Puma Biotechnology for Speculators Only

by Ryan Fitzwater, Director of Research, The Oxford Club

Shares of Puma Biotechnology (NYSE: PBYI) are down over 15% today after the company announced it will delay a breast cancer drug application for U.S. regulatory approval until the first quarter of 2016.

Originally Puma had planned to file for approval of its new drug, neratinib, in the first half of 2015.

There are two culprits behind the delay.

Reasons for the Delay

First, Puma originally planned to apply to use neratinib as an “extended adjuvant treatment” for later stage (HER2-postive metastatic) breast cancer. HER2 is a genetic mutation that can drive a cancer’s growth. And people with HER2-positive metastatic breast cancer, and other later stage cancers, have seen their cancer spread and are generally a sicker and higher-risk group.

Puma announced yesterday that it now plans to apply first to use neratinib in early stage HER2-positive breast cancer (versus cancer that has already spread) as a follow up treatment after initial therapy.

While the company is also testing neratinib on other forms of breast cancer, malignancies and lung cancer, it is Puma’s only drug under development. A delay in approval filing of almost a year is clearly not good news for the company or its investors.

Second is the fact that the FDA has asked Puma to compile and submit cancer-risk safety data from animal studies. And since Puma doesn’t have animal carcinogenicity data yet, it had to delay its application in order to fulfill the FDA’s request. Long-term data on whether neratinib caused other cancers in animals during pre-clinical trials will take time to compile, hence the delay. In fact, this is really the main culprit.

No Sales or Profits... Why the Oversized Valuation?

When you first look at Puma, you see a startup drug maker founded in 2010 that has yet bring in a cent in revenue. So why does a company with a book value of $4.70 a share and no revenue or profits trade for over $190 a share and have a market cap over $5 billion?

One reason... the company’s CEO, Alan Auerbach.

You see Aurbach sold his previous company, Cougar Biotechnology (yes another company named after a wild cat species) to Johnson & Johnson (NYSE: JNJ) back in 2009 for $1 billion. This made Cougar shareholders a lot of money.

So today you have a lot of the same investors backing Auerbach in Puma, thinking he can mastermind another large takeover by the Pharma big boys.


As you can see in the chart above, in July, shares of Puma took off after it announced positive trial results for neratinib. Over the past year, shares have more than doubled.

But the celebrating is coming back down to Earth today as investors are concerned about the FDA filing delay and the unknown outcome of the animal carcinogenicity studies. Both should cause potential takeover bidders to hold off until more data on clinical trials is released. This delay is worrisome, but it doesn’t mean Auerbach can’t do it again. Now it might just take longer than before.

But in the end, investors are still in the dark. I already mentioned the company has yet to bring in a single cent in revenue. This makes Puma a very speculative investment that is banking on a CEO who had success delivering the goods in the past.

Hard to Grade

Today let’s just look at the company from a financial standpoint so you can better understand why investments like Puma are considered very high risk. I don’t normally reveal a grade before I cover the metrics behind it, but today you must know that Puma gets an “F” rating on its financial health.

But you should know before we run Puma through the Investment U Fundamental Factor Test in general, you don’t want to even look at the standard fundamental metrics when evaluating a startup drugmaker who has no drugs for sale yet and has yet to turn a profit.

If you really wish to speculate, you have to put your faith in management, Auerbach in this case, and hope the company has enough cash on hand and/or access to capital and investors to last long enough to get through the time-consuming FDA approval process. If things start to look promising, you then have to hope for a takeover, which is never guaranteed. That is a lot of unknowns, and as you can see below, there is not much else to gauge other than hoping for the cash to last and things to work out in the end.  

Earnings-per-Share (EPS) Growth: Puma has no earnings per share and it is projected to turn a profit for the first time in 2018. Far down the road indeed.

Price-to-Earnings (P/E) Ratio: With no earnings you cannot calculate P/E. And with no profits expected to come in over the next 12 months, you also cannot calculate forward P/E.

Debt-to-Equity The good news is that Puma currently has zero long-term borrowings and positive equity from its initial investors. This means its debt-to-equity ratio is 0%. This helps with the long game.

Free Cash Flow per Share Growth : With no money coming from sales, it’s hard to get positive free cash flow.

Profit Margins Puma isn’t a profitable business yet so it cannot have positive profit margins.

 Return on Equity And same goes for return on equity . If the company isn’t generating revenue, return on equity won’t be there.

Bottom line, with only a few fundamentals to even grade, Puma is for speculators only.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

F: Sell (One key metric or less)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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