Monday, October 1, 2007

Choosing a Biotech Stock 4: Sepracor

What about Sepracor (SEPR)? Isn't Sepracor a lot less of a risk than Gilead, with just about equally good growth potential?

(Meanwhile, since #2 of this series on September 10, saying Gilead would become my default choice if I could not find a better biotechnology investment, Gilead stock has gone from $37.50 to $41.87 per share. Then again, the market in general is well up.)

I have not followed Sepracor closely these last few years, and there is a history to that. Back in the slump in 2002 I bought some Sepracor for $5.06 per share because I thought the price was ridiculously low. In April of 2003 I thought the price had gone ridiculously high, so I sold it at $17.07 per share. It was one of my best trades ever. Imagine how dumb I felt as the stock continued to climb. By 2004 it went over $50 per share.

Sure it was a good company, with a good strategy for developing marketable drugs, and it already had approved drugs and revenues. But I thought the people who bought it at $50 per share were taking an astonishing risk. In my eyes it would take years of increasing sales revenue and net income growth before such a high price could be justified. The price peaked at over $65 per share in early 2005.

But today I can buy the stock for $27.41 per share, and maybe I should. But my experience illustrates an important point about stock speculation: there is a lot of pure chance and investor psychology involved. The idiot who bought my stock for $17.07 per share, even holding it until today, has done fine. Selling it at $65 per share, that guy looks like a genius. But buying overpriced shares is a bad bet. You might get lucky, but it is a practice to avoid.

Today Sepracor ended at $27.41 per share, for a market capitalization of $2.94 billion. If you had $2.94 billion, would you buy the company?

What you would get would be trailing revenues of $1.25 billion and net income of $192 million. Dividing net income into market cap is one way to get the PE ratio: 15.3. That is pretty good, a return of 6.5% per year, which is great if profits are growing rapidly.

But yes, there is a major fly in this ointment. Q2 numbers were a disaster. Revenues slumped to $278 million, and net income was a mere $6 million. If that is the picture going forward, this stock is way overpriced. On the other hand if it is a one-quarter, or even 2 quarter blip we are in the midst of a buying opportunity not available since I sold my stock back in 2003.

So what happened? What does Seprecor sell, anyway? You should check out the Seprecor web site, of course; start with the products page. You can see they sell Xopenx for asthma, Brovana for COPD (chronic constrictive pulmonary disease), and Lunestra for insomnia. Note that everything else, their entire pipeline, is in Phase I or preclinical. Which means that they have a lot of time to wait and money to spend, and risk of failure, between them and any of these potential products coming to market. So its nice they have a research program and some candidate drugs, but the real value in the company is the three drugs they already are selling.

The press release of second quarter results tells the story per management. There is a bunch of good news in the press release. Brovana had its commercial introduction. Marketing agreements were made for Lunestra overseas. The company has $890 million cash in its coffers, a very good thing.

But Lunestra sales were up only slightly from a year earlier. Xopenx sales fell from the year before; this was said to be because Medicare and Medicaid reduced what they would reimburse for the drugs usage. Investors beware: government decisions can be a major risk factor for pharmaceutical companies even after they have FDA approval and are marketing drugs.

Brovana sales just began in the quarter, with revenues of $5.5 million.

I would expect revenues and net income to resume growth this quarter; results should be out towards the end of October.

I think at the current price we have a buying opportunity. There should be some growth in the near term from selling Lunestra outside the U.S. and a new income stream from Brovana. Even if sales just get back on an even keel, with profits more like what we saw in the second half of 2006, the stock is priced very nicely.

But Gilead (GILD) or Seprecor (SEPR)? I would still put my money in Gilead. It seems to be on a clearer upward path and its price to earnings ratio, looking forward rather than back, is on par with Sepracor.

Of course you should always look for diversification. If you are looking for several biotechnology stocks to add to your portfolio, both Gilead and Sepracor are worth further investigation.

You can find some links I have assembled to help biotech investors at my Biotechnology Investor Research Help page.

1 comment:

  1. Is anyone aware that Sepracor will be terminating approximately one-third of its workforce, starting this month (October 2007)? No layoffs here because they don't want their stocks to dip any lower.