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in today's video we are going to analyze a stock of interest by creating a story using mr peter lynch's teaching along with breaking down some of the company's financial languages please note our analysis could be wrong and we are not recommending anyone to buy or sell this stock and please consult with your experts first this is just an example of one way to analyze a stock before you buy into it we hope this video can help somewhat to spark investing knowledge and ideas now let us dive in this company is a biotech company that been in business for over 15 years conducting overdose reverse solutions for opium and other drugs they came out with a patent roughly around 2017 approved by the fda for one of their product which is now a registered brand they license their patent to a bigger pharmaceutical company that have all the distribution channels and capability to mass market the product the company that took on the license made roughly 250 million dollars lane 2019 from the sale of this drug according to our research in the first quarter of their profit of 2020 this drug made the distributed company a whopping 72 million out of their 192 million for that quarter this is equivalent to 37 of their revenue for that first quarter of 2020.
this drug saves lives from overdosing on opium and in some states it is mandatory that all first responders must carry it in their vehicles the patent for this drug will expire in 2035 giving our company a mode of around 15 years to collect royalty of roughly 10 to 15 depending on the sale of the drug however in june of 2020 another big pharmaceutical company won the patent dispute in the local district court to make and sell generic versions of the drug generic is another smart way of saying a copycat version of the drug that our company has a patent to after this decision their stock fell dramatically from 52 weeks high of 18 down to six dollars and now is hovering at seven dollars during the making of this video the late mr graham once said price is what you pay value is what you get value companies are what we want as long-term investors and in this video we will break down why this bet is not a value bet even with a huge upscale we are still wrong for gambling with this company now let us dive into some of their fundamental checklists the p e is at four this is dangerously low or opportunity to buy while their average p e is around 18.
as mr lynch mentioned low pe is not always a good thing because it can mean something is disruptive about the business and a lot of investors had fled as for this company a lot of investors did flee because the local district court rule in favor of another competition to come into the market moving to their debt and equity a special thanks to msn money for their free financial website this information can be accessed under the balance sheet tab as you can see their current access been growing year over year with barely any debt if we look at current assets this usually means quick liquidity access and then we compare it with their total liability this company looks like a strong company that can pay off their total liability from the chart please note that a high current ratio is not always good and in this case it is too high this can indicate that the company is not effectively using its current assets efficiently however this company's current assets have no trouble in covering their debts they have no long-term debt but all the debt together is 5.9 instead of 5.6 as you can see from the chart the two circles that we made on the chart are the most recent year now we are going to look at their equity and share outstandings once again the red circle is their latest year as we can see their equity is growing year by year however their share outstanding is growing too we would as investors would prefer them not to increase their share outstanding and keep it as two or even better if they buy back their share their equities are increasing year over year for the past three years as you can see they came from negative four all the way to positive 34.4 that is a very strong growth rate and we should be careful about such a growth rate because it might not be sustainable in the long term for the past few years their growth rate is around twenty five percent to fifty percent using the same number that we have on this chart with equity and share outstanding we will now go over to valuesnip.com to get their intrinsic value for free for the calculators to work we can't use their negative 4.7 years so we will use their 4.3 years now highlighted in yellow please note this calculator is created by preston and we have the description next to the clear button when you click on the exclamation mark this calculator has two parts to it but it is very simple to use the first part is to enter the past shareholders equity and past share outstanding which we had it highlighted in yellow for you so 4.3 and 2.0 will be entered in the first two fields as you can see from the screen the next one will be the numbers that we highlighted in red the reason why we enter two years instead of three years here because our first year will be our control year then we will click calculate and that should give us the outputs of old book value current book value and average changes book value for this company then we move down to part two of this calculation this company gives zero dividends we will enter zero there the current book value is 8.19 so we are going to enter that number there the average book value change 95.18 is not realistic to maintain so we will use a more conservative number of 25 percent for this calculation please note when calculating intrinsic values for any calculators we would want to be as conservative as possible and use the most conservative result as well just to be safe we are going to enter two for the number of years for the federal discount rate you can find that on google by typing in federal 10 years note and it should give you a number of less than one percent as of this video however in the environment of such an unprecedentedly low rate we as investors want to be conservative and use the base of a long-term rate of two percent so for the discount rate we are going to enter two in there our result came to be twelve dollars and thirty cents as the intrinsic value as of the making of this video this stock is trading at seven dollars this gives us the safety of a margin of roughly 40 percent you can play around with this calculator and more calculators for free at valuesnip.com we will leave the description below before we sum up this company and move on to their pro and con please if you like what you see so far may you kindly a lot and we owe it all to you thank you now we are going to move on their cash position per share they have roughly around seven dollars of cash for every share outstanding this means that we are buying this business for free because their cash per share is already at seven dollars and they are trading at seven dollars on the stock market exchange this will only be a huge bargain if they don't accumulate more debt and their earnings can be consistent according to her book buffetology mary suggests that in mr warren buffett's world of investing consistency is king we are going to take a quick look at the cost of running the business their total operating expenses according to the chart is roughly 29 million you can find this under their income statement on msn money according to the 10k annual report they have roughly 30 million in cash this will and can cover their expense for a full year if no other source of income is coming in let us wrap this company up and why all this information is useful to you as an investor and we should be doing this type of analysis or more before jumping into any stocks anyone that is buying this company will be banking on a few things one investors are banking on the outcomes of the court decision if the appeal is going to be filed to fight off competition because the case is still very fresh and it is in the lower court and if the appeal is successful they can expect earnings and growth to maintain for 10 years if the appeal court respects their patent this can be a very strong moat under their belt especially when the product is mandatory for all first responders in some states two if the appeal is not successful or no appeal is filed to defend their patent and new competition does come in the company claims that this drug will sell well over a billion dollars a year in the next few years while taking this sale growth into consideration we decided to take their sale growth projection and slices in half so our sales projection now is 500 million instead of one billion as their sale projected to be after slicing the pie in half again for the new competitions in half for their licensee which is roughly around 250 million and they get 10 to 15 royalty on it so our company should be fine moving forward with this worst projection if the sales growth is correct three the analysis suggests that this company should be traded at forty four dollars per share and the ceo suggest a fair price of forty dollars let's take a very conservative number of book value eight dollars per share we are still buying this company at a discount at seven dollars if this company liquidates everything as soon as we buy in then we will instantly profit one dollar after that quick profit don't forget uncle sam at the end of the year therefore quick profit is not a sound idea for long-term investors that want the compounding effect to be at work for their portfolio here are some of the con of this company that investors should be worried about one the worst case scenario is the licensee decided it is not worth pursuing this license any longer and end the licensing deal shorter than expected our company will be in for a troubled ride if this story is to take place our company can't sustain its operational cost so they will have to take on debt to survive two another drawback of this investment in this company is their sole revenue is depending on the success of only one licensee this is very dangerous when it comes to bargaining power and if anything happens to this one licensee their whole survival is depending on it three their financial records and earnings per share history are very choppy and not consistent as we mentioned above value investors only invest in companies that have a consistent record and in the world of investing consistency is king for if we look at their retained earnings it is negative 62.8 this retained earning number shows us that this company since inception is not profiting yet it is actually bleeding money what would you do with this company would you pull the trigger or wait for the court ruling to buy it what do you think about this analysis if you have no thoughts on this maybe you can share it with your investor friend and see what would they do and if you agree or disagree with this analysis or how to improve it please don't be shy to leave comments below thank you before we let you go please if you do well is message was brought to you by payingforward.net direct giving is what they believe in their site is still under construction please leave your email in there if you want to get involved once it is up they will never email you with any solicitation to 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