Pharsight: Intriguing Healthcare Software Smallcap

Healthcare software is one pond I've been fishing for stocks in recently, and Pharsight (PHST.OB) is an interesting fish in that pond.

What it does: Pharsight offers software and consulting services that facilitate the drug creation process. These services aim to reduce the cost and quicken the time required for drug discovery, development, and commercialization. Their software product is particularly useful for clinical trial simulation and related statistical analysis.

Why it interests me: Think of all the multi-billion dollar drug companies that live and die by their pipelines. Along comes Pharsight and says, "We can help you get new drugs faster and cheaper." I like the value proposition.

Far from a startup, PHST has been around since 1995 and claims all of the world's fifty largest pharmaceutical companies as customers. With a market cap under $38 million, a stock that trades on the bulletin board, and the company recently reporting the highest quarterly revenue in its history, Pharsight could be a hidden gem. McKesson owns 14% of the company, and some top VC firms also hold large stakes.

The company is cash flow positive, has no debt, and cash equal to 39% of its market cap. Despite being in a sector that tends to fetch inflated multiples, its enterprise value is only 88% of sales and 9.2x EBITDA.

What to watch out for: Customer concentration, potential equity dilution, uncertain sources of growth.

Why I'm not buying it now: For the above reasons, plus because I know very little about the analysis and reporting of pharmacokinetic and pharmacodynamic data. Accordingly, I find it hard to evaluate the company's products and come up with a valuation I have confidence in.

Data sources: Yahoo, Reuters, company literature

PHST.OB 1-yr chart:

Comments

[Watcher:]

Pharsight has been relisted on NASDAQ since this article was published. Does that change the picture and give additional upside?

2007 Dec 12 01:47 PM