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When Stocks in a Sector are Trading for Less than Their Cash on Hand, it May be Time to Bargain Hunt

If you’re shopping for a wallet and one comes complete with $100 worth of cash inside and is priced at $60, would you think there is value to this purchase? A situation similar to this has evolved in many biotech stocks. Their balance sheet cash and cash equivalents exceed their market value. Whether the broader market recognizes the value in these companies and pushes prices up, or large-pharma, currently flush with cash, swoops in to own more than their purchase price, remains to be seen. But, the value many of these firms offer is more than just their R&D, patents, or product pipeline. It is also measurable assets in excess of where the market currently values the company.

Background

The Nasdaq Small-Cap Biotech Index did well beginning March 20, 2020. At the time the race was on for a vaccine for the novel coronavirus and attention was being paid to these smaller, more nimble firms. The index rose from a low on March 20 of 2,667 to reach a high of 7,052 on February 5, 2021, just after vaccines began being distributed. That’s a 164% increase in 10 months. During that period, if you were a biotech firm, raising capital was easier than it had been in years.

From February 2021, the index began a long slide and is actually cheaper than it had been before the initial run-up. The index is now at 2,437 (May 25).

Valuations

Number crunchers at Noble Capital Markets created a list of all Nasdaq-listed biotech companies with Market Caps below $160 million. They then netted the market cap from the corporate cash position on each. The results are surprising. The list of companies is 267 long, and more than half (135), held cash and equivalents that exceeded their market value.

While a full evaluation of any company, including its cash burn rate, and future prospects is necessary, by this one measure, there are a number of potential positive outcomes for these seemingly undervalued companies.

First, investors could begin to recognize value. As institutional and retail investors begin to become aware of the value in this sector, they may begin allocating more to small-cap biotechs.

The second is that big pharma is flush with cash. Their cumulative position is now over $300 billion. The entire group of companies with more cash than market cap has a combined market cap of $6.5 billion (values shown in green on the linked
spreadsheet). (Note: the linked spreadsheet is available exclusively for Channelchek members. Registration is free)

Third, the FDA has more free time. The pandemic put the arm of the FDA that reviews and approves new drugs and vaccines under more pressure than normal. Those resources are presumably more available now to review and approve non-pandemic-related applications.

Fourth medicine and therapies are largely recession-proof. Keeping money out of the stock market exposes investors to the erosion of an 8% inflation rate. Money in the market exposes investors to stocks that are still, by many measures overvalued. The biotech sector is not guaranteed to be revived anytime soon, but the case that it is overvalued is a tough one to make in light of the assets vs. price of these corporations.

Examples

While there are 267 companies that met the criterion, 135 had cash exceeding market value. Below are three examples as a demonstration of what is included on the spreadsheet:

Eledon (ELDN) has a market value of 57% of its cash position. In actual dollar amounts, it has a market cap of $43.6 million, and current cash assets of $76.7 million. ELDN is a clinical-stage pharmaceutical company focusing on developing medicines for patients living with autoimmune diseases and requiring an organ or cell-based transplant.

ELDN is currently trading at $3.11 per share.

Tonix Pharmaceuticals (TNXP) has a market value of $39.9 million. According to its March 31, 2022 10-Q, Tonix has $140.4 million in cash and equivalents. This causes cash to be 350% of market value. Tonix is a clinical-stage biopharmaceutical company. It focuses on discovering, acquiring, developing, and licensing therapeutics and diagnostics to treat and prevent human disease and alleviate suffering.

TNXP is currently trading at $1.94 per share.

Sigilon Therapeutics (SGTX) has a market value of $25.8 million. The company’s cash position is $107.1 million which is 314% of the market value. Sigilon is a clinical-stage biopharmaceutical company. It’s developing a new class of therapeutics and functional cures for patients with chronic diseases by providing stable and durable levels of therapeutic molecules.

SGTX is currently trading at $0.74 per share.

Take-Away

For a brief moment in 2020, oil prices were so low that oil futures were negative – you could actually get paid to own an oil contract. Some months after this situation, the entire energy sector became the best performing industry. It still is. Small-cap biotech may now be experiencing its own oversold conditions.

An investment in some companies is backed by more cash and other assets than it would cost the investor or acquirer. There are four companies on the linked list trading at a level where the net cash is four times the market cap.

The biotech sector appears ripe for attention by bottom-pickers.

Paul Hoffman

Managing Editor, Channelchek

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