Deep Restructuring Play in Biotech

It’s been a while since I’ve written about a particular company, and frankly its not because I don’t have the time … I just haven’t really found any worth writing about. Whether its a new IPO, or Amazon’s buyout of Whole Foods, one event or another seems to kick the market past 6th gear and into overdrive. However, like I mentioned in my investors newsletter, and like I alluded to in previous pieces, what I think about the general market means absolutely nothing. It shouldn’t mean anything to you, the reader, and it shouldn’t mean anything to those that choose to put their money with me. My job is to find value. Period. It’s important that I stress this because when most people think of finding value, they assume that most of the value to be sought is during bear markets. We haven’t had a bear market in eight years now (since I started investing). To be on the sidelines during a bull run like this for the sake of “not being able to find value” is an atrocious and poisonous mistake to capital and intellect. Sure it might not have been a bear market where deals are found just by running a simple screener, closing your eyes, and landing on a net-net within seconds, but to make excuses is to attempt to cover up a lack of dedication and research.

I’ve mentioned numerous times how I overvalued I think the market is, but looking at my current portfolio; out of my 10 positions, 4 of them are long US equities. That’s 40% of my portfolio long US Equities. One of them is a pure momentum play, but the others are what I consider deep value, net – net picks. Even in this bull market you can still find deals, you just have to look extremely hard. Peter Lynch said it best, “Whoever turns over the most rocks will generally win.” Let’s turn over another rock.

Continue reading “Deep Restructuring Play in Biotech”

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InsipreMD (NSPR) A Medical Cigar Butt

Quick Fundamental Figures

Price to Book – 0.23

Price to Sales – 0.19

EV – to – EBITDA – 0.06

Price to Net Cash – 0.43

Price to NCAV – 0.28

A Cigar Butt With A Few Puffs

InspireMD Inc is a medical device company. The Company is engaged in the development and commercialization of proprietary MicroNet stent platform technology for the treatment of complex vascular and coronary disease. Based out of Tel Aviv, Israel, this is a global micro cap with tremendous value potential. This company isn’t for the faint of heart. This is a true blue net net, beaten down equity close to life support. However, I think it has the potential to be a rare bird, with the right catalyst. InspireMD (NSPR) is taking a different approach to their business, moving away from single distribution to a direct distribution model. Much of the decline in the share price has been the volatility associated with this change in business models.

NSPR has declined 94% over the last year after starting 2016 at $10.58 per share. In order to find out how NSPR got here, we have to take a look at the past.

Financials Analysis

Starting with the Income Statement, it is easy to see the decline in share price. Since starting record keeping in 2009, NSPR has failed to make a profit. From 2011 to 2014, the company lost $14, $18, $15, and $24 million respectively. Translate that into EPS and you get dismal numbers: -3.33, -240, -260, -374.50 for 2011 – 2014.

Cash Flows paint a similar picture, showing increasing losses from 2011 – 2014, and decreasing cash positions since 2013. Free cash flow in the negatives was also reported from 2011 – 2014.

Taking a glance at the balance sheets, a similar trend prevails. Decrease in current assets since 2013 and a decrease in total assets since the same year.

A Potential Comeback?

The past numbers are pitiful, that’s well understood. But the important thing with my investing approach is an emphasis on the present, the here and now. Yes, going back 10 years in terms of financial data can help you understand how the business got to where it is now, but that doesn’t do anything for you if you’re trying to find value going forward. I guess this has been part of my change as an investor in my process. When I started, I was a deep believer in analyzing the balance sheets and finding the truth in that, instead of in the price action. However, the price action is the final and only metric that truly matters. It doesn’t matter if you find a company you think is tremendously undervalued, if the price action doesn’t reflect your sentiment, it doesn’t matter. At the same time, however, I believe the market is slow to adjust in the small cap and micro cap space.

Looking at the last 10 quarters of data, I see a much more positive trend. Operating income has trimmed from -6 to $-2 million. Earnings Per Share has seen the greatest turnaround, going from -50.00 to 0.44 in the black. We see the same thing when we move to the Cash Flow Statements. Net cash provided by operating activities increased from -6 to -2 million. Cash and Cash Equivalents have increased from 5 million in 2014, to 8 million in 2016. Free cash flow has increased from -6 million to -2 million.

Most Recent Earnings Report

James Barry is the CEO of InspireMD, and he had positive things to say about NSPR in their latest Quarterly Earnings Report on the 9th of May. Barry was quoted as saying:

“Earlier this year, we announced our transition away from a single distributor covering 18 European countries to a direct distribution model. In just a few short months, we have announced numerous distribution agreements covering markets across Europe, Asia and South America, fulfilling our commitment to relaunch both more broadly and more focused in Europe, as well as expanding our global footprint. We are extremely encouraged by the favorable response from our new partners and potential near-term future partners around the world. Not only have these distribution agreements expanded our geographic coverage, but in markets previously served by our former European distributor we are gaining deeper access into all four key clinical specialties that implant carotid stents” (Finance.yahoo.com)

The catalyst to growth and increased value in NSPR is through their latest product, the CGuard EPS device. Just starting to roll out the device to distributors, NSPR has received tremendous praise about this device. So much praise in fact, that it was honored in Russia at the ICCA Stroke 2017 Convention, as well as the Leipzig Interventional Course in Germany. Most importantly is the growth of the product. Even during a transition period in the business, NSPR recognized a 12% growth in their YoY sales of the CGuard EPS. In comparing 4Q2016 to 1Q2017, NSPR saw an 84% increase in their sales of the CGuard EPS. Because of this growth, NSPR is upping its guidance on sales for the year 2017 and 2018, banking on their device going mainstream and falling into the hands of surgeons, cardiologists, radiologists, and neurodiologists.

Revenues for the most recent quarter were up $6,000 from the previous quarter, which doesn’t seem like a sizable increase, but it was offset due to their decline in the MGuard Prime EPS. The decline in the MGuard is due to what Barry calls, “the trend of doctors increasingly using drug eluting stents (DES), rather than bare metal stents in STEMI patients” (Finance.yahoo.com). NSPR says it will look to partner with DES devices to strengthen its MGuard Prime product.

The biggest takeaway from the earnings report is the actual EPS of the company. After suffering a loss of $7.00 per share in the same quarter last year, NSPR achieved a net loss of a mere $0.81 per share in 1Q2017. NSPR also increased their cash position by a little more than a million dollars.

The Cigar Butt Value

Like I mentioned up top, the ratios on NSPR scream net net, deep value. Trading at a 77% discount to book value, an 81% discount to sales, an 81% discount to NCAV, and a 43% discount to net cash, NSPR is roadkill in the market. However, no matter how great the value may seem, it does nothing for us if the price action doesn’t coincide with our thesis. For this reason we must take into consideration the chart.

Price Action Potential

As you can see from the chart, there is tremendous amounts of consolidation at the 0.76 to .60 price channel. In an effort to focus more on the price action, I am looking for a breakout from that 0.76 price level. If that breakout happens, it could signal the bullish thesis I laid out. A more convincing price action would be a breakout above the 50 MA. I am content to wait on this one and wait for the price action to confirm my entry.

Final Thoughts

In my journey as an investor, I have made tremendous changes to my approach. Ask me a year ago, and I would’ve just bought and held a company like this, not worrying about the losses, only focusing on the gains. However, the road to true wealth and true capital management is by focusing on the losses, letting your winners run, cutting your losses short, and going for home runs. Once again, in a position like this, I would risk 1% of the portfolio, and place my stop below the lower end of the price channel at 0.50. I made that exact mistake with this exact company. Instead of waiting for the price action, I got caught up in the value of the company, bought right away at 0.96 per share, and watched it ride all the way down to 0.63 before selling. There were two main things I did wrong when I first entered this company. First, I didn’t enter on a price action breakout (i.e., I didn’t wait for the price to confirm my hypothesis), I entered during a consolidation, one of the worst entries one can make. Secondly, I didn’t place any stop losses. So not only did I violate the first rule of waiting for the price action, but I violated arguably the most important rule of risk and capital management, control your losses.

I have learned so much from this one mistake. That’s really what molds the investor, through mistakes. I try to keep my mistakes at a minimum, and instead read, learn, and research from those that have made countless mistakes before me. I love this quote from Benoit Lessard, and I’ll leave y’all with it:

“Learn from the mistake of others. You won’t live long enough to make them all yourself.”

 

Juniper Pharmaceuticals Distress Play

Pharmaceutical companies. When I think of biopharma, the first word that pops into my head is, “stressful”. I’m right, to an extent. Pharmaceutical companies, especially those in the small cap / micro cap space live and die by drug approvals and pipeline passes. Failure to pass a drug test or failure to bring a product to market sends most biopharma’s down into the depths of their price history, with companies falling 50 – 60% on average after the rubble has been cleared. But yes, even in those depths can one find value, albeit contrarian deep value. When I look for Graham Net Nets, I’m not looking at the hottest sector, much the opposite. I want to find the industry that is going through the ringer (a la Retail). However, biotechnology hasn’t been in the depths of the markets. It has experienced stress with the new health care reform and drug pricing regulations. So, off I went to try to find some value in biopharma, and along came Juniper Pharmaceuticals.

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