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Friday, June 6, 1997
Noven
Pharmaceuticals HOW DID IT FIND TROUBLE? Noven Pharmaceuticals surprised investors in early March when it made an earnings pre-announcement warning of a 4th quarter loss of $0.11 per share. The company had been expected to report a profit of $0.08 per share in the quarter and post the first fiscal year profit in its history, but it was not to be. What happened? The company was victimized by an "inventory rebalancing." It seems that marketers of the company's transdermal estrogen product had cut orders to allow their inventory to come down a bit. The company also warned that the "rebalancing" would continue through the first half of 1997. This was bad news for Noven, as the transdermal estrogen preparation is its most significant product. The earnings disappointment and inventory rebalancing caused investors to rebalance their portfolios and shed some Noven inventory. The stock went from just above $16 a share to a low of $ 7 3/8 in short order. BUSINESS DESCRIPTION Noven Pharmaceuticals is one of a group of pharmaceutical companies that develops and markets alternative drug delivery systems. Noven focuses on transdermal drug delivery that uses thin, solid-state, multilaminate patches. Products currently on the market include transdermal estrogen, nitroglycerin, dental pain medication, and nicotine. Products in development include a transdermal estrogen/progesterone combination, albuterol (an asthma medication), and an anti-fungal medication for cutaneous fungal infections. The company has partnered with Ciba-Geigy for marketing of its estrogen patches. FINANCIAL FACTS Income Statement 12-month sales: $17.6 million
12-month income: ($4.1)
12-month EPS: ($0.21)
Profit Margin: N/A
Market Cap: $156.6 million
Balance Sheet
Cash: $13.6 million
Current Assets: $23.7 million
Current Liabilities: $1.5 million
Long-Term Debt: N/A
Ratios
Price-to-earnings: N/A
Price-to-sales: 8.9
HOW COULD YOU HAVE SEEN IT COMING? It looked like Noven was on the road to profitability when the wheels came off in March. Earnings surprises are just that, surprises. The reality is that speculative issues like Noven carry an inherent risk of surprises such as this. Noven is not the only maker of estrogen patches and since the company's earnings were dependent on this single product, it was vulnerable. In general, the risk of trouble is inversely proportional to the number of products a company has in production. WHERE TO FROM HERE? Noven is trading near its historical low stock price. The company has good products and is generating sales in both the domestic and international market. The estrogen replacement market is expected to grow as the average age of the population increases, particularly with the increase in awareness of osteoporosis prevention. All is not lost. When looking at any pharmaceutical maker, it is best to look both at drugs currently in production and the pipeline of new products that are in the works. Noven has a great product in the estrogen patch and is introducing its dental analgesic patch in the current quarter. The pipeline has some interesting products for anxiety, fungal nail infections, and asthma. From this doc's perspective, there is promise in the pipeline. However, Noven is not alone in the transdermal business. Competitors include 3M, Johnson and Johnson, Alza Corp. and several others. This is a highly competitive marketplace. Zacks lists analysts' earnings estimates of $0.05 per share for the current fiscal year and $0.41 per share for fiscal year 1998. Long-term growth is estimated at 50% annually. A PEG is not possible because of prior losses, but a YPEG valuation of $21 a share looks pretty tasty. Once Noven's licensees start adding to their inventory, a Foolish investor might want to put a few of these stubs in inventory as well. -Mark Weaver, MD ([email protected])
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