Stock Analysis: NPS Pharmaceuticals (NPSP)

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.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Yesterday NPS Pharma announced their third quarter results.  Despite missing estimates on both top and bottom lines with earnings of $-0.02 and revenues of $57.2M, the stock responded favorably today.  Sales of Gattex/Revestive met expectations of $28.1M and they also made $29.1M - which was 3.5% higher than what they made the year previous.  They also provided guidance for 2014 on the lower end of their ranges with sales likely being closer to $100M.  One of the largest factors to this quarter's miss on earnings has to do with dramatically increased expenses.  Almost all of these increases could be attributed to their efforts in expansion into Europe to sell its Revestive Short-bowel Syndrome drug as well as all of the efforts to prepare for approval, production, and sale of Natpara.  Fortunately despite this ramp-up in expenses, they've also guided this to the lower end of their ranges at $185M for the year.

I believe the biggest key to the stock reaction was forward "guidance," if you will.  They announced that they just started Revestive sales in Germany this quarter with expansion into about half a dozen more countries this quarter along with an Orphan Drug approval process begun in Japan.  The results in Germany so far have been as positive as the US and are expected to continue with the entire rollout to Europe.  This gives a positive indication to continued growth of Gattex/Revestive revenue growth.  That's only part of the story, though.  Despite the numerous bumps in the road, we also have the Natpara FDA approval meeting coming up in January.  There were a lot of positive comments in the call around expectations that this will be approved once the label and risk mitigations have been established.  The company continues to prepare for approval and expects sales to begin in the second quarter of 2015.  NPS estimates 50,000 people in the US and another 50,000 in Europe suffer from Hypoparathyroidism.  I wouldn't be surprised if you could estimate another 20,000 in the rest of the world as well, though they didn't say that.

At $28.1M in sales, there's still a lot of room for growth in Gattex/Revestive revenues.  In their January call, they estimated over 8500 potential patients world-wide.  They are also selling the drug at $295K/year according to this site.  Based on these figures, they've reached 285 patients so far, or 3.4% of the total addressable market (based on low-end estimates) has been reached.  There's a lot of runway here for future earnings yet.  Then there's the potential for Natpara.  I already gave the estimated market potential.  In yesterday's call, they stated that if a Osteoperosis drug was used as a Hypoparathyroidism treatment, it would cost $40,000/year for a patient.  Given that, I'm going to try to get a conservative picture of potential.  Say they charge $35K/year and the market they can actually reach is only 60% of their estimates.  That would be potential revenues of $2.1B in addition to the potential revenues of $2.5B.  That's a lot of future potential for a company only doing a projected 100M in sales this year.  This is what investing in a speculative stock is about - the potential for revenue growth 3+ years from now.  Considering sales of about $31M last year, they're increasing revenues at a 200% clip from last year to this year.  Next year has potential for them to grow at another 200% or more, if Natpara is approved on January 24.  So what kind of price to I give the stock?  Well, that's kind of hard for me yet, in all honesty.  This stock is trading on the potential of a FDA approval and the future sales that can be made as well as the growth rate of those sales.  Right now, the company is trading at about 29 times sales for 2014.  If they can make $300M in sales next year, the stock would be trading at just over 9 times sales for next year.  It has a very clean balance sheet with little debt.  Is it too much hype to say this stock should be able to trade at 20 times forward sales right now?  Probably.  I say that because you really have to factor risk into this as well.  What if the FDA denies?  Then sales won't reach that target and will be decelerating.  10 time forward sales might not be so bad for 2014.  As we get into 2015 and get to that FDA approval, then it might be reasonable to trade the stock anywhere from 10 to 20 times forward sales, I think (if I learn more to change that thought, I'll share as soon as I can).  We're past trading on 2014 earnings.  This is all about the future at this time.  As such, maintain my 2015 price target of $40 (about 15 times my forward sales estimate).  However this is dependent upon a FDA approval in January.  If it suffers more delays or rejections, this stock will pull back hard and fast.  Make sure you prepare accordingly as I expect this stock to continue to be volatile as it has been in 2014.  I also maintain my ranking of a 2.  If this pulls back into the mid-to-low 20s, it's worth picking up.  But not at these levels after the nice pop it had today.