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Jacob Wolinsky
Jacob Wolinsky
Articles (632)  | Author's Website |

Keryx Biopharmaceuticals: An Interesting Small Cap Value Play

I just read an excellent article on Seekingalpha regarding the bullish case for the company Keryx Biopharmaceuticals. I must admit that Biopharma is not my forte and I probably will not buy the stock as it is outside my circle of competence. However, I thought many of the more astute investors might be interested in Keryx.

I must also admit I do not like to use TTM for valuation metrics( I prefer average 3 or 5 years of earnings) but in young companies I do not think this is always fair( this might be hypocritical on my part I admit but I think there is merit to doing this).

I investigated further, the stock currently at $4.80 per share was trading at P/E 15 but went up a lot after a buy recommendation several days ago from an analyst . The company is now trading at a P/E of 19. The company has plenty of cash and little debt (which is many times a problem for small biotech companies). The company has no long term debt, and has TOTAL liabilities of 9 million versus cash and short term investments of about 34 million. The company is cash flow negative from operations. However, this trend is encouraging the company lost $57 million in 2007 from operations, $38 million in 2008, and only $5 million in 2009(all this despite the "The Great Recession"),.

In terms of earnings the company lost a lot of money in 2007 and 2008 but made $10 million in 2009. It has a return on equity of 51%. In addition its return on sales are 48%, ROA 38%, and ROI of 51%. These figures are all within the top 80 to 90% of companies in the industry.

The seeking Alpha article states that the company has a Myeloma drug Perifosine in stage III. Currently over 10,000 people die from myeloma a year.

The author Jeremy Richards states in his SeekingAlpha article:

"Assuming that 50% of the 10,580 deaths are to receive Perifosine and that the average cost of treatment is $5,000 per month (Velcade is $45,000). Also note the average course of treatment is 22.5 months (averagesurvival rate from the phase II trial), but for simplicity and a more conservative estimate, I will just assume that treatment is received for only 12 months. Thus, the number of patients to go on and off treatment each month is equal.

  • $5,000 per month X 5,290 patients X 12 months/year= $317,400,000 Sales / year
Now, let’s assume net profit of 18% (Average Pharmaceutical Industry Profit)

  • $317,400,000 X 18%= $57,132,000 Net Income
Now, divide by shares outstanding to get net income per share:

  • $57,132,000 / $56,000,000 shares = $1.02 net income per share

Now, if we multiply that by the average P/E of the pharmaceutical industry:

  • $1.02/EPS * 14.15 P/E = $14.44 per share"

EPS TTM is currently 0.21. So using conservative estimates this new this new drug could increase EPS about fivefold.

In addition, I think the author is using conservative estimates for net profit. The company currently seems to be an industry leader and is dominating in areas like gross margin 29.46%, Operating Margin 29.12% which places above top 91% versus peers, and Pre-tax margin of 48.33% which places it above 95% of its peers.

I can not give an estimate for intrinsic value for this company. However, assuming Perifosine creates as much revenue as the author suggests the stock is worth a lot more than $14.44 a share.

It is also interesting to note guru Kenneth Griffin of Citadel Investment group also owns a small stake in the company.

If anyone wants to see more information on the bullish case for Keryx check out another article on my website http://valuewalk.com/sponsored-articles/sponsored-post-keryx-biopharma-nasdaqkerx-product-development-update/

Disclosure: No positions

About the author:

Jacob Wolinsky
Jacob Wolinsky is the founder and CEO of https://www.ValueWalk.com. What started as a hobby ten years ago has turned into an acclaimed financial media empire with over five million views a month. Before doing ValueWalk full time, Jacob worked as a private equity analyst, small-cap stock analyst, and in hedge fund business development. Jacob lives with his wife and four kids in Passaic, New Jersey.

Visit Jacob Wolinsky's Website

Rating: 4.5/5 (15 votes)


Jacob Wolinsky
Jacob Wolinsky - 10 years ago    Report SPAM
Does anyone have thoughts about the company?
Batbeer2 premium member - 10 years ago
At first glace they seem to have managed their cash quite well and they have indeed begun to generate a lot of cash from recent sales. Like you say, an interesting trend. Anoher interesting trend is the insiders now selling who bought< $1.

A few things may be worth checking out:

- What percentage of sales comes from one product (I guess a very large part) ?

- Is someone somewhere working on a better product ?

- Do they produce the stuff themselves ?

my 2 cts.

Kfh227 - 10 years ago    Report SPAM

Burning through cash. Share count grows every year (by about 10%).


Not even worth considerign at glance as far as I am concerned.
Jacob Wolinsky
Jacob Wolinsky - 10 years ago    Report SPAM
I normally dont regret printing an article. But after reading more about the company I agree with you. I spoke to several colleagues of mine who are savvy value investors all of whom believe this stock is awful. One of them pointed out the reason that there is no debt is because the company is just raising cash by issuing shares as KFH pointed out. Some went as far as to claim that this is a pump and dump scheme. While there is no evidence to support that I believe there is a very bearish case for the company also. I too would not buy the stock and have no position in the company. My article was the bullish case, this post is a short bearish case.
Kfh227 - 10 years ago    Report SPAM
I should point out that the share count is going up for a reason. This is how the company is funding research.

Pro: debt levels don't grow

Con: Constant dilution till something changes.

PS: Don't regret posting the article. Putting your thoughts on paper is the best way to organize ones thoughts. Allowing a peer review of your thoughts is even better! Being open about the way you think is going to pay dividends down the road. Heck, I owned WM for a while and watched it drop from $40 to $20. Thank goodness I just opened my mouth and was convinced by others of my error.
Jacob Wolinsky
Jacob Wolinsky - 10 years ago    Report SPAM
Thanks Kfh I agree. Debt is not good but neither is dilution both have their negatives. However the amount of shares outstanding has really been growing at a rapid rate recently.

Thanks for the compliments. I just got all negative remarks from my colleagues that is why I stated my regret. I think this stock could turn out to be a good performer but is highly speculative and therefore not a value stock.

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