Does Aspreva Pharmaceuticals' Valuation Even Matter?

What does Aspreva Pharmaceuticals (ASPV) have in common with a mining company? I'll bet you answer 'nothing' and ridicule at me for posing such a silly question. That is just fair. But given it is trading at a P/E (ttm) of 5.9 (as of this writing), I'm sure you would agree with me that ASPV is valued no different than a boring mining stock by the Street.

When a mining company has limited proven reserve, the reserve itself becomes the only thing that captures investor attention. This is no different with Aspreva. Tell me, who cares about P/E when Aspreva's sole "gold mine" is the CellCept partnership with Roche? Not to mention CellCept patents are set to expire from mid 2009 to late 2010 throughout its major global markets. P/E (5.9), ROE (57.8%), and net margin (57.8%) are no longer meaningful yardsticks to the street. All that matters now is CellCept's finite potential.

I'm not about to argue with anyone who postulates that ASPV's fair market value at this juncture is more appropriately determined by CellCept's discounted cash flow than by ASPV's P/E ratio. Aspreva's current sole reliance on CellCept is as plain as a piece of white paper. And that was why I started with the mining stock analogy in the first place. However my question is if Aspreva's P/E ratio is still relevant at all?

The answer all depends on if Apreva can find another "gold mine."

Aspreva has put together a business development [BD] team of 13 employees working full time on the company's "next big thing." But the management now has a policy not to report progress on its BD effort until a deal is finalized. As such, Wall Street and the investment community are much fatigued and frustrated. They are fatigued because they have waited far too long for this "next big thing." And they are frustrated because of the lack of visibility of a new transaction, more than three and half years after the CellCept agreement with Roche was entered.

Aspreva held its 2006 Q4 and year-end earnings conference call in early February. It was no surprise the financial analysts failed once again on the conference call to have the management reveal the actual progress of its BD effort. However, the amazing teamwork of the analysts did yield some interesting insight into Aspreva's BD dynamics.

The majority of potential partners in talk with Aspreva a year ago are still "on the table" with Aspreva today. When one round of discussion on a certain product turns out to be fruitless, the partner tends to come back with a new product proposal for a new round of discussion. Partners do not usually just walk away. Often, Aspreva approached a partner for a target product but ended up discussing a different product with the partner.

How much could this knowledge of BD dynamics improve investors' perception of the company's BD progress? Probably not much. But the "stickiness" of the collaboration discussions should serve as an indication that partners see a value in Aspreva's global clinical expertise in its specialty area (mainly autoimmune diseases). It should also serve to illustrate Aspreva's ability in maintaining a constructive customer relationship.

Aspreva's slow progress in landing a new deal appears to be a direct result of the management's strict selection criteria for a transaction. The management wants a deal that can really create value for the company and shareholders, not one that just serves to appease the street. In CEO Mr. Glickman's words, they will not do a deal just to "get the monkey out of your back" and they will not bring in a deal "that six months from now blows up in our face."

The long wait the street is going through now points to the difficult nature of landing a satisfactory deal. But fortunately, the company can afford to wait given that it carries no debt and hoards 92.3% of its equity in cash (that is $259.9M cash as of year end 2006, or 35.8% of its market cap as of this writing). And this "luxury" all comes from the great value the CellCept deal has brought to the company, which in turn serves to stress the importance of bringing in the right deal.

Regardless of how likely another CellCept-like deal is, I'm totally with the management on selecting only the right deal that creates shareholder value. However, the management should also realize that time is now ticking on them. Not only is it all important to ensure Lupus Nephritis' clinical success, they ought also to bring in a new deal in time that will help maintain a good return following CellCept's patent expiration in about two years. A good management is one that understands that equity is not free and shareholders always expect certain rate of return. Only then can shareholders expect value creation.

So it is quite obvious that only the management can determine whether P/E is still relevant for Aspreva. Mr. Glickman believes "the drought will end, and Aspreva will deliver." And we know that when the company delivers, Aspreva will be a true two-in-one stock, i.e., a value stock plus a growth stock!

Disclosure: Author holds long positions of ASPV as of this writing

ASPV 1-yr chart

Comments

[James Cullen]

Excellent writing, and I love the mining stock analogy. Having also listened to the conference call, you can tell the slow pace of the BD is maddening to everyone following the stock, especially the analyst at Pacific Growth.
As much as Aspreva management is under fire to deliver soon, I think they have at least a year (until mid-2008) until serious worries start to kick in... not that I would encourage them to wait that long, but they generate a ton of cash flow and can ride CellCept a while longer. Right now though, the price puts it in definite value territory, and an eventual partnership will give it a growth kick and should take it upwards of $30.