Is Sage Therapeutics an interesting investment?
Opdateret: 3. maj 2022
Sage Therapeutics has lost almost half of its value since mid-June. Is it a company that you should add to your portfolio, or is it a falling knife you should stay away from?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I have added Sage Therapeutics to my portfolio. However, I will try to make this analysis at neutral as possible. It is important that you do your own research in case you would like to add Sage Therapeutics to your portfolio, as there are risks as with all other biopharmaceutical companies.
Sage Therapeutics is a biopharmaceutical company that is located in Massachusetts, USA. They focus on developing therapies to improve brain health. At the moment they have one approved drug called Zulresso. Zulresso is the only approved drug against postpartum depression (PDD), and the patent expires in 2033. While Zulresso is certainly an interesting drug, the pipeline at Sage Therapeutics is even more interesting, which is I will cover later in this analysis. As with all other companies in the biopharmaceutical sector, Sage Therapeutics has a secret moat due to their patent.
Their CEO is Barry Greene. He has only been the CEO since December 2020. Prior to joining Sage Therapeutics, he served as the president of Alnylam Pharmaceuticals. He has a vast experience in the sector, as he has been part of it in more than 30 years. Once he took over at Sage Therapeutics he was described as a world-class leader with global experience and a significant success in R&D and commercialization. It is impossible to judge anything from Barry Greene's short tenure as CEO in Sage Therapeutics, but I like that he focusses on innovation. In a interview he said: "We see hope and opportunity and believe there is still room for innovation in the treatment of brain health disorders. To advance medical research, we need to question status quo". I find it very interesting, which is something I will elaborate a bit about later.
We have determined that Sage Therapeutics has a secret moat. While it is too early to say if management is good, I believe we are off for a good start. Now let us investigate the big five numbers to see if Sage Therapeutics does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. So, Sage Therapeutics are very far from reaching the requirements when it comes to ROIC. And you might ask yourself, why I'm interested in investing in a company with these numbers. Numbers like these are normal for companies in the biopharmaceutical sector, as they need to develop drugs. Zulresso was approved in 2019, which is why we only see positive numbers in the one-year benchmark when it comes to ROIC. Hence, with relatively new companies in the biopharmaceutical sector, you would need to look behind the numbers.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. As with the ROIC there is a natural explanation of the numbers. Hence, it isn't something I give much importance.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. We see the same pattern. The number keeps increasing as time goes and we get closer and closer to approved drugs. The numbers are great, and the increase has a natural explanation.
The Equity Growth Rate is also known as the most important of the four growth rates. It is not surprising that the equity growth rate hits its highest point in the one-year benchmark due to the improvement of Zulresso.
Finally, we look into the Cash Growth Rates. It is the same pattern as in the other growth rates. The latest benchmark is the best numbers due to Zulresso. Obviously, the numbers have been great all along, like in all of the growth rates except sales for obvious reasons.
To shortly summarize the five numbers from Sage Therapeutics. ROIC will always be the most important number but as Sage Therapeutics didn't get a drug approved until 2019, it is natural that their ROIC has been negative in the three oldest benchmarks. It is nice to see that since they got a drug approved, they have had a positive ROIC well above the requirement. Looking at all growth rates except for the sales growth rate, they have done well even before their first approved drug. However, I wouldn't give much importance to the numbers we have seen. The future is much more interesting.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation in Sage Therapeutics, I can see that Sage Therapeutics has 0 years earnings in debt, which is of course is fantastic.
I believe that Sage Therapeutics is an interesting company but like with all other companies in the sector, you have one major risk and that is the pipeline. They will need to develop drugs to keep growing their business. Right now, they have two interesting drugs in the pipeline, and the most advanced is Zuranolone, which they are currently doing Phase 3 trials on as cure on Major Depressive Disorder (MDD) and Postpartum Depression (PDD). The reason the stock has dropped significantly since mid June is the underwhelming results in the waterfall study of Zuranolone in patients with MDD. While the study did meet its primary endpoint in demonstrating a statistically significant and clinically meaningful reduction in depression symptoms, Wall Street wasn't impressed. Later this year we have the results of two other studies (Coral and Shoreline) regarding Zuranolone, which could be a catalyst for the stock if we see positive results. We also see phase 2 trials with Zuranolone against Treatment Resistant Depression, Generalized Anxiety Disorder and Bipolar depression. Another interesting drug in the pipeline is SAGE-324 that could be a potential cure towards Essential Tremor, Epileptiform Disorders and Parkinson's Disease. It should be noted that Sage Therapeutics made a deal with Biogen to develop and commercialize Zuranolone and SAGE-324, meaning Biogen received license to the drugs outside of the U.S., excluding the rights to Zuranolone in Japan, Taiwan, and South Korea. It will obviously hurt the profits from these drugs.
On the contrary to Wall Street, I have higher hopes to Zuranolone. On the contrary to other drugs for MDD, such as Zoloft by Pfizer and Prozac by Eli Lilly & Co that takes months to treat depression and six weeks before effects start to show, Zuranolone is only meant to be used daily for two-weeks to see results. Besides being more comfortable for patients with only a two week treatment, it could also benefits patients in other ways. Research has shown that patients that are treated with multiple medicines and stay depressed for long periods of time go on to develop diabetes and cardiovascular diseases. And whole Wall Street was not impressed with Zuranolone, we saw some positive statements elsewhere. Mental Health America stated on Zuranolone: "We welcome today's news and the potential for a new an innovative treatment that could change the way we treat depression" while the Chair of Psychiatry and Neurobehavioral Sciences at the University of Virginia School of Medicine stated on Zuranolone: "These data suggest that this treatment, if approved, has the potential to work fast with a short-course of therapy that is well-tolerated, with the effect maintained long-term".
Finally, it should be mentioned that the MDD market is expected to grow with a 7,1 % CAGR until 2029 according to GlobalData.
All right, we have gone through the numbers, potential and risk regarding Sage Therapeutics, and now it is time for us to calculate a price for Sage Therapeutics. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS at 10.50 (which is a bit higher than last year of 10,31 but lower than the current one of 12,41). I chose a Estimated future EPS growth rate of 8 (which I believe is attainable, and could possible be higher depending on Zuranolone), Estimated future PE 16 (which is the double of growth rate, as the historical highest PE is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $89,65, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Sage Therapeutics at price of $44,83 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 664,28. The Capital Expenditures was 0,34. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 0,24 in our further calculations. The Tax Provision was 0. We have 58,81 outstanding shares. Hence, the calculation will be like this: (664,28 - 0,24) / 58,81 x 10 = $112,91 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 3,71 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $42,62.
I believe that Sage Therapeutics is an interesting company with a good moat. Obviously, it is quite risky, as many things depends on Zuranolone in the short-term future. I opened my first position in Sage Therapeutics at $57,61 and will probably top up now when it is possible to get it below the PAYBACK TIME price at $42,62, as you get it at a 50 % discount on all calculations. There is still a bit too many uncertainties regarding Zuranolone, and personally, it will just be a minor position in my portfolio.
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