Any way you cut it, Rockwell Medical (RMTI 3.08%) stock is having a rocky year.
With little revenue to support it, and no profits whatsoever, this small-cap biopharmaceuticals maker is largely subject to the whims of investors who either love it or hate it -- or both, depending on the day of the week. Right now, these investors have sold short 19% of Rockwell's float.
And so, down 23% year to date, and down 37% over the past 12 months, Rockwell Medical stock rides the rollercoaster of investor sentiment. But the good news for shareholders is that this sentiment may soon take a turn for the better. This morning, analysts at San Francisco-based institutional broker BTIG began advising their clients to buy Rockwell Medical stock. Says the analyst, Rockwell shares that cost just $7 and change today could hit $12 within a year -- a 45% profit.
But is BTIG right about that? Here are three things you need to know.
1. BTIG? Who dat?
It's not exactly a household name on the order of a JPMorgan or Goldman Sachs, but BTIG is one of the better analysts we track here at Motley Fool CAPS. Ranked in the top 30% of investors, BTIG sports an accuracy rating of 50% on its picks -- which isn't great -- but a record of outperforming the market by more than 20 percentage points per pick on average.
So when BTIG is right about a stock, it can be very right indeed.
2. And why does BTIG like Rockwell Medical stock?
Now here's what BTIG has to say about Rockwell Medical, as reported on the pages of StreetInsider.com this morning: "RMTI's lead asset, Triferic, has the potential to replace IV iron in hemodialysis patients. Although there is a near-term delay in Triferic ramp-up due to pursuing transitional add-on reimbursement, we view the effort as worthwhile, given the added incentive for dialysis providers."
Currently, Rockwell Medical does about $50 million selling Triferic (marketed as an iron replacement drug for dialysis patients) and other biopharmaceuticals for treating end-stage renal disease, chronic kidney disease, and similar conditions. Over time, however, BTIG sees the market for Triferic expanding, to the extent that the analyst predicts "peak sales of $180M+" for that drug. Additionally, the analyst sees peak sales of Calcitriol (for calcium replacement) hitting $48 million or more, eventually.
3. Valuing Rockwell Medical
Currently valued at $375 million in market cap, Rockwell Medical stock sells for about 6.7 times its trailing sales. To put that in context, Baxter International (BAX 1.30%), a Rockwell partner in distributing Triferic, costs just 2.6 times sales -- and Baxter is already profitable, and growing its profits in the double digits (which Rockwell Medical is not).
On the other hand, if BTIG is right about the end game for Rockwell, then adding up all the revenue streams, it looks like the company could eventually produce revenue in excess of $280 million ($180 million from Triferic, $50 million-ish from Calcitriol, and $50 million more from the company's "base business.").
If and when that happens, today's valuation of $375 million would work out to just 1.3 times sales -- half the valuation at Baxter -- and Rockwell Medical stock could begin looking very cheap indeed.
One final thing
Is this scenario realistic? My fellow Fool Keith Speights has his doubts, recently pointing out that even after Rockwell got Triferic approved by the FDA, it took the company eight more months to actually bring the product to market -- which doesn't speak well of the company's efficiency. " Moreover, multiple legal firms," says Keith, are suing Rockwell for "potential misrepresentations" to investors, which raises doubts about how much we can rely upon the company's promises.
And of course, there's there are the following nagging details to worry about: No matter how bright Rockwell and BTIG say its prospects may be, currently, the company is generating just $56 million in annual sales, losing more than $18 million annually on those sales, and burning cash at the rate of more than $13 million a year (according to S&P Global Market Intelligence data). All of these are facts that could give investors pause, as well.
Meanwhile, most analysts who follow the stock see Rockwell's sales peaking in 2018, and at not the $280 million level that BTIG suggests, but at just $121 million, and then falling off sharply thereafter. If that's the way things end up working out, then BTIG's recommendation to buy Rockwell Medical stock today could be setting up investors for a very big fall.