SciClone Pharmaceuticals (SCLN) is a $271.89 million small-cap biotech company based in the United States, but primarily focused on selling drugs in China. It is an established company with 15 drugs on the market. The company's primary drug is Zadaxin which has an indication for hepatitis B, hepatitis C, certain cancers, and as a vaccine adjuvant. This is the only drug that SciClone markets itself, without partnerships with other companies. Zadaxin has been approved in over 30 countries.
Here's a look at SciClone's full product list and the company's partnerships:
By partnering with Sanofi Aventis (SNY), Baxter International (BAX), Pfizer (PFE), and Iroko Pharmaceuticals, SciClone benefits from a variety of biotech and marketing expertise. Strategic licensing agreements with these companies allow SciClone to successfully market its drugs and to develop new ones.
In addition to the company's 15 marketed drugs, SciClone has several drugs under development in its pipeline.
The stock is currently undervalued with a forward PE ratio of 5.36, a PEG of 0.46, and a price to book ratio of just 1.64. The undervaluation can be attributed to the fact that the company is under investigation by the SEC and Department of Justice regarding the Foreign Corrupt Practices Act. The issue being investigated is whether the company provided illegal payments to Zadaxin customers. If the company has been found to be in violation, it will face fines. The amount of these fines are unknown.
The company's exposure to China might be another reason for the undervaluation. Since China's GDP has declined from over 9% growth to 7.6% growth within the past year, the stock has gone from a 52-week high of $7.58 to its current price of $4.69. According to the company's 10-Q filing, China comprises 98% of the company's revenue.
My thoughts are that SciClone's drop in price will prove to make a good investment for the long-term. The company has increased revenue every year since 2007 and increased earnings every year since 2008. So, it is bucking China's trend of slowing GDP growth. This is reasonable since the company provides key drugs for serious conditions that will be used regardless of the economic strength in China.
China's population continues to grow every year, which should lead to increasing demand for the company's drugs.
SciClone has a nice double-digit profit margin of 26.48% over the past twelve months. It has $81 million in cash with only $2.5 million in debt. For the past twelve months, the company had $43 million in operating cash flow and $41 million in free cash flow.
The company has exceeded its earnings estimates for the past four quarters. It is expected to grow earnings annually at 14.1% for the next five years.
Since the outcome of the investigation is unknown, it would be wise for conservative potential investors to wait until the impact is known. More aggressive investors can take a position in the company now, leaning on the side that a negative outcome won't have a significant impact on the stock price. If the outcome results in fines, the company's financial position could be hurt, resulting in a lower stock price. I would take a wait and see approach as the company may be more of a bargain in the future. My thoughts are that the outcome of the investigation will probably not be a showstopper for the company. During the investigation, the company's management has been instructed to evaluate and expand policies to train employees on anti-bribery laws and regulations. Therefore, I think that the SEC wants to ensure that the company will strictly follow the proper regulations going forward. Although the potential fines (if levied) are unknown, I don't think they will cripple the company.
Overall, SciClone's China exposure is a plus. The growing population will drive increased demand for the company's drugs and continue the trend of increasing revenue and earnings.