Transcept Pharmaceuticals: Deep Value, Quick Return Possible

Transcept Pharmaceuticals: Deep Value, Quick Return Possible

Transcept Pharmaceuticals Inc (NASDAQ:TSPT) is a speciality pharmaceutical company focused on the development of products that address the therapeutic needs in the field of neuroscience. At present the company has a market capitalization of $66.3 million and an average daily volume of 150,580 shares.

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Transcept Pharmaceuticals offers deep value

Currently, Transcept Pharmaceuticals Inc (NASDAQ:TSPT) offers deep value, as the company is trading below the value of its cash balance. Indeed, at the end of the fiscal third quarter, Transcept reported cash and short-term investments of just under $76 million, worth around $4.02 per share. The only liabilities that the company had booked at the end of the quarter was $3.06 million. These were current accounts payable and expenses. All in all, total equity amounted to $76.3, which works out as a book value per share of $4.05 based on 18.4 million shares in issue. So, at its current stock price of $3.53, Transcept is trading at a price book ratio of 0.9 and a similar ratio of price to cash.

Transcept is trading at a deep-value price and offers a margin of safety. But what about the underlying business? Well, as I’ve already covered Transcept is a small cap biotech company with one drug currently underdevelopment and one drug already approved. Transcept Pharmaceuticals Inc (NASDAQ:TSPT)’s development candidate is TO-2070 a rapidly absorbing treatment for acute migraine incorporating dihydroergotamine (DHE) as the active drug. Transcept’s approved treatment is Intermezzo. Intermezzo’s commercial and development rights are held by Purdue within the United States and Transcept is receiving royalty rights.

Transcept Pharmaceuticals’ royalty revenue

Purdue launched Intermezzo commercially during April 2012, so 2013 will be the first year that Transcept Pharmaceuticals Inc (NASDAQ:TSPT) earns a full year of royalty revenue from Intermezzo sales. For the nine months ending September 30th gross royalty revenue totalled $1,381,000. Unfortunately, during the period the company also made a one-off payment of $6.7million related to advertising expenses for Purdue relate to Intermezzo. Furthermore, Transcept is facing crippling admin and research costs, which for the first nine months of this year came to a total of $13.7 million. This indicates that even with full-year royalty revenues, Transcept will be unable to break even this year or even for the foreseeable future unless costs are slashed.

That being said, the company is working on cutting costs and management is undertaking key initiatives to increase stockholder value. Still, with a cash loss of $25.7 million for the first nine months of this year, Transcept Pharmaceuticals Inc (NASDAQ:TSPT) needs to make some quick changes before its runs out of money. However, it would appear that these changes are underway.

Realizing shareholder value

At the beginning of this month, management revealed to investors that it had slashed its employee headcount by 50%, reducing the annual payroll by 37%, or $1.23 million. What’s more, thanks to its healthy cash balance, Transcept Pharmaceuticals Inc (NASDAQ:TSPT) is exploring a number of strategic initiatives in order to realise shareholder value. These include a distribution of cash to shareholders, sale of the business and liquidation. A final decision on the outcome of the strategic review is expected during the first quarter of 2014.

While this review is underway, Transcept Pharmaceuticals Inc (NASDAQ:TSPT) intends to continue the development of its TO-2070 treatment, although management does not intend to initiate a Phase 1 human pharmacokinetic study.

So all in all, Transcept is a deep value opportunity currently in the process of reorganisation. Actually, as Transcept Pharmaceuticals Inc (NASDAQ:TSPT) is currently trading below the value of cash on its balance sheet, if the company intends to liquidate or distribute cash to investors, the stock could offer a lucrative short-term play and quick return.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email -
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