A company that is working on solving cancer and infectious diseases like AIDS deserves recognition. Not to be confused with the terrorist group, ISIS Pharmaceuticals, with a 1-Star Business Predictability rank, is such company.
Since being featured on Jim Cramer's Mad Money in September 2014, ISIS has appreciated 51%. Is this return enough recognition, or does ISIS deserve further appreciation?
In order for us to understand the company better, we must delve into company financials. Witnessed below, ISIS market value has increased from $676 million to $4.6 billion since September 2011. This appreciation has to do with passing FDA trials. If a pharmaceutical company receives FDA approval, revenue could go from a few million to hundreds of millions within a couple years. Before drugs are passed, many investors speculate on the FDA approval. If enough investors believe the drug will pass, the company price may skyrocket before approval.
With trailing twelve month's revenue of $171 million, ISIS investors are anticipating tremendous growth in revenue. From less than $25 million in 2007 to $171 million, ISIS has grown. Investors, however, must ask if this recent growth validates the current price. Paying $4.6 billion for $171 million in revenue means the investor is paying about 42 times revenue. This number is known as the Price to Sales or P/S ratio. From a P/S ratio low of 2 in 2003 to a high of 100 in 2007, ISIS investors have experienced both pessimism and euphoria. Investing at the high P/S ratio, speculative growth investors learned the consequences of overpaying for revenue, i.e. a 52.5% price drop. Value investors realized the benefits of paying a low price for sales in 2003. At a P/S ratio of 41.6, in the 90th percentile of all readings, will growth investors win this time around or will cautious value investors be proven right once again?
Studying the operating profit margins since 1996, one will find six quarters where ISIS had positive figures. Pharmaceutical companies are known for large research and development costs. These costs can be seen in the negative operating margins. Every company is looking for the big payoff. If a drug passes all FDA trials, these negative margins have the potential to be near the highest levels of any company.
Looking at the net profit margins, the number of positive quarters cuts in half. For a company with $171 million trailing twelve months revenue, investors are anticipating a major success story.
However, negative margins can not last forever. Witnessed by ever increasing shares outstanding, financial backers have been supporting these negative margins for a long time.
As Jim Cramer states, "if it works," ISIS Pharmaceuticals could be a major winner. However, with negative margins and a 42 P/S ratio, is it too high a price to pay for the risk it does not work?
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