DUSA: A Great Value in Micro Cap Biotech

By far the best value story I know in microcap biotech is a company called DUSA Pharmaceuticals, Inc. (DUSA). DUSA combines a proprietary light-activated topical drug (the Levulan Kerastick) with a proprietary light system (BLU-U) that allows dermatologists (or their assistants) to treat patients for an increasingly common pre-cancerous skin lesion called an actinic keratosis (AK).

The company has been growing revenues over 20% a year and gross margins on its core product have just hit 88%. The sole analyst (from Roth Capital) covering the company projects it will do $36.6 million in revenue this year and earn .04/share, and because of those very high gross margins and great top-line growth, the company is projected to earn .20/share in 2011. Additionally, it has almost $18 million in cash (with no debt), plus net operating losses which I estimate NPV (net present value) at around $5 million or so.

The stock closed on Wednesday at $2.34/share, so with 24.2 million shares outstanding the market cap is $56.7 million, and if you net out $23 million for the cash and NOLs, you get an enterprise value of around $34 million, which is less than 1x projected 2010 revenue. Typically, a company growing the top line at around 20% a year (it even did this in 2009 over 2008, excluding some discontinued non-core products) with gross margins approaching 90% will sell at an EV of closer to 4x revenue.

As noted above, for 2011 the company is projected to earn .20/share (a 400% increase over the 2010 estimate). With that kind of growth and gross margins, I believe that the stock very conservatively deserves a 20x multiple on that 2011 estimate, which is a valuation of $4/share, and with the cash and NOLs worth another $1/share, I see fair value here at $5/share. And if a larger pharma company buys the company, it could easily pay 4x to 5x revenue due to the SG&A savings (DUSA has a lot of sales & marketing overhead for a single-product company), which would be an acquisition price of $6 to $7/share, fully diluted. In short, I think this company is an outstanding value, and have a large position here.

Disclosure: Long DUSA