By Brian Nichols
The technicals and the sentiment of the market can often change the outlook for a stock. These factors can affect a stock’s short-term direction, even more so than fundamentals. However, fundamentals usually win in the end, as a company trades higher or lower to reflect fundamental performance. I would like to research four stocks in biotechnology and determining price targets based on the fundamentals.
Biotechnology is the hardest industry to value, because speculation is a major contributor to valuation. When you assess biotechnology you have to account for speculation, whether it be a company in clinical testing or a company with a recently approved product that will earn sales for the first time. Hence, determining a price target for biotechnology stocks is also a prediction of “potential” for those particular companies.
Osiris Therapeutics, Inc. (NASDAQ:OSIR) is currently trading with a market cap of $300 million; but without guidance from the company, I don’t see revenue of more than $20 million in 2013. The company operates in two segments: Therapeutics and Biosurgery. The Biosurgery segment grew 32% last quarter to $2.2 million; if it can maintain current growth then this segment should contribute $17.5 million to the company’s top-line.
Osiris’ other segment consists of Prochymal, which is an approved therapy in Canada and New Zealand, but is yet to launch. This is a stem cell therapy that treats a rare condition in children called GvHD (Graft-vs-host disease), in which the incidence is less than 200 in both of its approved regions combined. Prochymal will not contribute to a large degree in terms of revenue—that is if it launches at all. The problem is determining a loss based on fundamentals, because this is a company with 61% insider ownership and nearly 16% institutional ownership. However, this is also a company that I don’t believe is worth its current valuation.
In my opinion Osiris is worth about $100 million, but high ownership will keep the stock from falling too low. As a result, I think Osiris will correct with a $200 million market cap, which will occur after either disappointing sales or an extended launch. I expect OSIR to reach $6.00, which is $1.25 less than the consensus $7.25. The only way I think it maintains its valuation is if Prochymal is approved in the U.S., but I don’t expect it to be—the efficacy data is minimal, and I think OSIR will fall significantly.
Dendreon Corporation (NASDAQ:DNDN) rallied on Friday after an upgrade and bullish sales expectations for its drug, Provenge. The consensus for sales of Provenge is $320-$370 million in 2013, meaning that expectations have been lowered. I have always been bearish on Dendreon, but actually took a long position back in November.
I was critical of the company closing the New Jersey facility, and believed that it would result in higher logistical costs and a slower reaction time to patients who needed the drug. However, costs are declining, margins are rising, and Dendreon has a realistic shot at generating positive cash flow in 2013. Furthermore, rumors of a takeover are beginning to stir, which may also drive the price higher. Thus, I think a price/sales ratio of 4.0 is achievable with the added speculation of a takeover and the improved fundamentals, or a price between $9.50 and $10.00 per share. This far exceeds the expectations of $6.06, but like all biotechs, you have to account for speculation, expectations, and improved fundamental performance when assessing a stock.
I bought shares of NeoStem Inc. (NYSEAMEX:NBS) at $0.36 and have returned very nice gains. NeoStem has continued to trade in a range between $0.60 and $0.68 with a market cap around $100 million. However, this is a company that is growing its revenue and many believe it can earn revenue of $35 million in 2013 due to the growth of its PCT manufacturing business.
NeoStem recently renewed its agreement with Hackensack University Medical Center for the company’s PCT division to provide services for processing and storage of cell types used therapeutically by the hospital. NeoStem hopes to benefit from late stage trials from companies such as SOTIO, Baxter International Inc. (NYSE:BAX), and ImmunoCellular Therapeutics (NYSEAMEX:IMUC) among many others. The company will continue to earn greater revenue as trials advance and, in 2013, these trials will become larger and the company will continue to seek new clients. Yet seeing as how NeoStem is also a clinical stage company, we have to account for the speculation of its product development.
The company’s data for its stem cell candidate, AMR-001, to preserve cardiac function after an acute myocardial infarction (heart attack) has all been positive to-date and it recently announced yet more encouraging facts for its VSELs. The company will be presenting more data for AMR-001 in 2013, and this is a product that the company says has a market potential of $1.3 billion. So considering that clinical stage biotechs usually trade at 1.0-2.0x peak sales while in late stage development (when data is positive) and that NeoStem has a growing revenue-producing business, I think a 2013 goal of $300 million is highly attainable and conservative as well. Right now, the consensus price target for NeoStem is $1.80 or a $287 million market cap. I think a $1.80 price target is fundamentally warranted, and that NeoStem should become a classic case of an underperforming stock rallying to reflect its recent developments and its likelihood of success.
Like many, I have both owned and have been frustrated with Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI) during the last year. The stock has industry leading short interest, with a short ratio of 32.30 and 60% of its float being short. This presence of short sellers has led to an underperforming stock, but so far in 2013 the stock has traded against the trend; it has rallied. In a recent presentation the CEO of Spectrum said that revenue for 2013 was over $300 million, and also said that revenue and operating income will be higher in 2013.
According to the company, its lead product, Fusilev, will continue to grow in 2013; Folotyn will continue to benefit from the synergy between the three products, and the company will file an NDA in the middle of the year. With that in mind, what is a good price target? The consensus price target is $22.00, which would represent a $1.3 billion market cap and a price/sales of 4.35 and a P/E ratio under 14.0 based on sales of $300 million and earnings of $94 million. Though, according to the company, both sales and earnings will be higher. That said, I think Spectrum could see $25.00 as investors continue to buy the cheap stock. Spectrum is not a company that will ever trade at 40x to 60x earnings; but if the company has another great year, then sooner or later it will start to change the minds of the naysayers and will trade higher. The primary risk is if sales and earnings don’t grow and if the short interest continues to build as the stock trades higher. Overall, Spectrum looks promising, but we’ve been let down in the past.
In my opinion, these are all stocks to watch, both for the upside and downside. Each of these companies is poised to have a breakout year, one way or the other, and have catalysts that could create significant movement in the stock. Therefore, I would take time to assess the position, and incorporate a more detailed look at the fundamentals to determine if any might fit into your portfolio. Because as of now, there are great entry points being presented for several of these stocks with the potential for solid returns in the future.
Brian Nichols is a blogger, author, and investor. Brian studied in the field of psychology and has researched extensively into behavioral finance, which include fear, emotional reaction, and all other emotions and or decisions that are clouded from an investor’s thought process as a result of money making (or losing) decisions. Brian uses his knowledge of psychology as a way to find value in the market and capitalize on the fear and irrational thinking that creates value in fundamentally strong companies. Brian is neither a long or short-term investor but invests with a system that includes selling once certain price targets are reached. The strategy can take weeks, months, and sometimes years but if the company is truly undervalued it will almost always return sizable gains. Brian explains this process in detail in his upcoming book “Taking Charge With Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio” which will be released in January 2013 by McGraw-Hill.