Supernus Pharmaceuticals' (SUPN -3.14%) stock price is up 24% over the last 12 months, suggesting investors are still keen on buying it despite its high valuation and some stiff pressure it's getting on its revenue. What could be driving stock traders to bid up its shares when they already seem pricey and near-term performance looks mixed at best?
Let's investigate, and in doing so try to figure out what makes this stock so purchase-worthy despite its issues.
Generic competition doesn't have to be a dealbreaker
Supernus' claim to fame is its longtime work developing medicines for central nervous system (CNS) conditions like attention deficit hyperactivity disorder (ADHD) and epilepsy. Over the past 10 years, its portfolio expanded consistently, and it now has eight medicines on the market. In that period its quarterly net income soared by 429%, arriving just short of $17 million, delighting shareholders in the process.
There are two key trends happening with Supernus at the moment. The first is that revenue from its drug Trokendi, which treats epilepsy, is crashing. Its sales were down 45% year over year as of Q1, bringing in only $34.8 million of the company's top line of $153.8 million. The culprit is a new generic medication launched in the first quarter that copies Trokendi and sells at a lower price point because the drug's exclusivity protections lapsed. In other words, investors should assume that Trokendi will not be a significant revenue generator in the long run.
The second trend is that revenue from Supernus' ADHD medicine Qelbree is just starting to ramp up. Approved in May 2022 for adult patients, Qelbree brought in $25.8 million in the first quarter. So it isn't yet large enough to replace Trokendi's share of revenue, but given that its sales more than tripled in the past year, it probably will be a bigger contributor than Trokendi was, and soon.
Plus, Supernus could soon file for a New Drug Application (NDA) for its candidate to treat Parkinson's disease, which recently concluded its phase 3 clinical trials. That means it could have another drug launching in the next year or so, driving more growth.
Be wary of Supernus' valuation and the chance of sagging growth in the long term
Despite its increasing revenue and the prospect of another drug launch in the near term, there are at least two issues that could make Supernus a stock that you don't want to invest in. Right now, its price-to-earnings (P/E) multiple is 36, which makes it pricey in comparison with the pharmaceutical industry's average P/E of 21. It's quite possible Supernus will justify its valuation by growing faster than the average company in its cohort. But, if you're looking for inexpensive shares, this isn't the right pick.
The more pressing problem in the medium term and beyond is that its pipeline is a bit thin. Aside from its Parkinson's disease program, it has two programs in phase 2 clinical trials. One of those is for another epilepsy drug, and the other is targeted at helping treatment-resistant depression (TRD). Other than that, its projects are still in the preclinical phase of research and development. That means there could be a lag time of a few years between when it commercializes its phase 2 candidates and when it could onboard additional new revenue sources afterward, assuming it gets the pair approved.
If you intend to hold Supernus stock forever, the commercialization gap is not a major concern, as it will almost certainly eventually be bridged by some of the programs that are currently in the preclinical phase. Likewise, there's an opportunity wherein investors could realize good returns from the trio of drug launches that could happen over the next four years or so. The hazard mainly affects investors who plan to hold their shares for between five and 10 years, as that's just long enough to experience the growth doldrums implied by the pipeline, but not long enough to see the tailwinds of new medicines getting commercialized to pick up once again.
If that doesn't intimidate you, buy away -- there's little chance of its valuation being more of a bargain unless there's an unexpected issue with regulators over the next 12 months.
