Value investing has a variety of definitions. Often times it means buying a stock that is out of favor or is merely being overlooked by Wall Street for whatever reason. It can also mean that the parts of the company are actually worth more than the whole. In short, it means that by some valuation metric, the stock can be deemed inexpensive.
CorMedix has the attributes of a value play based on:
• Later Stage Product Candidates in Development
• Upcoming Phase II Data 1H11
• Potential Initiation of Pivotal Phase III 1H11
• Revenue Potential in Europe 2H11
CorMedix has an attractive balance sheet relatively speaking compared to most microcap/small biotechs, with $9.5M in cash, no debt, cash to last until at least the end of 1Q12 as indicated in the latest 10Q filed for the period ended September 30, 2010. The ending cash balance does not include the Federal funds of $490K received in November. Additionally, CorMedix has only 11.4M shares outstanding.
That said, there is usually a reason for the market awarding a stock a depressed valuation. Sometimes a company’s stock is undervalued because the sector that the company is in is out of favor, and sometimes it’s because something happened with the company to cause it to be so. Whatever the reason is, value investing is an approach that has created incredible wealth for savvy, patient investors. “Patience” is the operative word.
The hedge fund community and trading community have fostered an environment where quick short term profits are the name of the game. As such, the buy side community has become obsessed with being able to pinpoint stock price driving catalysts in determining which stocks it’s going to buy. Fundamentally based short and intermediate term stock buyers are always asking:
• If I buy this stock, what’s going to make it move higher?
• Is the company coming out with any near term news?
• Are there any new product rollouts that are imminent?
• Is there some sort of geopolitical event that has occurred that is going to directly or indirectly benefit the company’s business and thus their stock price?
These are all valid questions and possible reasons to consider buying a company’s stock. However, sometimes good companies’ stocks are inexpensive and merit the attention of investors that are prepared to be patient. Why? Because a prudent value investor knows that often times the catalyst to move a cheap stock closer to fair value can come when least expected. Unexpected press commentary, industry expert endorsements, political events, flu epidemics and acts of terror are just a handful of examples of catalysts that can take the market by surprise and impact certain stocks. Investors will easily remember the H1N1 flu that catalyzed biotech flu vaccine company stocks a few years ago, or the parabolic move security stocks made following 9/11 — just to name a couple examples. In such situations, it could be said that the greatest risk is not holding a position in these stocks, because when the “catalyst” comes, and often without warning, the stock will have already made a big move.
The terms “biotechnology stocks” and “value stocks” are not very often used in the same sentence; however there are instances when it could be argued that they should be. CorMedix is a company that could be looked upon as a value play. Trading on the NYSE Amex under the ticker “CRMD,” CorMedix carries a market cap of $13.5 million and an enterprise value of a mere $4 million. Enterprise value is commonly defined as total market cap + debt – cash on the balance sheet. CorMedix has no debt and, as of September 30, 2010, has over $9 million in cash. What they also have are two lead product candidates, Neutrolin (CRMD003) and Deferiprone (CRMD001). Both products are in late stage Phase 2 clinical development. Neutrlin® is indicated for the prevention of central venous catheter infection and clotting in hemodialysis; whereas Deferiprone is indicated for the prevention of contrast-induced nephropathy in high-risk patients with chronic kidney disease.
Neutrolin and Deferiprone
The CDC has identified Catheter-Related Bloodstream Infection (CRBI) as one of its seven major healthcare challenges. Neutrolin could potentially become the first FDA-approved catheter lock solution used in the prevention of CRBI. The product is designed to prevent catheter-related bloodstream infections and clotting in patients receiving hemodialysis using central venous catheters. In short, it is about eliminating infections before they actually occur. If approved, it will elevate the standard of care for hemodialysis patients, while producing economic savings to healthcare providers. Neutrolin’s main ingredient, taurolidine, is well-known as an antimicrobial agent in some European countries and has demonstrated effectiveness against numerous strains of antibiotic-resistant strains.
Neutrolin represents a $675 million annual sales opportunity for CorMedix in the US alone.
To explain…
• There are approximately 80,000 Hemodialysis patients using a catheter as their vascular access
It’s like the old say, “Something about an ounce of prevention being worth a pound of cure.”
Cormedix is expecting to begin a pivotal clinical trial of Neutrolin in the first half of 2011. CorMedix will be seeking approval of Neutrolin not only in the US, but also in Europe. The Company has stated publicly that they plan on commencing a CE Mark application by year end 2010. This is very significant. Upon CE Mark approval the company has plans to explore marketing the product in Europe and potentially generate sales.
“CE Mark approval” indicates conformity to the legal requirements in the EU. The CE Mark certifies that a product has met the EU’s health, safety and environmental requirements. Because Neutrolin is considered a device, it is reasonable to expect CE Mark approval within 6 months following the application filing. Suffice it to say the EU market for Neutrolin is significant. In short, the EU opportunity is not only significant, but it also represents a more near term revenue opportunity for the company.
Deferiprone – Deferiprone’s (CRMD001) market opportunity is approximately $365 million. It is indicated for Contrast Induced Nephropathy (CIN). Succinctly put, Deferiprone is an “iron trap” to be used in a preventative capacity. Patients with chronic kidney disease often need to undergo diagnostic X-ray procedures. Contrast dye agents are commonly used in such procedures and are typically well tolerated amongst the general population. However, due to their increased levels of labile iron, patients with chronic kidney disease are far more prone to develop CIN from the dye. CIN can lead to both morbidity and death.
A Phase II study started in the second quarter of this year. Favorable results are expected to a lead to the launch of a pivotal Phase III trial in the second half of 2011. The company is expected to release preliminary data for the drug in Q1 2011. Deferiprone has been previously administered safely in over 7,500 patients in numerous studies for different indications. It is approved and available for sale in 50 countries outside (ex-US) as a treatment option for iron overload disorders. However, CRMD001 is a CorMedix proprietary formulation of Deferiprone indicated specifically for CIN. For this indication, there is currently no FDA-approved drug on the US market.
The bottom line is CorMedix’s stock seems to be pressured by some weak hands and year-end tax loss selling. At a $13.5 million market cap, the market is attaching a mere $4 million enterprise value to the two Phase 2 compounds that the company has in its pipeline. The company’s two assets could be viewed as having reduced risk as their respective main ingredients have been used quite effectively in other markets. If, for example, Neutrolin receives CE approval in the next 6 – 8 months, the stock along with its market cap could move significantly higher. Typically, when a company announces an event of this caliber, the stock gaps up and investors are given no opportunity to get in at lower prices.
Remember, there are only 11.4 million shares outstanding. It’s also worth mentioning that Chrystyna Bedrij, the biotech analyst at Griffin Securities, has a $6.00 target on the stock. Her report and “Buy” recommendation was put out in late August of this year. If the price target is achieved, that would represent more than a five-fold return from current levels.
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