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mid-cap

Two Speculative Healthcare Bets - SAGE, VIVO

Jul 15, 2021 | Team Kalkine
Two Speculative Healthcare Bets - SAGE, VIVO

Sage Therapeutics, Inc.

SAGE Details

Sage Therapeutics, Inc. (NASDAQ: SAGE) is a biopharmaceutical company engaged in developing and commercialization of novel medicines for people suffering from devastating brain illnesses. The company currently generates revenue from the sale of ZULRESSO (brexanolone), an injection for treating postpartum depression (PPD). SAGE is currently focused on brain illnesses and disorders relating to three key areas: depression, neurology and neuropsychiatry. As of July 14, 2021, the company’s market capitalization stood at USD 3.07 billion.

Product Pipeline (Source: Company Website)

Positive Clinical Trial Results: On June 15, 2021, the company and Biogen Inc. announced that the Phase 3 study for Zuranolone 50 mg showed significant improvement in depressive symptoms in Major Depressive Disorder (MDD) patients compared to placebo at Day 15. On average, patients responsive to Zuranolone at Day 15 retained ~86% improvement even four weeks after dosing ended. However, on the flip side, this recent data from the study showed that the improvement level from the mean has declined and that 60% of the patient group experienced side effects such as headache, drowsiness, and dizziness.

Previously, on April 12, 2021, the Phase 2 KINETIC Study conducted by SAGE and Biogen, evaluating SAGE-324 in the treatment of essential tremor (ET) in patients, witnessed a 36% reduction in upper limb tremor amplitude in patients receiving SAGE-324 compared to a 21% reduction in patients receiving placebo under the Essential Tremor Rating Assessment Scale (TETRAS) on Day 29.

Q1FY21 Results: During Q1FY21 (ended March 31, 2021), the company registered a significant decline of 30.75% in total revenue to USD 1.58 million vs USD 2.29 million in Q1FY20. Net loss for the quarter amounted to USD 95.76 million, an improvement from USD 126.74 million in Q1FY20, primarily due to a 43.18% reduction in selling, general and administrative (SGA) expenses to USD 39.85 million during Q1FY21 as a result of the corporate restructuring announced during Q2FY20.

Key Risks: The company has only one revenue-generating product with a considerable pipeline of therapeutics currently under clinical trials. SAGE cannot market its products until approved by the Food and Drug Administration (FDA) in the US and the requisite regulatory authorities in other countries. Obtaining approval in the biopharmaceutical industry is a complex, lengthy, and expensive process.

Outlook: As of Q1FY21, SAGE stated that it expects to end the year with cash, cash equivalents, and marketable securities of more than USD 1.7 billion, 15% lesser than USD 2.00 billion at the end of March 31, 2021. It also does not expect to receive milestone payments from its collaborations in FY21.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SAGE Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: SAGE stock fell 35.15% in the past three months and is currently leaning towards the lower band of the 52-week range of USD 40.66 to USD 98.39. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is 26.06. We have valued the stock using the EV/Sales Value-based relative valuation methodology and arrived at a target price of USD 56.44. On the technical chart, the next support level is USD 44.18. Considering the correction in the stock price, strong product pipeline, positive results from clinical studies and current valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 49.07, down 6.46% as of July 14, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Meridian Bioscience, Inc.

VIVO Details

Meridian Bioscience, Inc. (NASDAQ: VIVO) is a fully integrated life sciences firm focused on development, manufacturing and commercializing diagnostic testing equipment and reagents as well as biologics used in other biotechnology companies. VIVO operates in two segments, viz. 1) Diagnostics, which provides manufacturing operations for infectious diseases, blood chemistry products and distribution of diagnostic kits, and 2) Life Science, which deals in the manufacturing and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used by pharmaceutical and biotechnology companies.

Subpar Q3FY21 Revenues: As per the preliminary revenue release on July 13, 2021, VIVO anticipates subpar Q3FY21 revenues of around USD 63.50 million. Recent supply chain problems with its LeadCare reagents have adversely affected the Diagnostics revenue. In addition, a decline in demand for reagents related to the Covid-19 testing has continued to weigh on revenues in the Life Sciences segment. However, the company has not yet published its Q3FY21 financials, and the preliminary estimates may be subject to change.

Resubmits Application for emergency use of diagnostic test: On June 28, 2021, the company resubmitted its diagnostic test SARS-CoV-2 to the US Food and Drug Administration (FDA) on Revogene's platform for Emergency Use Authorizing (EUA). In order to conduct additional studies based on the guidance of the FDA, VIVO had voluntarily revoked its EUA application on February 22 2021.

Q2FY21 Results: VIVO reported a 48.81% increase in total revenues of USD 85.26 million for Q2FY21 (ended March 31, 2021) compared to USD 57.30 million in Q2FY20, primarily due to an increase in revenues generated from the Life Sciences segment. Net income soared by 2.81x YoY to USD 26.30 million in Q2FY21 vs USD 9.36 million in Q2FY20. As of March 31, 2021, the company stood at the cash and cash equivalents of USD 63.38 million with a total debt of USD 50 million.

Quarterly Net Revenues (Source: Virtual Healthcare Conference, May 27, 2021)

Key Risks: In FY20, two US distributors accounted for 23% of the total Diagnostics revenues. Likewise, in FY20, three diagnostic manufacturing clients accounted for 27% of the Life Science segment revenue. The loss of any of these critical distributors or customers could harm the company’s financial situation. In addition, about one-third of VIVO’s revenues were in currencies other than USD in FY20, exposing it to currency fluctuation risk.

Outlook: As of Q2FY21, VIVO expected to generate total revenues in the range of USD 305 – 335 million in FY21, with an adjusted operating margin ranging between 30% and 33%. EPS was estimated to be in the range of USD 1.60 – 1.80. However, these estimates may be revised down due to a lower than expected topline in the third quarter (as outlined above).

 Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

VIVO Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: VIVO’s stock price has declined by 26.14% in the past 12 months and is currently trading in the lower band of the 52-week range of USD 12.98 to USD 30.65. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is 30.19. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 20.86. On the technical chart, the next support level is USD 14.82. Considering the company’s conservative capital structure, strong margins, medical innovations, and associated risks, we recommend a “Speculative Buy” rating on the stock at the current price of USD 17.35, trading flat as of July 14, 2021, at 2:40 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.