Current share price: $6.03
Affymax is another interesting play. Affymax's primary product is hematide, a pegylated small-peptide therapy for the treatment of anemia in chronic renal failure patients. The company currently has a licensing agreement with Takeda for Hematide. AFFY's stock recently took a 60% haircut when it reported a small but statistically significant increase in cardiac events in pre-dialysis patients over traditional therapies in their most recent phase III trials. The partnership recently stated that the company would go ahead with their NDA submission and is aiming for early 2011.
The company relies primarily on milestone revenues from Takeda but the market looks relatively large for Hematide once it obtains approval. At this point, it is unclear whether or not the therapy will only be approved for post-dialysis patients or will be approved for the whole patient population (I'm leaning towards the former) but either way this company is cheap based on future cash flows. The company has a operating free cash flow of $-55 million per year but has $141 million in cash and equivalents to offset the burn into the foreseeable future.
AFFY is covered by seven analysts with an average 'hold' rating and a one-year price target of $11.80.
BioDelivery Sciences International (BDSI)
EV/Rev = 0.45
Current share price: $2.25
BDSI is an interesting company as it doesn't even have a website that I can find - just a 'coming soon'. The company is in the drug delivery business with its proprietary BioErodible MucoAdhesive (BEMA) technology. The technology is, from what I understand, a transdermal patch for the inside of your cheek. Their main product is Onsolis, a fentanyl film, for the management of pain in cancer patients. The company reported $2.2 million in revenues and a negative operating cash flow as of the last quarter, but positive over the last twelve months. It, too, has a strong cash position and should be able to weather a few down quarters before additional treatments reach the market.
BDSI's future relies largely on the ability of the company to realize its BEMA technology in other treatments as well as extending its revenues for Onsolis.
BDSI is covered by three research analysts with an average 'strong buy' rating and an average one year price target of $7.00/share.
ISTA Pharmaceuticals (ISTA)
EV/Rev = 0.49
Current share price: $2.94
Ista is a company I've talked about before. Their primary product is XiBrom for the treatment of ocular pain and inflammation following eye surgery. The product lost exclusivity in January of this year but the company has yet to face any generic competition. The threat of generic competition is a real one, however, as Xibrom makes up over half of the company's revenues. As of the most recent quarter, operating cash flows were virtually zero.
Ista may have a rosier future, however. Total product sales year-over-year have increased 47% from 2009 to 2010. Furthermore, XiDay, a once daily version of Xibrom, faces a PDUFA date of October 16 and could allow Ista to maintain its XiBrom revenues. The company has several other treatments in the pipeline - including ecabet sodium and bromfenac for dry eye and T-Pred for inflammatory ocular conditions - but none have advanced beyond phase II trials yet.
Ista is covered by three research analysts with an average 'buy' rating and an average one year price target of $6.33/share.
AEterna Zentaris (AEZS)
EV/Rev = 0.60
Current share price: $0.95
Aeterna Zentaris, a Canadian biotech, currently has one marketed therapy and several drugs in its pipeline. Cetrotide, a luteinizing hormone-releasing hormone for in vitro fertilization, is currently bringing in $21 million per annum with the other two thirds of it's income coming from licensing fees. It's operating free cash flow is currently very negative and the company appears to have only about a years worth of cash to burn.
AEZS's pipeline appears to be in good shape, however. The company has two drugs in phase III trials - Perifosine for multiple myeloma and advanced metastatic colorectal cancer and Solorel for growth hormone deficiency in adults. AEZS was able to pick up a licensing partner for Perifosine in Keryx Pharmaceuticals. The big question with AEterna Zentaris will be whether or not it can realize increased revenues before it's cash reserves run out.
AEZS is currently covered by six research analysts with an average 'buy' recommendation and a $2.13 per share one year price target.
Again, these companies may be excellent deals and may be seen as good acquisition targets. Most of these companies have made this list because of significant setbacks or questions about the feasibility of their business. Some of them may simply be out of fashion. If you want to invest in these companies, concentrate on what is currently holding the company down and decide whether or not the company will surmount its obstacles.
Disclosure: Long ISTA