Neurocrine's Implosion: Let The Dust Settle Before Buying (NBIX)

Includes: MNK, NBIX, NKTR
by: Jon Ogg

After the overwhelming traffic generated from the “Evaluating the Implosion in Neurocrine” article, it is worth providing some additional data that still offer patience as the best guide rather than trying to be brave and fighting the tape. Neurocrine Biosciences (NASDAQ:NBIX) is trading down another 4.8% pre-market and has cracked under the $20 mark.

As noted in yesterday’s article, it is almost always better to patient on biotech implosions than it is to be brave and that is still the case. There should be some value left in the company after the dust settles, but in cases like these implosions you have to exercise caution and patience. It is also impossible to know yet where the value will be ($20, $15, $10, $5, etc...) ahead of time. After you see a stock lose 48%, 52% and then over 60% it is of little consequence if you have to pay up a little for it days or weeks later, even if it has recovered 10% or 20% off the lows. What is important is to let the dust settle and evaluate the situation when you have a very clear idea of what the picture looks like and when you can evaluate the merits in finite terms and figures.

Also as noted yesterday, when you see these implosions the balance sheet and revenue statements can be very misleading because the entire equation changes and you just do not know what the real picture will look like. After we find out what the financial terms are and what certain covenants are, then it is possible to form a longer-term opinion; but once again, when dealing with biotech implosions patience is usually better than trying to be brave.

Because the company has other partnerships and in many different areas, it will likely be enough to keep the company from being scrubbed off the map entirely. The company does still have cash and does have a shot at generating revenues from this and other areas, albeit less than what would have been expected a mere 48 hours ago. We haven’t even seen the typical shareholder class action lawsuits yet that say the company bilked investors, and you can bet they will come (they always do). There may be some key employee resignations or firings as a result as well, and all of these developments make patience the best strategy if you are evaluating it as a new or potential investment.

You can see how low the fair value estimates from Wall Street firms have come down, and as we get closer to those levels then you can start making some decisions if you want to consider new money in this stock. Let all the coming bad headlines come out, because you have to know that there will likely only be bad headlines in the immediate future.

Normally when you see a rash of downgrades after a blow-up after negative news, the initial reaction is to call the analysts all a bunch of penguins. In the case of Neurocrine Biosciences (NBIX) it may not be entirely fair to use that term. This did catch almost all analysts off guard, and the street was by and large expecting an approvable indication rather than just a partial. Even the options going into the event were far from expecting the move that occurred.

There are numerous negative calls out there between yesterday and this morning, and these are only a small sample of the calls:

Jefferies downgraded to Underperform from Hold, new target $15;

Lehman downgraded to Equal Weight from Overweight, new target $23;

Piper Jaffray downgraded to Market Perform from Outperform, new target $22;

Prudential downgraded to Neutral from Overweight, new target $23;

UBS downgraded to Reduce from Buy, new target $17;

What may also come at any time is a termination of Pfizer’s (NYSE:PFE) pact, although it is unknown if that will occur and with a partial approvable nod it is possible that the deal may stay (with lower participation likely). The company’s partnership pacts and milestone payments are what account for the company’s revenues, so the prior revenues may also not be reflective of future revenues.

Also after digging around it appears that a couple more names than mentioned yesterday may be beneficiaries of this. Questcor Pharmaceuticals’ (QSC) Doral (quazepam) may be more successfully marketed to neurologists now, and Pfizer already has a similar marketing pact with Exubera from Nektar Therapeutics (NASDAQ:NKTR). Stay tuned for further developments in this ongoing situation.

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