For a valuation comparison, look at peer Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). It carries an enterprise value-to-revenue multiple of 16.5. Even at a conservative $650 million in sales for sebelipase alfa, that means the enterprise value for Synageva could be $10.7 billion, more than seven times the current value, which would justify a share price of roughly $378 per share. That is 500% higher than the current share price — and that’s based on just one of the company’s five assets.
There could be an argument for a long-term investment in the shares, sticking around to see how trials develop on the other four assets. I do not generally hold small-cap biopharma stocks that long, and I wouldn’t suggest you do either. The stock has surged on news of Baker’s bet, but there’s still a good risk-return trade-off under $80 per share.
A fairly sizable short interest has built in the stock after the recent increase in price, just over 13% of the shares available. The stock has jumped 45% since the beginning of September, and that kind of increase in an early-stage company brings out the short sellers. The shares could give back some of their gains, but those potential losses would be nothing compared with the upside after Phase III completion or an FDA approval.
Rather than a price target, I would wait for developments in the sebelipase alfa enzyme before making sell decisions. The shares could surge on news that the company has completed Phase III trials and has applied for a new drug patent. From there, you could take some profits on some of the position and wait for a year on the rest of your holding. As an orphan drug, the application should not take more than a year to be reviewed and could lead to another pop in the shares.
I would cash out after any news on the new drug application and not wait for developments in the other four assets, which could take several years.
Risks to Consider: The final stage of trials for the company’s oldest drug is still a year from estimated completion, and Synageva still must file an application with the FDA after that. With any pharmaceutical developer, there is the risk that drugs just won’t work out; investors should diversify against that risk with holdings of several companies.
Action to Take –> Baker is optimistic on the future of the company to the tune of almost $1 billion, and GEVA could have a huge upside over the next couple of years. As with any speculative play, this shouldn’t be a large percentage of your portfolio — but it’s worth a look on pipeline prospects.
This article was originally written by Joseph Hogue and posted on StreetAuthority.
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