Hello everyone,
In this edition of the Mr. Market Original blog, we will look at Corcept Therapeutics (ticker: CORT), a US company listed on the NASDAQ. As of this writing (it will probably take me a few days until the final version is published, so the price may vary), CORT is trading at $ 28.75.
I came across this company after a screening process using certain parameters that I considered pertinent. CORT is immersed in the Health Care sector. Despite the context, this company does not focus its attention on the current health emergency, but on the development of drugs to treat diseases related to cortisol[1], which is a hormone that performs functions such as fighting infections, regulating the level of sugar in the blood, etc. The purpose of the blog is not to inform about medicine, but about investments, so you can go to other sources to complete your understanding on the subject.
The Health Care sector is a very attractive one, since it is resistant to economic crises (people will hardly stop taking their medicines in one) and usually has recurring income (people must take their medicines with some regularity, so they must buy new ones relatively frequently).
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DISCLAIMER
All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be considered as a recommendation or as a guarantee of any specific outcome or profit.
With that, please enjoy this report on Corcept Therapeutics!
Definitions:
The following definitions will be useful to understand before reading this report. More definitions will be introduced throughout the post, if needed:
· Orphan Drug: it is a drug that is used to treat a rare disease, which, due to this rarity, would not be profitable to produce without government assistance. In the United States, a rare disease is considered one that affects less than 200K people. Orphan drugs get seven years of marketing exclusivity from the drug approval date, tax credits for clinical trial costs, waivers of marketing application filing fees, and FDA assistance in drug development process. Receiving orphan drug designation does not alter standard regulatory requirements or the process for obtaining marketing approval.
· Cushing's Syndrome: it is a hormonal disorder related to high levels of cortisol that is characterized by obesity in the upper part of the body, a rounded face, thin arms and legs, among other characteristics.
1. Executive Summary
CORT has a Market Capitalization of just over 3B, which leads it to be included in the group of Mid Cap (2B-10B). It was founded in 1998 by Alan Schatzberg and Joseph K. Belanoff, and made its IPO in 2004. Belanoff remains as CEO so far. Since then, the company was in an R&D phase, until 2012, when it received FDA approval to market its first drug: Korlym. It is from that year that the company begins to receive significant income.
CORT has patents registered in the FDA Orange Book, which is a database of drugs approved for use in the United States. The company also has a very favorable cost structure, an aspect that we will evaluate later.
The top 5 shareholders are as follows[2] (page 13 of Proxy Filing, April 27, 2020):
The thesis formulated on this occasion is the following:
“Considering important advantages that the company has, such as low production costs, favorable capital structure, pricing power, patents, the board of directors with skin in the game and apparently being good capital allocators, and considering global trends towards Health Care, which suggest that companies in this field will be fairly valued in this decade (2021-2030), we believe that Corcept Therapeutics (CORT) will be able to consolidate itself as an important player in the sector”.
2. Company Overview
CORT focuses its efforts on developing drugs that treat cortisol-related diseases, and Korlym, a pill-format drug, was its first proposal to treat Cushing's Syndrome, a disease caused by the presence of high levels of cortisol in the body. This disease is rare, and the company itself estimates that there are about 20K patients in the US, its current market. The detection of people with this condition contributes to the identification of 3K new patients each year. This situation has led the US government to consider Korlym (and probably any other drug that treats Cushing's Syndrome) in the Orphan Drug category.
Although it is true that this is a small market, there are other diseases related to cortisol that are much more widespread, opening a very wide range of possibilities. In addition, the price of a Korlym pill is in the hundreds of dollars, which helps make the business profitable despite the tiny market.
On the other hand, CORT has taken anti-takeover provisions: this means that they have placed obstacles against a hostile acquisition, and rather they seek that, if there is a takeover bid, it is first negotiated with the managers. In the 2019 Annual Report, page 24, it reads as follows[3]: “These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control to first negotiate with Corcept’s board of directors. We believe that the benefits of protection to Corcept’s potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure Corcept outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms”.
3. Investment Thesis
Warren Buffett once said that to identify if a company has a deep moat, one would have to imagine that one has $1B and if with this money one can compete with it. Carrying out this exercise of imagination, one realizes that despite having such capital, it is very difficult to enter this sector, since not only money is required, but advanced academic and scientific knowledge to found this kind of company and develop lines of research, so this company satisfies this aspect. CORT is a high growth company with strong entry barriers:
· Holds patents.
· Korlym receives special treatment from the government for her Orphan Drug status.
· Being a brand-name and specialized drug, it is very difficult to substitute it, especially if it is not fully paid for by the patient (the pill costs approximately $550, so patients who must take it daily must receive government financial assistance from programs like Medicare and Medicaid). The pill began being marketed at approximately $223.
· Advantage in the cost structure, an aspect that we will observe later.
· Being specialized in cortisol-related diseases, so that advances in one line of research can feed back other lines.
· Specialized knowledge is required to found a company in this area and compete with CORT, unlike, for example, the technology sector, where developing a product writing code is relatively cheap and easy (see case Whatsapp and its growing threat on Facebook, until it was acquired).
· The market for orphan drugs is so small that it may inhibit larger competitors from venturing to serve it.
Regarding management, let's look at the following table:
It should be noted that the values for 2020 are identical to those for 2019, since there is still no information for that year; while there is no information from 2016 of Sean Maduck, the “Senior Vice President, Commercial”, because there was no such position in that year. The CEO and one of the founders, Joseph K. Belanoff, currently owns a little more than 5% stake in the company, and the market value of his shareholding is 35X his compensation, which indicates that he is not only an employee, but also a stakeholder in the business to prosper. The same goes for Charles Robb (17X his compensation) and Sean Maduck (16X his compensation). Andreas Grauer would be the only exception, but it's understandable considering his recent addition. The fifth column represents the CAGR of each director's compensation.
In addition, during the second half of 2020, we observed a recurring purchase of equity participation by Leonard Baker, a non-executive director at prices of $ 12, $ 17 and $ 22, which reveals great confidence in the strength of the company even during the development of the pandemic[4].
I have found no scandals or unethical acts in their work at other companies. For more information about the executive team, go to the link that I leave at the bottom of the page[5].
As an example of the CEO's vision for the company, I include some of the statements he made in an interview[6]: “If we're successful here, you not only take away the abortion issue but you can go to larger markets like diabetes and hypertension that are just too big for us to handle alone. We’d have to have a partner”; “The first is our tenet in the company that everyone who needs the drug is going to get it. Period. We have a payer assistance program. The second thing is, we have to get paid. Payers, I think, understand that ”.
As statements of strength, in the Earnings Call 2020 Q3 we will see the following phrases from the CEO[7]: “I know of no other company our size that combines commercial success with such diverse and promising clinical activities”; “Pandemic-related changes in medical practice and patient behavior modestly reduced awareness this quarter, but the foundation of our business and effective medication promoted by a dedicated commercial team that could be an [indiscernible] patient approach have been rock solid and supports to benefit from growth once conditions improve”; “Stock repurchase program we announced today reflects our Board’s confidence and fundamental strength of our business. Most important use of our cash is to fully fund our commercial operations and our increasingly broad clinical development programs”; “Before we [indiscernible] our stock repurchase program allows us to repurchase our stock when we think it's undervalued, like it has been diminishing [ph] now (on November 3, 2020, conference date, CORT was trading around $17)".
THAT'S THE CONFIRMATION: THE BOARD OF DIRECTORS PERFECTLY UNDERSTANDS HOW TO MAKE AN EFFICIENT CAPITAL ALLOCATION AND THEIR REPURCHASE PROGRAMS WILL BE EXECUTED WHEN THEY CONSIDER THAT THEIR SHARES ARE TRADING BELOW THEIR INTRINSIC VALUE! Although it may not seem like it, this vision of the board is not very common and having it is extremely valuable. They will not use debt to finance their $200M buyback program, with a view to ending September 30th, 2021.
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4. Investment Details
So far, Korlym is the only product marketed by CORT, and therefore its sales depend on it. The company is in litigation with Teva Pharmaceuticals and Sun Pharmaceutical to defend its patents and protect its revenue generation, as the latter ones want to manufacture alternative generic drugs to Korlym. On November 18, 2020, CORT announced a favorable result of one of its litigation, so this constitutes an important precedent in the defense of its intellectual property[8].
5. Business Model
Korlym is only marketed in the United States and CORT has not planned to market it outside. Due to the small market it is aimed at (Cushing's Syndrome), it makes no sense to build its own production centers and all the necessary infrastructure, an action that would significantly reduce the company's profits, which is why it outsources a large part of its production process.
The API (Active Pharmaceutical Ingredient) that Korlym uses is Mifepristone and is produced by Produits Chimiques Auxiliaires et de Synthèse (PCAS), a French company that works with other pharmaceutical and petrochemical companies, among others. This API has certain adverse effects in certain women, since it can cause vaginal bleeding, but CORT is already working on a successor to this drug, since this last characteristic may result in the discontinuation of sales. We will talk about this successor, which is in research phase, later. Similarly, tabletting and packaging is outsourced. Due to the tiny market, Korlym is not offered in traditional mass pharmaceutical chains, since it is not profitable, and rather they are offered in Optime Care Inc.[9], a chain specialized in commercializing orphan drugs. Considering all this, we observe that CORT does not present a vertical integration (and we do not glimpse a horizontal integration either).
It is important to notice the aspect of the development of the merely investigative lines. Being in the "Business Model" section, why talk about these lines that do not produce income? Because, although they do not produce income, they do produce expenses (R&D section). During the development of the investigations, it is necessary to carry out clinical tests, and these represent an investment in the Income Statement. CORT entrusts the conduction of its clinical trials to other firms, such as ICON, IQVIA, Medpace, among others.
On the other hand, by recognizing the small size of its market, the company actively contributes to creating it (page 6, 2019 Annual Report[10]): for the detection of Cushing's Syndrome, CORT is developing a test (FKBP5 Gene Expression Assay) to diagnose more efficiently patients with hypercortisolism and optimize their treatments. Traditional tests are often imprecise and frequently fail to identify patients with less severe manifestations of the disease. If successful, this will make it easier for doctors to identify patients with hypercotisolism, and this in turn will help expand the market for Korlym now and its successor later.
Finally, there are 2 very important drivers that drive revenue generation, recognized by Sean Maduck himself: Patient Retention and Unique Patient Acquisition. The director said in the Earnings Call 2020 Q3[11]: “So, there are two key drivers for our revenue, the two key components, one is patient retention, and then the second is unique patient acquisition. During this COVID window is doing well, our inpatients, but apparently, new patients have been challenging. So, there's three key factors that have impacted us over the last six months and the first - it varies state by state, but physicians have moved to more of a hybrid model of in-person in telemedicine and they're not seeing patients with the same frequency that they have previously in pre-pandemic. So, screening the diagnosis rates are down, which, of course, impacts the patient’s ability to get diagnosed and then get treated and then to get to an optimal treatment regimen, that’s point one. Point two; Even if patients are able to go to the physicians or to give their labs, they've been very reluctant to do so. Those are very, very sick patients. And due to the preexisting conditions until the virus that they haven't been doing. And the third piece is, the whole practices in health systems have been open to some patients and many have been closed to the pharmaceutical industry, which impacts our clinical ability to educate new potential prescribers. So, as Joe mentioned, we needed a technology platform and we're doing what we can to try new things, to reach physicians when in-person interaction is not feasible. So, in terms of Q4, it takes time for a patient to be diagnosed. It takes time for a patient to potentially to be fully on for Korlym, and then it takes time for them to verify the authenticate and reopen its business impact. So, there's a lag on that first few months. And we already mentioned that it is definitely a significant slowdown in physician interaction in Q2, when everything was shutdown with the onset of COVID-19, and that slowdown impacted Q3. Now, the changes I think have somewhat in the third quarter, there are revenue in activity and a nice factor that will benefit our Q4”.
6. Growth opportunities in existing Business Lines
The only drug on the market is Korlym. In this regard, the CEO stated the following in the Earnings Call 2020 Q3[12]: “As I referred to on prior calls, there are many patients who could benefit from Korlym who have not yet received it. Our plan and success of Korlym are co-related and has the potential to benefit many more”. However, despite this opinion, he also mentioned the following: “[…] it's my expectation that over time (new drug) would entirely replace Korlym as the first-choice drug”.
Given the above, we see that the CEO has a vision for Korlym's successor to replace it as the drug of first choice. In the next section we will see what it is about.
7. Growth opportunities in potential Business Lines
At this point, we see a range of possibilities unfold in front of us. Next, I will put a list of the investigative lines[13]:
• Endocrinological and metabolic research.
• Cancer research.
• Neurological and neurodegenerative research.
• Research on addictions.
• Ophthalmological research.
• Psychiatric research.
• Research on Alzheimer.
• Research on anxiety.
• Research on obesity, diabetes and hypertension.
• Research on non-small cell lung cancer.
Of all these lines, the first and second are the ones of which there is more information, since they are already in phase 3. The treatment for Cushing's Syndrome is found in "Endocrinology and Metabolism". Here is Korlym's successor: Relacorilant. Note that Korlym is the brand name of the drug containing the API Mifepristone, while Relacorilant is also an API and does not have a brand name yet.
As I mentioned, Relacorilant is in phase 3 of research to treat Cushing's syndrome by eliminating the effects of Mifepristone; while Relacorilant+Nab-paclitaxel is also in phase 3 of research to treat pancreatic cancer. Two very positive news have been communicated by the company regarding both lines of investigation: the first[14], in 2019, the European Medicines Agency Committee for Orphan Medicinal Products (COMP) issued a positive opinion recommending the approval to the European Commission of the Orphan Drug designation for Relacorilant as a treatment for Cushing's syndrome; the second[15], in 2018 Relacorilant received Orphan Drug status from the FDA to treat patients with pancreatic cancer.
In the quarterly report 2020 Q3[16] (page 15), CORT reports that Relacorilant finally received Orphan Drug status also in Europe.
Similarly, the company expects to submit an NDA (New Drug Application) to the FDA for Relacorilant for the treatment of Cushing's syndrome in 2022 Q2.
8. Industry Overview
In the field of Cushing's Syndrome, CORT mentions that there are currently around 20K patients with this diagnosed condition and their number increases by 3K each year. Considering the active market formation of the company, exemplified mostly in the development of a more efficient test of hypercortisolism (FKBP5 Gene Expression Assay), we can foresee that these 3K per year will increase once it is disseminated: the informative activity of the company on the disease will be accompanied by the diffusion activity of its products to treat it. Furthermore, while they have no plans for Korlym to be marketed outside of the US, there are plans to market its successor in Europe. The growing aging of demographics, a phenomenon that already affects many countries, is also a factor that can work in their favor. All this promises a very interesting growing market for Korlym and Relacorilant.
In the field of pancreatic cancer, the US National Cancer Institute[17] mentions that there are new cases in every 13.1 out of 100K inhabitants, and the mortality rate is 11.1 out of 100K inhabitants. In 2017, it was estimated that approximately 79K people were living with this type of cancer in the country. From this, one can deduct a current potential market larger than that of Cushing's Syndrome. The company does not offer more information on the subject in its annual reports. I have not considered in this report the other lines, because they are in earlier stages of investigation.
9. Financial Overview
Knowing all of the above, it's time to chew numbers! We will review the 3 most important Financial Statements: Income Statement, Balance Sheet, and Cash Flow Statement.
Income Statement
The magnitude of the values is in the millions. I considered taking information from 2016 because it was in that year that the company became profitable.
We see that, from 2016 to 2019, Revenues have increased at an impressive CAGR of 55.6%, while Cost of Sales has increased at a CAGR of 38.8%. However, in 2019, revenue represented approximately 55X Cost of Sales; while in 2020 (as of the writing of this report, the complete results for 2020 have not yet been published, there is only information until Q3), revenues represented 61X Cost of Sales. In the last 12 months (LTM: Last Twelve Months), Revenues continue to represent 61X Cost of Sales.
Now, being CORT a drug development company, it has 2 vital items without which its business cannot flourish: Selling, General & Administrative Expenses (includes payment for specialized personnel, that is, scientists) and R&D Expenses. The nature of the company requires having highly qualified personnel, with degrees, masters and doctorates related to biology, medicine and chemistry, so salaries must be very attractive for said personnel, which represents a disadvantage for the company compared to its larger competitors, with greater resources and possibilities of offering more attractive salaries. Also, the shortage of these skilled employees can push up their wages. This does not happen in all companies: UBER does not require that the most qualified drivers use its application, since its business model is addressed to masses. However, CORT mentions in its Annual Report: “Our employees are not covered by a collective bargaining agreement”. Regarding that first item (SGA expenses), from 2016 to 2019, we observed an increase at a CAGR of 30.4%, and in the last 12 months we see an even greater investment than in 2019; while R&D has increased at a CAGR of 55.1% in the same period, and in the last 12 months we see an investment even higher than in 2019. In 2018 and 2019, these items represented approximately 30% of revenues, respectively, which places them as the activities that have consumed the most resources. This reveals to us that the company management knows where to put resources and does not distract their efforts in unproductive activities.
Operating Income from 2016 to 2019 increased from $10M to $111M (CAGR of 122%), and in the last 12 months we see an increase even greater than in 2019.
Interest Expenses are negligible and disappear as of 2018, which shows us that the company practically does not operate with debt and finances its activities with its own cash flow.
There is something to note regarding the Income Tax Expense, and that is that in 2017 there was an income of $76M. As explained by the company itself, this is due to changes in the tax regulations made by then-President Donald Trump, so this can be considered an abnormal event.
Regarding Net Income, we see that in the 2016-2019 period, it increased from $8M to $94M, which represents a CAGR of 126%. As a result of the above, in the 2016-2019 period, we see an increase in EPS from $ 0.07 to $ 0.77 (CAGR of 122%), and in the last 12 months we see an increase compared to 2019.
Balance Sheet
Let's analyze the most important items: Total Cash and Short Term Investments has been decreasing over the years, which is perfectly understandable in a company that is in growing and expanding. The Short Term Investments item is comprised, according to the company's reports, of corporate bonds, commercial papers, asset-backed securities, US Treasury bonds and money market funds. From my point of view, this has a positive impact on the accounts, since it is money that they do not use, and instead of letting inflation eat away at their purchasing power, they have it invested in assets that help maintain that purchasing power over time, until they find an appropriate use for it.
Net Property, Plant and Equipment remains at minimum levels, this as a consequence of outsourcing a large part of its operations. Total Assets, in the period 2016-2019, have grown at a CAGR of 81%, and in the last 12 months there has been an even greater growth than in 2019. Total Liabilities, in the period 2016-2019, have grown at a CAGR of 14%, and in the last 12 months there has been a greater growth than in 2019. Finally, Total Equity, in the period 2016-2019, has grown at a CAGR of 107%, and in the last 12 months it has there has been even greater growth than in 2019.
The Total Debt in the last 2 years, has been practically zero, and what is particularly striking is that the Net Debt is negative. For those who do not understand the latter, that the Net Debt is negative means that, if the company decided to liquidate all financial debt (the one that generates interests) that it has pending, IT WOULD STILL HAVE CASH!
Since 2012, we have noticed a dilution effect (99M shares in 2012; 114M in 2019), but the efficiency of the capital allocation (buyback program included) shows us that this will not be a major problem. In that way, in the period from 2016 to LTM, the issuance of shares has been increasing at a CAGR of 0.71%, a ridiculous magnitude if we compare the CAGR of other items already seen, growing at rates of 2 and up to 3 digits, and all this with a single product. In addition, we observe that the number of employees has increased considerably in recent years, an understandable phenomenon in a growing company.
The Capital Structure (Debt and Equity) has been improving significantly since 2012, to the point that, in 2019, liabilities represent only 10% of assets, while equity represents 90%. This structure is tremendously favorable, because it provides extraordinary financial comfort in the event that CORT wishes to borrow in the future to expand its operations. The Net Working Capital has been negative in almost every year since 2012, except for 2017, which indicates that the company finances its normal operations not with its own money, but by leveraging it with someone else's money. This, for a company in full growth, represents a tremendous advantage. It should be noted that, in the calculation of Net Working Capital, I have excluded cash, since it is not used on a regular basis, and it is mostly protected in financial assets.
One thing to keep in mind is that Total Cash and Short Term Investments currently represents 12.94% of the Market Capitalization.
If any of the astute readers reviews the financial statements of the company, you will find the item Strategic Inventory. The explanation is simple: as the company depends on a single supplier to obtain its API (Active Pharmaceutical Ingredient), it buys large quantities that stores. That enigmatic item is that inventory that they do not expect to sell within the next 12 months. Mystery solved!
Cash Flow Statement
The Cash Flow Statement is, for me, the most important of all. By only considering money that has actually flowed to and from the company, I give it special importance. Cash from Operations, which is the net cash received from the company's normal operations, in the 2016-2019 period, has grown at a CAGR of 94%, and in the last 12 months there has been a greater growth than in 2019.
Cash from Investing, in the 2016-2019 period, has grown at a CAGR of 644%, and in the last 12 months there has been a greater growth than in 2019. It should be noted that the Capital Expenditure is minimal, and that this explosive growth It is due to the purchase of Marketable and Equity Securities (corporate bonds, US treasury bonds, etc.).
Cash from Financing, in the period 2016-2019, has grown at a CAGR of 59%, and in the last 12 months there has been a greater growth than in 2019. The growth of the last years responds to the share buyback program that CORT has been doing. Let's understand better the above: CORT is a company that was founded in 1998, and until 2012, when Korlym started commercializing, it did not generate any significant income. One can assume that during 14 years of operations without income, a company would accumulate a huge debt load that would deplete profits when it began to receive income, but this has not happened. EXCELLENT CAPITAL MANAGEMENT!
The Free Cash Flow Per Share (FCFPS), which in this case is almost identical to the Cash Flow Per Share due to the negligible expenditure on Capital Expenditures, has grown at a CAGR of 94%, and in the last 12 months there has been a greater growth than in 2019.
Financial Ratios
It should be noted that it is better to consider these ratios as of 2017, since some of them link the information from the year then present with information from the previous year: the information from 2016, when the company became profitable, is in relation to the information from 2015, when the company was not yet, which gives us rare results in some cases. Liquidity Ratios (the higher the better) have been improving considerably year over year.
Leverage Ratios (the lower the better) have been improving considerably year over year. "Interest coverage", which indicates how many times the company can pay interests (derived from debt), grows from the already monstrous figure 484X to 3775X, and then disappears (the denominator, interest, is 0). Net debt, being negative, shows negative ratios.
The Efficiency Ratios also present good prospects: Inventory Turnover (the higher the better) has increased slightly, as has the Receivables Turnover. The Payables Turnover (the higher, the more unfavorable, since it indicates that the company is paying its accounts more quickly, which implies outflow of cash) has remained relatively low. Then, we have the translation of those ratios in days and, finally, we see a reduction in the Operating Cycle and even negative values (suppliers finance) in the Cash Conversion Cycle.
The Profitability Ratios have been increasing since 2016 and are impressive: a Gross Margin of more than 90%, an Operating Margin greater than 30% and a Net Margin greater than 30%. I cannot qualify these metrics with another adjective: EXTRAORDINARY! I want to draw attention to the high ROCE and ROIC: in recent years, these have been around 30%, demonstrating the great quality of business that CORT has. Data from Professor Aswath Damodaran indicates that the average ROIC for the Healthcare products industry, since 2013, has been 15.71%, lower than our company. The Performance Ratios have followed an upward trajectory and the Coverage Ratios, due to the lack of debt, have disappeared. The WACC is 6.03%, lower than ROIC and ROCE, which shows us that this company is building value. The industry average WACC since 2013, according to Damodaran data, has been 7.05%, higher than our company. The Dupont Analysis, which serves to decompose ROE and note which elements drive its growth, shows us that what drives this growth is the increase in profits and assets are kept very close to equity, without resorting to debt to operate.
On the other hand, I have reviewed three metrics that, in my opinion, are very important: Beneish M-Score gives a result of -3.09, which indicates that the company does not show signs of accounting manipulation; Altman Z-Score shows us a value of 47.40, which indicates that the company is a distant from bankruptcy; and Piotroski F-Score gives us a value of 7, which indicates that CORT is a company with financial and business strength.
For those who prefer to observe some of the ratios described above graphically, I attach the respective graphs (ignore LTM Q4, since there is no information yet):
AND WHAT DO YOU GET WITH UNUSUAL GROWTH AND INSIGNIFICANT DILUTION? VALUE! Let's see the evolution of its price so far:
Having held the position since early 2016 ($4) to now ($28), that would have generated a 7 bagger (47% CAGR!). Anyway, if one had not taken a position in 2016 waiting a year to see the positive results of CORT, maintaining the position since the beginning of 2017 ($7) so far, that would have generated a 4 bagger (41% CAGR!).
10. Valuation
At this point, I find necessary to remember the following:
All investment and investment strategies involve risk of loss. Nothing in this website should be construed as investment advice. Any reference to the past or potential performance of an investment is not and should not be construed as a recommendation or guarantee of any specific results or benefits.
Using a Discounted Cash Flow (DCF) model, considering 2020 as year 0, using the LTM FCFPS ($1.43), assuming a CAGR of 10% (much lower than 94%, already exposed above) from years 1 to 10; a CAGR of 7% for years 11-20; a CAGR of 4% for years 21-30; and a CAGR of 1% from year 31 onwards, the intrinsic value of CORT is $41.59, which represents a margin of safety of approximately 31% and an upside of 44.8% with respect to its price ($28.75).
On the other hand, using the valuation by multiples, we have the following historical average information (the most updated information is LTM Q3): P/E (PER) of 30 (the historical average since 2016 is 33, but given that a company with high growth is usually valued around 30, I decided this was the best), P/FCF of 21 and EV/FCF of 20. This information is based on the projection that, by 2020, revenues will be 355M and which, by 2024, will be 704M. In other words, we are assuming that A HIGH GROWING COMPANY WILL JUST DOUBLE ITS INCOME IN APPROXIMATELY 5 YEARS. The above is extremely conservative for me, but I prefer to be wrong for pessimism rather than for optimism.
Personally, I prefer to use the EV/FCF ratio, which gives us a 5-year price target of $57.14, giving us, from the current price of around $28, a 51% safety margin, an upside of 104% and a CAGR of 15%. The historical value of the EV/FCF ratio is 20.41, which shows that its current value (17.46) is below its historical average. Despite the current margin of safety being 12.94%, the growth of the company may justify a purchase. We also note that, at current prices, the EV/FCF for 2022 is 13, which also indicates that this may be a good buy. As can be seen and from my point of view, all of this is extremely conservative, considering its potential expansion with Relacorilant throughout Europe and in the United States for the next few years, not to mention drugs for cancer treatment, among other lines of research and development.
On the other hand, I have relied on the data provided by Professor Aswath Damodaran to obtain an overview of the “Healthcare products” industry. Since 2013, the industry average PER has been 110.18, certainly a very demanding metric. For this reason, I decided to use the PER normally assigned to high-growth companies for the valuation, which is 30 and is much more conservative. Unfortunately, I have not been able to find average data for the other valuation metrics from Damodaran.
There is an important aspect to consider, and that is that, as a result of the pandemic, I firmly believe that the Health Care sector will be closely observed by the market, at least during the 2021-2030 decade, which will lead to companies in the sector to be fairly priced and even overvalued. As an example of this, I mention initiatives such as the GS Global Future Health Care Equity Portfolio[18], a recently launched Goldman Sachs fund specialized in Health Care. In addition, we have the HBM Healthcare Investments[19], Novartis Venture Fund[20] and Nextech Invest[21].
It should be noted that the company itself declares that it benchmarks its shares with 2 specific indices: Nasdaq US Benchmark TR Index (NQUSB) and Nasdaq Biotechnology Index (NBI). In addition, I have included in the following graph the returns of the Janus Henderson Small Cap Growth Alpha ETF (JSML), the ETF most exposed to CORT (3.30% of its portfolio) and ProShares UltraPro Russell2000 (URTY), the ETF, that includes CORT, that has performed better in the last 30 days (27.40%)[22].
We note that since 2012, the year Korlym began being marketed, CORT has outperformed its benchmark indices and the aforementioned ETFs.
11. Competition
I have decided to approach the following CORT competitors: Teva Pharmaceutical (TEVA: Market Cap of USD 12B) and Sun Pharmaceutical (SUNPHARMA: Market Cap of USD 1.5B). Let's compare the aspects seen in the CORT Financial Overview with the same aspects of these competitors. It is worth mentioning that competitors will not be approached in the same depth that CORT was addressed, but you can carefully review the attached images and find more information about them in other sources:
1. TEVA:
Income Statement
The magnitude of the values is in the millions.
We observe that during the last few years, its sales have been decreasing, and its costs of goods sold are approximately half of those sales. On the other hand, its most important items, those that support its business, Selling, General & Administrative Expenses (includes the payment of specialized personnel, that is, scientists) and R&D Expenses, have been decreasing dramatically.
Operating Income has been decreasing, while Interest Expenses have been increasing constantly. We also see recurring expenses in legal settlements, indicating a distraction of its cash in non-productive activities. Net Income has been negative for 3 years. Let's look at the margins: the Gross Margin is higher than 40%, the Operating Margin is higher than 15% and the Net Margin is negative. We have the sour cherry of this cake in the dividends, discontinued in 2017 and, paying attention to the Payout (percentage of Net Income used in the payment of dividends), we observe in 2016 that it was 473%, which means that it used money from debt, stock issue or saved cash for the payment of dividends. This shows us a terrible management of capital by the board.
Balance Sheet
The magnitude of the values is in the millions.
We noticed that Total Cash and Short Term Investments have been accumulating over the years, which tells me that the board doesn't know what to do with that money. The Net Property, Plant and Equipment corresponds to a company with high fixed costs, which indicates to me that their line of business is directed towards widespread diseases, which makes me think that their attempt to manufacture a generic for Cushing's Syndrome could be counterproductive: making a generic, low-margin, which requires massive sales to be profitable, for a rare disease, seems like a bad decision to me.
Total Assets have been declining considerably, and Total Liabilities account for a large portion of them. Total Equity is the item that has fallen the most drastically: Common Stock, which has gone from $56M to $10B, corresponds to a deficit. Both Total Debt and Net Debt are higher than Income, which does not show a very favorable picture for the company. A revealing fact is the Full Time Employees, which indicates that the company has been laying off personnel in recent years, indications of a company in troubles: THE MANAGEMENT PREFERRED TO USE ITS CASH, IN 2016, TO PAY DIVIDING INSTEAD OF USING IT TO STRENGTHEN THEIR BUSINESS AND ITS INVESTIGATIONS!
Cash Flow Statement
The magnitude of the values is in the millions.
This Financial Statement confirms TEVA's weak position. Cash from Operations has drastically decreased year over year; Cash from Investing has increased in this period, which indicates a dependency on debt. In 2016, there is a cash expense for acquisitions, and apparently it has not been a good purchase, due to the aforementioned decrease in revenues and operating flows; and in Cash from Financing, we observe constant debt repayments, which distracts that cash from productive activities. Historically from 2016 to 2019, it has been trading at an EV/FCF of 66, an undoubtedly high multiple for a company with clear problems and disadvantages.
Finally, let's look at the evolution of the stock since 2016:
When the fundamentals do not accompany, the price does not hold.
2. SUNPHARMA:
Income Statement
The magnitude of the values is in the millions.
We note that, since 2016, Revenues have increased at a timid CAGR of 1.4%, while Costs have increased at a CAGR of 5.5%, which is certainly a bad sign. Revenues represent approximately 3X costs. On the other hand, the Selling, General & Administrative Expenses (includes the payment of specialized personnel, that is, scientists) have increased to a CAGR of 4.9% and the item of R&D Expenses (R&D) is non-existent. I went to the Annual Report of the company, and the information on that last item is practically non-existent and does not explain the different classifications within that item, so I suspect that the company is trying to hide this information or is trying to downplay the importance it should have, which does not generate confidence.
Operating Income has been decreasing since 2016, as has Net Income. EPS are unstable. Let's look at the margins: Gross Margin is around 70%, Operating Margin is around 15% and Net Margin is around 10%.
Balance Sheet
The magnitude of the values is in the millions.
Total Cash and Short Term Investments has been decreasing in recent years. Total Assets have been growing, and of these, Total Liabilities have remained at the same level. Total Equity has increased considerably.
Cash Flow Statement
The magnitude of the values is in the millions.
Cash from Operations has been decreasing, due to the aforementioned decrease in sales. On the other hand, we observe a constant issuance of debt and repayment of it, in addition to the repurchase of shares and payment of dividends, which indicates to me that they want to please shareholders in the short term and not create value in the long term. Regarding the EV/FCF, from 2016 to 2019, the values have been the following: 52, 40, 61 and -100. This last value is due to the fact that the FCF was negative.
Finally, let's look at the evolution of the stock since 2016:
When the fundamentals do not accompany, the price does not hold.
Pros for an investment
1. CORT is a company that did not have to resort to debt to continue with its operations, which shows a solidity of the accounts.
2. There were recurring purchases by insiders throughout 2020, which shows a strong faith in the future of the company.
3. The costs that the company incurs to generate its income are negligible compared to its competition, which gives it a structural advantage.
4. The financial ratios seen previously show a company with great financial and business strength.
5. The current EV/FCF of CORT shows that it is slightly undervalued, compared to its history since it began to be profitable.
6. The competitors, TEVA and SUNPHARMA, have weak financial positions and, apparently, an inefficient management.
7. CORT plans that Relacorilant, the drug that will be the substitute for Korlym, will be marketed in Europe and the USA, and as it does not present the adverse effects of the former, I believe that its expansion will be faster and more aggressive.
8. CORT has already achieved that a drug of its that aims to treat pancreatic cancer is considered an Orphan Drug by the FDA and the European authority, which can dramatically increase its revenue in the future.
9. Products coming out of its other lines of research can dramatically increase revenue.
10. It is a company with practically no debt and low production costs, which gives it a wide margin of indebtedness in the future, if required.
11. CORT has a board of directors aligned with the other shareholders, which helps them have a long-term value creation vision.
Cons against an investment
1. If generic versions of Korlym (and its future successor) are approved and successfully marketed, its business will be adversely affected (litigation with Teva and Sun).
2. CORT relies on third parties to manufacture the Korlym API, tablet it, package it and market it, as well as the other candidate products. If any of these third parties are unable to perform their function and are unable to transfer such activities to other companies on time, the business will be seriously damaged.
3. They could face competition from companies with greater financial, technical and marketing resources.
4. If they lose key personnel or are unable to attract talented personnel, CORT may be unable to achieve its objectives.
5. If CORT cannot defend its intellectual property, it will harm the business.
6. CORT's anti-takeover measures could make an acquisition more difficult and costlier, even if it is beneficial to the company.
7. CORT and drug companies in general, are highly susceptible to reputational damage, which can lead to declining revenue and falling stock prices.
8. The only Black Swan that I envision in the future is the interruption of the global supply chain due to some event, since it imports its API from France (so far).
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May the Value be with you!
[1] https://www.corcept.com/about/ [2] https://ir.corcept.com/static-files/087e8fb7-c548-4137-b4fa-99f2f09c581c [3] https://ir.corcept.com/static-files/d29e64dd-5926-4e78-b533-5516330caf0e [4] https://www.insiderscreener.com/en/company/corcept-therapeutics-inc [5] https://www.corcept.com/about/executive-team/ [6] https://www.bizjournals.com/sanfrancisco/blog/biotech/2012/02/corcept-korlym-cushings-joe-belanoff.html [7] https://seekingalpha.com/article/4386311-corcept-therapeutics-cort-ceo-joseph-belanoff-on-q3-2020-results-earnings-call-transcript [8] https://ir.corcept.com/news-releases/news-release-details/us-patent-trial-and-appeals-board-affirms-validity-all-claims [9] https://www.optimecare.com/ [10] https://ir.corcept.com/static-files/d29e64dd-5926-4e78-b533-5516330caf0e [11] https://seekingalpha.com/article/4386311-corcept-therapeutics-cort-ceo-joseph-belanoff-on-q3-2020-results-earnings-call-transcript [12] https://seekingalpha.com/article/4386311-corcept-therapeutics-cort-ceo-joseph-belanoff-on-q3-2020-results-earnings-call-transcript [13] https://www.corcept.com/research-pipeline/pipeline/ [14] https://ir.corcept.com/news-releases/news-release-details/european-medicines-agency-recommends-orphan-drug-designation [15] https://ir.corcept.com/news-releases/news-release-details/corcept-therapeutics-receives-orphan-designation-relacorilant [16] https://ir.corcept.com/static-files/dccaa5c1-fa0f-4afe-9101-59811a0dc6c5 [17] https://seer.cancer.gov/statfacts/html/pancreas.html [18] https://www.gsam.com/content/dam/gsam/pdfs/international/en/prospectus-and-regulatory/kiids/LU2225206908_CE.pdf?sa=n&rd=n [19] https://www.hbmhealthcare.com/en [20] https://www.nvfund.com/#OurFund [21] https://www.nextechinvest.com/ [22] https://www.etf.com/stock/CORT
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