Poisoned or Preferred💊Probability
How should we view Pharmaceutical net-net "value" trades
If you have read through a few stock market books, I am sure you recall the moments you suddenly found yourself in front of your first value investing book enamored by the writings of Warren Buffett or Benjamin Graham, a once prominent advocate of value investing. I will tell you that it gave me a new found arrogance to jump to buy my first net net stock. Repeating what every newly named “value investor” has done believing they are on their way to riches. I knew almost immediately I was on my way to billions in no time. Think again!
Companies such as Vanda Pharmaceuticals Inc. add complexity to what might seem like straightforward investment opportunities, and it's important to be cautious about committing all your capital to a single investment. Benjamin Graham recommended focusing on companies whose stock prices were below their liquidation value. He believed this strategy offered a path to high returns with relatively low risk. In his book "Security Analysis," Graham stressed the significance of buying stocks at prices lower than their net asset value but understood why there were objections to buying these investments.
“The objection to buying these issues lies in the probability, or at least the possibility, that earnings will decline or losses continue, and that the resources will dissipate and the intrinsic value ultimately become less than the price paid.”
VNDA 0.00%↑ patent issues are a huge indication as too why we should remain as skeptics to the stock and large reason why it trades below its net cash balance. A few points before digging into Vanda Pharmaceutical:
Biotech/Pharmaceutical companies are turning into a larger theme as Andrew Walker and Chris Demuth have discussed on the Yet Another Value podcasts episode 198 and episode 203. If you haven’t subscribed to Andrew Walkers podcast or blog I highly recommend you do.
Lets get into it:
💊Who are they
Why they’re undervalued 📉
🛡️What’s the downside protection
Why now⌛️
⚠️Risk
💊What do they do?
Vanda Pharmaceuticals Inc. $VNDA is a commercial-stage biopharmaceutical company that develops, manufactures, and markets prescription products with a primary focus on the treatment of central nervous system (CNS) disorders, including bipolar disorder, insomnia, and gastroparesis. The company's two marketed products are Fanapt, an atypical antipsychotic once-daily medication for the treatment of schizophrenia and bipolar I disorder, and Hetlioz, a once-daily circadian-rhythm regulator oral drug for the treatment of narcolepsy and shift work sleep disorder. The most promising is Tradipitant currently expected for regulatory review by July 2024.
Definitely read
piece on VNDA 0.00%↑here titled: VNDA - Tradipitant For treatment of motion-sickness and gastroparesisMost importantly how are we so damn “lucky” to be offered a stock to trade at less than its liquidation value. These are the type of investments Graham and Buffett were made of.
Why is VNDA 0.00%↑ Undervalued?📉
Value investors may be interested in VNDA 0.00%↑ because the company's stock price is significantly below its intrinsic value particularly trading below net cash per share of $6.74 as of second quarter June 30, 2023 not including $70 million in deferred tax assets . The company has some valuable assets, including its pipeline of drugs and a well-established marketing and sales infrastructure. But buyer beware, we have risks with VNDA, including the risk of generic competition for Hetlioz the breadline of the company.
VNDA 0.00%↑ stock price has declined significantly in recent months, due to a number of factors:
Generic competition for Hetlioz: Hetlioz is Vanda's blockbuster sleep drug, and it lost its patent case in June 2023. Generic versions of Hetlioz could be available soon, which would likely slash Vanda's revenue rather significantly as management has stated.
Uncertain future of Vanda's other drugs: Vanda's other drugs are either in the early stages of development or have recently been approved for commercial use. It is unclear how successful these drugs will be in the market.
Concerns about Vanda's management: Vanda's management team has been criticized for its handling of the Hetlioz patent case and for its lack of transparency.
VNDA 0.00%↑ Intangible Assets Should be Under Scrutiny in Third Quarter Filing
Intangible assets are assets that do not have a physical form, but have value to a company. Examples of intangible assets include patents, trademarks, copyrights, and goodwill.
VNDA's intangible assets are primarily related to its patents and trademarks. The company's patents protect its exclusive rights to develop, manufacture, and sell its drugs. Vanda's trademarks protect the names and logos of its products.
The company is at a crossroads, facing the loss of patent protection for its flagship drug, Hetlioz, investors need to brace for the possibility of asset impairments in the company's upcoming third quarter 10Q filing. They should also look for any changes in the amortization of Vanda's intangible assets.
A write-down of intangible assets would be a significant admission that the loss of patent protection will have a material impact on Vanda's business. However, it would also be a positive step towards improving transparency and would be signal that management is not holding counterproductive biases like sunk cost. This clear action would reflect how seriously management is taking the loss of patent protection and preparation for the acknowledged revenue decline that will result.
Deletion from S&P SmallCap 600:
VNDA 0.00%↑ was dropped from the S&P 600 SmallCap Index on . If you are unfamiliar to this type of news, the affects of an index deletion can be:
Reduced trading volume: ETFs and other index funds that track the S&P 600 SmallCap Index will be required to sell their shares of Vanda Pharmaceuticals. Generally this leads to a decrease in trading volume and liquidity for the stock
Lower stock price: A decrease in trading volume and liquidity tends to result in a lower stock price
Increased cost of capital: As a company, it just become more expensive for VNDA to raise capital either through debt or equity
Reduced investor interest: Retail & institutional investors and shareholders may be less interested in a company that is not included on a major index. This is generally led through retail brokerage houses that systematically will no longer portray VNDA stock.
In Vanda Pharmaceuticals' case, it seemed the market began to get news of the S&P 600 deletion on August 29, 2023 as hourly volume began to tick higher. The following Monday September 5th, the stock price fell by as much as 19% after the S&P Dow Jones Indices announcement after market closed on September 1, 2023. Their quarterly rebalancing showed VANDA would be dropped from the S&P 600 SmallCap Index.
So why are we given this opportunity of undervalued stock:
Generic competition: VNDA's main drug, Hetlioz, is losing its patent protection, which could lead to a significant decline in sales.
Uncertain future of other drugs: VNDA's other drugs are either in the early stages of development or have recently been approved for commercial use, so their success is uncertain.
Concerns about management: VNDA's management team has been criticized for its handling of the Hetlioz patent case and for its lack of transparency. Management definitely are going through a few biases and fallacies like sunk cost, escalation of commitment, loss aversion and zero-risk.
Removal from S&P SmallCap 600 Index: VNDA was dropped from the S&P SmallCap 600 Index, which could lead to a decrease in trading volume and liquidity for the stock, which could in turn lead to a lower stock price.
I will throw in tax loss selling season is among us and asset management portfolio window dressing getting rid of dead weight.
🛡️What Might be the Downside Protection?
Vanda Pharmaceuticals has a number of factors that could provide downside protection:
Strong cash position: As mentioned above, Vanda has a strong cash position, which gives the company the resources to weather any challenges it may face in the near term.
No debt: Vanda Pharmaceuticals has no debt, which further strengthens its financial position.
Current Market leadership & new approval uses for Hetlioz: Hetlioz is the only FDA-approved drug for the treatment of N24HSWD. This gives Vanda a significant advantage in this market. There are two melatonin agonists currently available, ramelteon and tasimelteon, but tasimelteon is the only drug FDA-approved for the treatment of Non-24.
Back in June, Vanda had nearly $500 million in cash and equivalents providing a decent cushion to weather the storm of generic competition and pipeline risk but it’s possible that management can burn right through that money. VNDA 0.00%↑ saving grace can be these next few points.
Vanda has a number of competitive advantages:
Strong intellectual property: Vanda's two marketed products, Fanapt and Hetlioz, are protected by strong intellectual property. This gives the company a period of exclusivity, before generic competitors can enter the market.
Experienced management team: Despite my criticism, this management team has a proven track record of success in the pharmaceutical industry.
Focus on CNS disorders: Vanda is focused on developing and commercializing drugs for CNS disorders. This is a large and growing market, with significant unmet medical need.
The potential for new applications launches: If Vanda is able to successfully launch new products, it could significantly boost the company's revenue and earnings growth potential.
Strong balance sheet: The company has a strong balance sheet with over $500 million in cash and equivalents. This gives the company the financial flexibility to invest in its pipeline and to weather any short-term setbacks.
Strong cash flow: Vanda Pharmaceuticals generated $37.5 million in cash flow from operations in the first half of 2023. This strong cash flow generation gives the company the financial flexibility to invest in its pipeline and commercialize its marketed products.
Low debt levels: Vanda Pharmaceuticals has low debt levels, with a net debt-to-equity ratio of 0.1 as of June 30, 2023. This low debt level gives the company the financial flexibility to weather any downturns in the market.
⌛️Why Now?
VNDA 0.00%↑ is simply trading at an insane discount to its intrinsic value there’s not much more to it. The interest on the bonds and cash on hand is absurd to fathom selling the stock.
There are a few lurking catalysts that could boost its share price in the 12 to 18 month future, such as the outcome of its lawsuit against the FDA and the results of its clinical trials for its pipeline drugs. The why says nothing about a likely suitor to come along and see VNDA 0.00%↑ with all that flush of cash. A relatively small company with a valuable pipeline of drugs and a boatload of good looking cash. makes it a watering acquisition target for anyone and everyone.
Risk⚠️
The main risk for VNDA is the loss of exclusivity for its two marketed products. Generic competition for Fanapt is expected to begin in 2024, and generic competition for Hetlioz is expected to begin in 2026. However, VNDA has a number of potential catalysts on the horizon, including the launch of new products and the expansion of its existing product labels.
Generic competition for Fanapt: Generic competition is already having a negative impact on Fanapt sales, and this trend is likely to continue.
Lawsuit against the FDA: The outcome of the lawsuit against the FDA is uncertain, and a negative outcome could have a significant impact on the company's bottom line.
Pipeline risk: Vanda's pipeline of new drugs is still in the early stages of development, and there is no guarantee that any of these drugs will be successful.
Clinical trial failure: Vanda Pharmaceuticals' pipeline of drugs is still in the early stages of development, and there is a risk of clinical trial failure.
Overall, VNDA is a bit of a melting ice cube until the acquisition environment picks up on this low hanging fruit. The company has two marketed products with significant sales potential, but it also faces generic competition and has a number of pipeline products that are still in development. These sound like problems for a private company to endure.
Vanda Pharmaceuticals is a company with a strong track record of innovation and a promising future. However, investors should be aware of the risks associated with the company, including generic competition, the company’s litigation strategy against the FDA, overall market volatility, and pipeline risk. Its hard to say no I can tell you that!
Nice write up!
It is nice to see financial analysis of VNDA, since I tend to be more confident on the science aspect rather than the financial.