Stock Analysis: NPS Pharmaceuticals (NPSP)

This week NPS Pharma announced their first quarter earnings results.  Overall, the quarter was an utter failure - hitting the trifecta of negative results by missing on earnings, revenues, and lowering guidance for the year.  As a result, the stock was hammered with a near 10% price cut on the announcement.  However, was this an over reaction?  It's possible that some people thought so, as all of the losses incurred were recovered in the next day.  At this point, I believe there is a positive future for the company and the stock, but that doesn't mean this stock is done going down.

Earnings were reported at a loss of six cents per share, lower than the two cent loss expected by wall street analysts.  Revenues were also lower than expected, however, product sales (for Gattex/Revestive) still increased 17% quarter over quarter while revenues from royalties increased slightly.  Leadership wanted to blame the decreased activity on the weather, which isn't the easiest pill to swallow.  It's true that the harsh winter may have made some travel needs for appointments or sales teams more difficult, but management also stated that they don't believe that the increased activity they've seen in March and April can recover what was lost in the first quarter.  If you take this, comments that they don't fully understand the SBS patient dynamics, and a sales team that has been rather dramatically increased, I think there's something else going on here.  People will want to call out the increased rate of patients that have discontinued use, but this is still well within their guidelines, so I don't consider it a major factor.  To me, they've run into some trouble convincing people to give Gattex a try.  Since this is the only drug in the market to help treat SBS and provide a way to keep people out of hospitals, I see this as a short-term problem that is part of the drug's maturing.  For some patients, they want to be certain it works without negative side effects before they'll try.  Give this a couple quarters and I believe this will no longer be a concern.  Additionally, efforts to get FDA approval for Natpara continue as planned.  It will undergo a FDA review in July, and the anticipated approval date is October 24.  This will not result in much for revenues this year, but should be a huge additive to earnings come 2015, if approved.  Royalties are guaranteed through 2017 and into 2018, so they have plenty of cash flow to help get things going.  There's no doubt that this quarter disappointed analysts and I don't blame them.  However, the more I look into this, the more I can see that it's more likely that everyone got too far in front of this one.

My Stock Ownership Plans:
I have decided to continue to ride this out for awhile.  I don't and can't expect growth rates for the stock price like I had seen over the last year.  I expect to see the stock create more of a base over the next 1 to 2 quarters as we prepare for the FDA approval of Natpara.  This stock will be volatile, though.  I can see it going down to the low 20s just as much as I can see it shoot up as people start anticipating future results.  I would consider buying more stock below $25 if I have room for it in my portfolio.  As such, I'm ranking this stock a 2 again, from the unranked status I gave it due to the confusion I suffered from the 30% sell-off.  This is a long-term stock for me.  Though I want to prevent large losses like this, the long-term thesis is still intact.  There are things I'm watching for, though.  Another negative quarter, any negative news, or continued sell-off in the stock's sector could turn this stock into a sell.  Another thing I'm watching is the 40-week and 20-week Simple Moving Averages.  These two lines have a very long history of forecasting the death of high-growth stocks when the 20-week crosses over the 40-week.  These lines have converged, but even with the massive sell-off the other day, the crossover has not happened.  If it does, I'll likely be looking to get out fast to preserve the gains I do have unrealized at this time.  At this point, expect a wild ride.  Growth stocks without earnings are not in favor for this market and that's what this stock is.  Keep in mind, just having earnings isn't enough either.  It's really the low-multiple values on earnings people seem to be looking for.  If the economy takes off, drug stocks may not perform as well as they have in the past even if they do have strong growth.  That doesn't mean get out, it means stay focused, stay sharp, and make sure you know what's going on and how to react.