Wednesday, April 12, 2017

Backing Up the Truck on NBIX below $50

update 4/12/2015 - added a quick sentence about Mitsubishi Tanabe agreement and minor formatting edits.

Notes on NBIX (Neurocrine Biosciences)

INGREZZA for Tardive Dyskinesia got approved after market.  Stock jumped from low 40's to almost $50 after market.

I kept buying after market. Literally bought until Interactive Brokers wont let me by anymore.

The big surprise is the approval came with clean label. I had anticipated 50/50 chance of FDA approval, but most likely with some sort of black box warning. More upside surprises (for me): management decline to give price guidance, but pointed out that even the high end of their $20-60k estimated annual price range will be well below Teva's rival drug Austedo (which comes with black box warning).

That's a game changer. Market share and pricing assumptions that people used a week ago will likely prove conservative.


  • INGREZZA for Tardive Dyskinesia (TD) - worth $40-60
    • US only peak sales - $1.5-$2bn, use 2-3x EV/revenue.  Get you to roughly $40-$60
    • That's just US.  
  • Elagolix for Endometriosis - 800mm-1bn peak sales, assume NBIX takes 20% royalty get you $150mm ballpark revenue. This is an NDA filing 3Q17, which has about 85% probability of success.  works out to $3-4/share.  
  • Opicapone - 150mm peak sales, NBIX takes 63%, 2x EV/revenue.  thats another $2/share

This gets to $45/share floor price already. Could be $65

What am I not counting?

1) Not counting 300mm of cash - I just assume they'll be burned near term for development and bridging to commercialization.

2) They have an agreement with Mitsubishi Tanabe Pharma to commercialize INGREZZA for TD in Japan & Asia. I'm assigned 0 value for now but it's certainly something.

3) Elagolix for Uterine Fibroids  - this is in Phase 3, which empirically have 55-65% probability of success. This is a bigger market than Elagolix for Endometriosis. Could be $2-5/share. 

4) and finally, the big one:

INGREZZA for Tourette Syndrome (TS), in Phase 2.  This is a bigger market than TD!.  If Ingrezza for TD is worth $40 conservatively, then TS indication could be worth $50/share.  That could doubles the stock price right there.

At anything < $50/share there's zero or very limited downside.  You're getting a free option on INGREZZA for TS - 100% upside. The Phase 2 results come out for that next month. 

Other Notes

CEO is loaded with stocks. This is an R&D focused company. Management team is full of PhD and MD's with decades of industry experience.

Obvious acquisition target with attractive pipeline/assets/catalysts. Great R&D capability, But I'm not sure they're willing to sell. NBIX is building out its sales force/commercialization capabilities. We could see them transform from a small biotech to the next great pharma.

There's almost 4mm shares short interest and those will get squeezed.

Sunday, April 9, 2017

R1 RCM (RCM) Has a Long Way to Go Up

R1 RCM (formerly Accretive Health) is a high probability trade with >2:1 upside/downside. The stock is trading at ~$3.3/share and I can easily see this going to $5 if not more. This is an idea that’s been on the radar for years. Here are just a few write-ups that helped along the way.

2014: From Buyside Notes

Also late 2014: write up by Sententia Capital

2016: mentions by Reminiscences of a Stockblogger

So why another write-up? This is now a material position for me and I owe myself a write-up for documentation. Also, given the recent run up, it would be helpful to explain why the stock can go a lot further, as well as provide some valuation ranges.

R1 RCM (formerly Accretive Health) does revenue cycle management for hospitals. I won’t bore you with what that means - that’s covered by the various write-ups I cited above. In any case I’m not enamored by the business. Basically I’m investing in the stock, not the business.

A few years back company had accounting/customer issues which caused delisting. They fixed those problems and just re-listed. The ugly history, customer concentration, combined with (still) ugly accounting and capital structure all combined to discourage investors and create this opportunity. I know that because for the last 3 years every time I looked at the company I thought “yuck” and skipped, until recently the opportunity simply became too good to resist.

Cheap Valuation Relative to High Probability of Delivery Next 3-4 years.

Management has a 2020 plan for free cash flows of $75-105mm by 2020. They expect to be free cash flow positive by 2H17.

Notably, management stated that currently contracted business alone would deliver 90%+ of the low end of that 2020 projection.

Capital structure is messy but not crazy once you work it out. Here are the basics.
  • $181mm of cash, but ~16mm of that is “customer float”. So excess cash is about $165mm
  • $0 debt. 
  • $214mm of Convertible Preferred’s that Pay-In-Kind (PIK) at 8%, convertible at $2.5/share. 
  • 60mm shares of warrants convertible at $3.5. 

The best way to value RCM is to roll the capital structure forward to 2020 and factoring in all the dilutions.
  • Cash and debt. The company will be cash flow positive by 2H17, so I give them credit for the full $165m cash at 2020, and still no debt.
  • Convertible Prefs. $214mm at 8% quarterly compounding get you to ~$295mm by 2020, which at $2.5 conversion price get you about 118mm dilutive shares at 2020.
  • Warrants: I used treasury stock method, assuming warrant holders exercise at $3.5/share, and then company buy it back at higher average price of $4/share (just to have some conservatism built in). This gets us 7.5mm dilutive shares.

All in, there should be ~125mm of total dilutive shares from convertible preferreds + warrants, getting to total share count of 239mm by 2020.

So here’s what valuation looks like. Using conservative EV/FCF multiples of 10-12x, RCM should be worth $3.8-$6.0 per share by 2020.

R1 RCM valuation

Given today’s stock price of about $3.3, there is no downside, while the mid-point of that valuation range provide almost 60% upside and ~20% IRR

This is almost too good to be true. At what point would I say “I may be wrong, let’s cut out and re-evaluate”? There appears to be some support around $2.4. Using that as a stop loss, downside is about 30%. Compare that to 60% upside that’s a 2:1 reward to risk ratio.

Again, this is a high probability given that currently contracted business delivers 90% of the low end projection. God forbid they actually win new contracts, the shares could go through the roof.


1) The recent listing has brought increased volume and the stock is already trending higher.

2) Company will go through an accounting change 1Q17 to simplify the story.  

Right now the accounting is a mess: GAAP revenue is completely meaningless, so investors have to rely on management’s non-GAAP measures. I remember spending lots of time reconciling GAAP revenue and EBITDA to management's corresponding gross and net "cash generated from customers", and then from that to GAAP cash flow from operations and management's free cash flow measure. It was a super pain in the ass. A simpler GAAP accounting profile would go a long way to remove the “yick” factor and bring in investors.

3) If they win a contract outside of Ascension and Intermountain, that could "prove" their capability and help the story. 

I think they can do it. The company offers a fully outsourced model where they effectively take the risk of cost overrun and reap the rewards of cost savings. I think that makes a lot of sense in today's hospital landscape where margin is tight, and where payers pushing "value based care" are pushing risk into hospitals.

Other notes

Dr. Rizk served as the Chief Executive Officer of Accretive Health, Inc. from July 21, 2014 to May 26, 2016.  It’s likely he left voluntarily because 1) he became CEO of Verisk Health (now Verscend) in Aug 2016, like 3 months later 2) they groomed Flanagan as COO for a while.