The past year hasn't been the kindest to NPS Pharmaceuticals' (NASDAQ: NPSP) shareholders, with the stock vastly underperforming the broader market and its peers. Yet, take off your short-term blinders and examine NPS Pharmaceuticals' performance over the trailing-two-year period and you'll see a stock up by nearly 150%.
The amazing thing about NPS Pharmaceuticals is that despite its huge ascent in just two years, the stock is still considered cheap by Wall Street's most widely followed valuation metric. Furthermore, analysts love the stock.
Let's look at this valuation metric that deems NPS Pharmaceuticals "cheap," discuss what catalysts keep NPS in Wall Street's good graces, and briefly glance into the future as to where the company might head next.
What exactly does "cheap" mean?
The metric in question that Wall Street loves to rely on to quickly and accurately value a stock is the price/earnings-to-growth ratio, or PEG ratio. The PEG ratio takes a company's price-to-earnings ratio, which is a measure of valuation relative to profitability over the trailing-12-month period, and divides it into the forecast growth rate for that company over a specified period of time (usually five years). This allows investors to see just how inexpensive a company might be based on its future growth prospects. As an example, if a company has a P/E ratio of 15 and a forecast five-year growth rate of 20%, its PEG ratio would be 0.75 (15 divided by 20). In general, a cheap stock is any stock with a PEG ratio below one.
What makes NPS Pharmaceuticals so cheap is Wall Street's astronomical five-year growth forecast of nearly 109% per year for the company, placing its PEG ratio well below one, and technically qualifying NPS as an inexpensive stock even after a 150% run higher.
Why Wall Street loves NPS Pharmaceuticals
Even more exciting than being a cheap stock, NPS has Wall Street analysts in its corner. Of the 13 analysts who have rated the stock, eight rate NPS the equivalent of a strong buy, three the equivalent of a buy, and just two rate it a hold. Not a single analyst views the stock as an underperform or sell. Furthermore, the median price target among those 13 analysts is $40, or 67% higher than where the stock closed on Friday.
Why is Wall Street in love with NPS Pharmaceuticals? Let's take a closer look.
The primary reason relates to the company's focus on orphan disease drugs. NPS Pharmaceuticals has one approved drug, known as Gattex in the U.S. and Revestive abroad, for the long-term treatment of adults with short bowel syndrome who are dependent on parenteral support.
Approved in the U.S. in December 2012, Gattex demonstrated a clinical response in 46% and 63% of patients after 20 weeks and 24 weeks, respectively, while exhibiting a mean reduction in parenteral nutrition of 2.5 liters per week and 4.4 liters per week. By comparison, the placebo achieved a response rate of just 6% and 30%, with mean parenteral nutrition reductions of 0.9 liters per week and 2.3 liters per week, respectively.
Within the U.S., some 10,000-15,000 people are living with short bowel syndrome, classifying it as a rare, or orphan, disease. Orphan disease drugs come with ample patent exclusivity protections and usually boast substantial price tags, since the innovating company needs to recoup its costs across a small base of patients. With a price tag of $295,000 per year in the U.S., and a drug that is highly protected from biosimilars for a long time, it's no wonder Wall Street loves this stock.
In addition, NPS could be on the verge of a second drug approval, with a federal decision on hypoparathryroidism drug Natpara due by Oct. 24, 2014. In September, the Food and Drug Administration's Endocrinologic and Metabolic Drugs Advisory Committee voted eight to five in favor of recommending Natpara for approval. Though NPS' shares dipped following the vote (investors were clearly looking for a more convincing vote), the panel's briefing materials described Natpara's performance in the REPLACE study as "superior to [the] placebo."
NPS Pharmaceuticals may be cheap, but can it head even higher?
However, investors need to keep in mind that just because a stock is considered cheap by a specific valuation metric, and is well-liked by Wall Street, doesn't in any way ensure it will rise. Every company has headwinds, and NPS is no different.
The more immediate hurdle is whether Natpara gains FDA approval. The agency isn't required to follow the advice of its panel, though it often does. A vote of eight to five isn't nearly as convincing as would have been expected from the briefing materials released two days prior to its meeting, leaving the door open that Natpara's either might not be approved or could have certain labeling requirements.
Also, I wouldn't overlook the potential role that regulators or pharmacy benefit management companies might play in the future with regard to drug pricing. Gattex isn't the only drug option to treat SBS, though it clearly demonstrated its response superiority in the late-stage study that got the drug approved in the first place. Pharmacy benefit managers or the U.S. government could start to play hardball with high-priced drug producers, which might ultimately hurt NPS' profitability over the long run.
I'm still of the opinion that NPS Pharmaceuticals is on the cheap side. Based on what I believe are fairly conservative Wall Street estimates, NPS is on pace by 2017 to deliver $750 million in sales and in the neighborhood of $2.50 in earnings per share. Based on Friday's closing price, we're looking at revenue growth in the latter portion of the decade of 10% to 20%, a forward P/E in 2017 of less than 10, and slightly more than three times 2017's total sales. Tack on what I believe will be the approval of Natpara in a few weeks and all the catalysts NPS needs to be successful are on the table. Getting Gattex approved in the U.S. for pediatric SBS would simply be icing on the cake for this rare disease drug developer.