Last year I wrote a blog post titled “PD-Rx Pharmaceuticals reports great FY2014 results“, but unfortunately, I can’t repeat that exercise this year. While it was likely that this year would be worse than the 2014 record year, 2015 was also worse than expected. Revenue dropped 33% from $29.1 million to $19.4 million while earnings dropped 72% from $2.0 million to $0.5 million. The company doesn’t go into a lot of details what’s the cause, except that they lost “significant sales in a single sector due to a loss of market demand for a single drug”.
I think that this is a risk that you just have to accept when you invest in smaller companies. They are often less diversified with regards the products they offer and the number of customers they have. The biggest product of PD-Rx now represents 16% of sales, so they should now be a bit less risky (it was 49% in 2014!). Another factor that reduces the risk investors in PD-Rx face is the large cash balance that the company owns. PD-Rx currently has a $9.8 million market cap while they also have a net cash balance of $6.2 million. Because of the large cash balance, I think the stock is still pretty cheap at the moment (and on the edge of becoming a net/net once again), although it remains unclear what plans the company has with it. It has slowly been building up for years now.
I have compiled an updated table of PD-Rx’s financials below. As visible historical results have been volatile – but consistently positive – in the past. Since the company only releases results once a year we have to be patient to see if they can recover next year.
Disclosure
Author is long PDRX
they should pay a one-time $1 per share dividend and they’d still have $2.50 per share in cash
Why not a $2 or $3 dividend then?
thanks for the update. I would not necessarily say this is a risk with smaller companies. This is an example of “Revenue concentration” and this is risk with such companies where loss of one customer or decline in revenue from one product can impact revenues and profits to this level.
At these levels with 2015 numbers, PDRX is 5x P/E ex cash. It would be interesting to know what is sustainable earnings and would we see any of the cash given back to shareholders. The company probably needs this cash for continued biz , working capital etc. Anyone speak to management?
Why do you assume the company needs the cash? It has been running for years with < $2m.
From the 2013 annual report discussing why they maintain a large cash balance.
“This kind of liquidity allows our company to go after larger projects that require a sizable investment in the product and carry the receivable until payment is made without seeking financing and the contingent finance charges that cut into profits or frankly could make the project unprofitable. This gives the Company a significant
advantage over our competitors.”
Yes, but based on the financials that cash balance is never used.
It’s likely used as a sign of financial strength when they bid for contracts. I did gas & chem procurement for a major MNC and we were always scared of our small suppliers going bust. Having a lot of cash made us willing to grant a contract without fearing we’d end up having to bail them out.
Thanks for your insight Brice, I do think that makes sense to some extent. Still don’t think they do need this much cash, and as a matter of fact you see that they did just fine 5 years ago when the cash balance was below $2 million instead of above $6 million. I think they should do something with that $4 million difference.
Both to have a cushion and to have working capital, I think $1 is just right. Don’t get me wrong I’d prefer more.
I haven’t checked my back copies, but if I remember, they have a down year about every three years. I am still long.
Thank you for the continued coverage. With a year until the next report I could see this getting even cheaper. A bit more color commentary by management would go a long way.
I almost can’t believe the stock traded at 40 cents in 2011, compared with the financials from your table.
I think I alluded to this risk last year, when I messaged regarding the concentration of revenues note in the financial statements. The stock is starting to get to an interesting level here, but I would like to see a little more pain (and margin of safety) to get back into this company.