If you could buy $10,000 for $7,300 would you take the deal?
Vanda Pharmaceutical (VNDA) is one of those rare stocks that is trading at a significant discount to its liquidation value. More specifically, if the company closed up shop tomorrow, investors would receive a 27% premium to the stock price just based on the cash and hard assets on the balance sheet alone. Here's Vanda's latest balance sheet to help you follow along:
The key to reading Vanda's balance sheet is an understanding of the two liability items listed as 'deferred revenue.' In 2009, Vanda was paid a $200m lump sum of cash by Novartis (NVS) to distribute one of their drugs. Rather than recognizing all the revenue at once, Vanda decided to recognize it over time for tax purposes by adding a 'deferred revenue' item in the liabilities column of their balance sheet. In reality, that 'liability' doesn't exist -- Vanda received the cash without contingencies from Novartis upon closing the deal.
So let's assume Vanda liquidates tomorrow -- the worst case scenario is that all the intangible assets and PP&E are valued at $0 and all the tangible assets are valued in full. In this scenario, the company liquidates for $185m, an insane 27% discount to the current $134m market cap.
Now let's try to consider a more fair value. In addition to the hard assets mentioned above, Vanda has valuable intellectual property in the form of two drugs:
- The first is an FDA approved schizophrenia drug, Fanapt. Vanda’s patent on Fanapt lasts until 2016 in the oral form and 2023 in the injectable form. Currently Fanapt is being distributed by Novartis, which focuses on North American sales. The international market represents a major opportunity, and recently this year distribution deals were inked for Argentina and Mexico.
- The second drug is Tasimelteon, a phase III sleep drug that has earned orphan drug status from the FDA and already had positive clinical trials. Confirmatory trials are ongoing this year which could provide another potential upside catalyst.
Management has been controlling cash tightly, and the slow burn has been mostly relegated to R&D expenses of the Tasimelteon trial. The company has tax loss carry-forwards that were last listed at $155m in 2009 which would be another major boon to any acquirer.
The stock hasn’t collapsed due to any crushing news but rather a failure of expectations of Fanapt sales to take off. Fanapt’s sales were disappointing, but the distributor arrangements represent no downside to Vanda and only a potential upside if sales improve. Lately, a slow drop-off of volume due to lack of news and interest has led VNDA to its new 52wk low.
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When I look at new investment ideas often I find that investors rely too heavily on M&A as a potential upside catalyst. I firmly believe that buyout candidates become buyout candidates first and foremost by being great investments, and they should be appealing to investors regardless of whether the entire company is being purchased. Vanda fits this description in spades. At current levels it is trading as a deeply discounted way to purchase cash with upside potential from its intellectual property. On top of these positives, it is clearly an ideal M&A candidate for any pharmaceutical company looking to pick up intellectual property at no or little net cost.
Disclosure: I am long VNDA.