Aspreva Pharmaceuticals (ASPV) is obviously hated by Wall Street. And if investors are to think of the Street as a predictive tool, currently the market is telling us ASPV’s earnings will decline by some 20% over the next 3 years, assuming ASPV does $3.04 for 2006.
The recent quarter pretty much goes against this thought, which should mean the market is not being efficient pricing ASPV, but rather giving it a heavy discount.
Now, the discount also means the Street has lost all faith in management and - more importantly - ASPV’s business model. This means ASPV will not see its proper valuation until the model is proven. And listening to the recent conference call, management does not seem eager enough to make a deal happen (or at least promote their company enough to make them a viable entity to Pharma/Biotechs).
In my opinion, this is what management needs to do in order for the market to begin valuing the company properly (numbered sequentially as to the most effective means of increasing shareholder value):
1. Make a deal with large Pharma/Biotech using equity. Offer an equity stake (maybe at a discount to market value for incentive) for the rights to the particular drug. This way ASPV pays for the trials, but the big boys can benefit as ASPV benefits via equity. This will give a sense of validation to their model, especially if equity stakes are taken by the partner. This also will allow high margins during off-label use because the majority of risk is on ASPV. The expenses are with ASPV -- if it fails the stock declines, but the pharma would have bought it at a discount and could get out at breakeven or so. And if the trial is good enough to market the new use, the big pharma just sits back and observes their asset appreciation, as well as free money via royalty payments.
2. Offer a payment for promising drugs. Similar to how big pharmas by milestone payments to smaller ones as trial progress… however, this will be the smaller paying the bigger as the trial progresses. And of course ASPV will pick up the tab for the trial expenses. This will substantially increase ASPV’s expenses, as all of the risk is with ASPV, but it is very enticing to the big boys. This should also allow high margin royalty revenue as ASPV is taking all the risk. More importantly, this would prove their model is sustainable.
3. Go private. Wall Street lost all faith, and without proof of a sustainable model, ASPV will never get appreciated by the Street. As such, ASPV should look for a fresh start. Tell the Street they think the stock is undervalued by offering a proper management buyout to take the company private. While private they can work on getting other deals to prove their model, and take it public again later. As for current investors we can get an exit substantially higher from current stock levels… I'mm thinking between 25-30, at the very least.
The company has the cash and dilution ability to execute both models, but it depends on whether management has the ability to sell that viability to the big boys. Right now they are doing a terrible job at that.
I would rather see the first option attempted, but it adds a risk element to the partner. The second option has no risk to the partner, and has a cost containment element to the partner that is very enticing. The partner will be begging to deal with ASPV, proving sustainability and increase equity. (A position ASPV should be it now!) The money ASPV will/could lose in expenses, could easily gain back via stock appreciation.
Management must put on their thinking caps and get moving.
Disclosure: Author is long ASPV
ASPV 1-yr chart: