Stock Analysis: NPS Pharmaceuticals (NPSP)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash

NPS Pharmaceuticals is a budding biotechnology company focusing specifically on orphan drugs - drugs that are specialized for diseases and conditions that are exceptionally rare.  The Orphan drug market has an advantage because few companies put forth efforts due to lack of a strong market as well as the fact that the diseases typically are both very difficult to solve as well as very expensive to treat.  With all of these conditions, orphan drug companies have a pricing advantage as well as availability to patents that are much longer than more traditional drugs.  NPSP is focusing primarily on Short Bowel Syndrome and Hypoparathyroidism currently as well as issues related to these items.  A year ago, they launched the distribution of their first solo endeavor in North America - Gattex.  To date, this launch has proven to be very successful, taking the company quickly to profits while still in the early stages of distribution.  Gattex is starting to expand distribution globally under the name Revestive this year, which should dramatically increase sales figures.  The company also has a pipeline of other drugs in process of working their way to FDA approvals and distribution launches, to which Natpara is next in line and is seeking FDA approval in October this year. If approved, the proceeds from Natpara and Gattex/Revestive should help build a strong cash flow to provide continued investments in research and development up through 2020.  One of the company's challenges is the fact that their pipeline is not very strong yet.  After Natpara, there is only 1 drug in phase 2 testing and 3 others not out of phase 1 testing.  It's hard to believe or expect that all of these will receive FDA approvals and become sales pipelines in the future, so it's safe to say that current growth prospect do seem a little limited.  Another concern that has come to mind revolves around Natpara.  So far testing results have been good, and it appears that pricing will be favorable as well.  However, this drug is meant to provide relief to people suffering from hypoparathyroidism, which is a condition which I understand to be hard for physicians to diagnose.  My concern is if it can be hard to identify/diagnose, how will physicians know to prescribe Natpara?  I'm sure this is something NPSP is tending to as they put forth additional expenses this year to share, prepare, and inform the medical community of what the drug is for, how it works, and start identifying potential patients.  It will still remain something to keep an eye on because this risk could hurt how quickly sales grow in the future (if the FDA even approves this).

Past Year:
I did not own NPSP the entire year last year.  That being said, the stock still provided a 75.36% gain for me on the year - almost doubling the S&P 500 which returned 29.69% and beating the biotech sector which returned 68.27% (based on the IBB ETF fund).  For those of you whom are wisely being skeptical of my statements, please note that NPSP opened the 2013 year at about $8.84 and closed the year at $30.36, while hitting a high near $35 in the fall.  Clearly, I got to this stock late and missed out on even more impressive gains.  The company reported fourth quarter and fiscal year results today and they were at the high end of the expectations of the NPS management team, much less the analysts.  Fourth quarter resulted in 7 cent per share profits, compared to 2 cent estimates and revenues over $52 million, beating the $42 million estimates.  The company maintained guidance that they published in early January, but that guidance includes a 250% jump in revenues, which certainly meets standards for accelerate revenue growth - a speculative stock junkie's dream.  One could say the down side has to involve the high expenses that are also expected.  These expenses are to prep for the launch of Natpara, so it's a cyclical rise in expenses and is an important investment if the drug is going to have a chance to sell well.  Depending upon how things can go, this could result in what appears like decelerated earnings.  It will be something to keep an eye on and see how the market digests the progress.

My 2014 Prognostication:
First, I want to make it clear that this stock is speculative.  It trades in excess of its earnings as people try to figure out what the company will be worth a few years from now with growing earnings like we're seeing.  As we approach October, it will also be a game of roulette, as much of the stock's price will be completely dependent upon the approval of Natpara from the FDA.  So tread carefully with this stock - if approval is denied, this thing could be cut in half in a heartbeat.  All warnings aside, I do believe from what I've seen, from this management team as well as documentation published from the tests of Natpara, I believe this drug will be approved and quickly add to the top and bottom lines - starting late in the fourth quarter, most likely.  So as we approach the second half of the year, stock prices will be more of a gamble (yes, I did say gamble as I stated how wildly this stock has the potential to trade) based upon what people will think can be earned in 2015.  Going into this quarter, I had a price tag of $40.  I believe after these results everyone will be raising guidance, but not necessarily a lot.  Right now, I'm giving the stock a $50 price tag.  I am not anticipating it to grow as fast in the first half of this year.  Things will change as we start getting more information about the progress of preparing Natpara, the results of global expansion, and whether or not they're getting any more potential drugs for the pipeline - much less the actual FDA approval.  If those things happen, I will reassess the situation.  Due to it's performance since I've owned it, it is now 17.6% of my portfolio - a true testament to why a little speculation can be fun and really help a portfolio.  Were it not for this stock, I don't think I would've beaten the S&P 500 on the year.  Since my money is still in the investment, I'll be looking for appropriate points to draw out the money I've put into the stock - keeping myself from going over 20% of my portfolio if that situation arises.  After my money is out, I'm free to play with my winnings however I see fit and that's the ultimate goal when investing.  All things being equal, this stock has a lot of upside potential so I give it a ranking of 2.  However, if the overall market appears to be hitting a correction, this will quickly turn into a 3 or 4 as it will quickly be sold to lock in gains and protect from downside risk - those that rise quick, typically also fall quick.  That's what makes this speculative, so buyer beware.