In the last 30 days, shares of Catalyst Pharmaceuticals (CPRX -1.37%) are down by 31%, with the stock crashing by 19% on May 10 when the company reported its first-quarter earnings. As you might be guessing, the culprit for the tumble was the company's abysmal performance in Q1, which saw its revenue leap upward by 98% year over year, and its earnings per share balloon to the tune of 117%.
Of course, that's not an abysmal performance at all -- it's actually phenomenal. So why did this stock crash, and could it still be worth buying anyway? Let's start by examining the first question.
It's hard to live up to expectations sometimes
In truth, the reason for Catalyst's share price collapse is quite simple, even if it's a touch frustrating for those who plan to hold the stock for the long term, like myself. No, it didn't report that one of its clinical trials had whiffed or that regulators at the Food and Drug Administration had rebuffed one of its attempts at commercializing a new drug. It simply reported an excellent quarter's results when the crowd was anticipating that the results would be even more stellar.
Whereas Wall Street analysts predicted on average that it would report $0.32 in diluted earnings per share (EPS) in Q1, it only achieved $0.26. While the difference between those two figures is only a matter of $0.06 per share, the point is that Catalyst only brought in around 81% of the earnings that analysts were expecting and that the market had priced into the stock's valuation. So the fact that the biotech's revenue nearly doubled, reaching $85.4 million, doesn't factor in. Nor does the fact that its diluted EPS rose by more than double; the expectation was for it to rise even further.
But does the underperforming of expectations signal that there's something going wrong with Catalyst's business model? Nope. Management reiterated its prediction for between $375 million and $385 million in total revenue for 2023, which would imply top-line growth of up to 80% over 2022.
Sales of its newest medicine, an epilepsy drug called Fycompa, totaled $27.8 million in the first quarter. The company only acquired the rights to sell it in late January of this year, so it isn't even done fully integrating the related commercial operations yet. Similarly, sales of its older medicine called Firdapse, which treats Lambert-Eaton myasthenic syndrome (LEMS), rose by 34% year over year, reaching $57.5 million. Its products are in demand, and it's continuing to find success selling them.
Treat this bump in the road like a sale
Despite its shares falling sharply, there's nothing "wrong" with Catalyst Pharmaceuticals. Its long-term appeal still rests on its habit of buying the rights to lucrative pharmaceutical assets like Firdapse and Fycompa, and then commercializing them for more than it paid. Likewise, its near-term plans to seek expanded indications for its medicines and get them approved in new regions are likely to succeed based on how readily it was able to do so in the past.
By Q2 of 2024, assuming its registrational study concludes without incident, Catalyst will be moving to commercialize Firdapse in Japan, which could be a major driver of fresh growth even as it continues to penetrate the North American market. Before the end of 2023, it'll also be submitting a packet to regulators in an attempt to increase the maximum permitted dosage of Firdapse. This could enable it to retain market share that it'd otherwise lose from patients looking for alternatives if they can't adequately control their LEMS symptoms with the existing approved doses.
And all the while, management will be in the market for pharmaceutical assets that might be useful to treat rare neurological diseases with the goal of buying them for future commercialization. Given that Catalyst has $148 million in cash and in Q1 it had free cash flow of $95 million, the most in its history, it will eventually find the candidate it's looking for.
That makes the stock's recent drop look more like a buying opportunity than anything, and that's before we even consider its somewhat low valuation, which is the icing on the cake. At the moment, its price-to-earnings ratio is 17.9, which is lower than both the biotech industry's average of 21 and the market's average of 22.9.
In short, this is a profitable and rapidly growing business with zero long-term debt. Why let Wall Street's wild expectations about its first-quarter performance dissuade you from buying a few shares?
