Valuing the stock market on free cash flow yeild?

[Fermion]

I found this 2017 article that said the S&P500 looks expensive (at 2500 LOL) except on one measure, free cash flow yield. By that measure, stocks did not look expensive in 2017.

https://www.cnbc.com/2017/08/03/goldman-cash-flow-market-looks-cheap.html

So, got me thinking about today. Back then the FCFY was about 4.2% and today it is around 1.9%.

Could be a good metric I guess.

It does make me like my Vanda, with a FCFY of over 6% and makes me look at some other stocks I like to see their FCFY.

 

[aja8888]

I found this 2017 article that said the S&P500 looks expensive (at 2500 LOL) except on one measure, free cash flow yield. By that measure, stocks did not look expensive in 2017.

https://www.cnbc.com/2017/08/03/goldman-cash-flow-market-looks-cheap.html

So, got me thinking about today. Back then the FCFY was about 4.2% and today it is around 1.9%.

Could be a good metric I guess.

It does make me like my Vanda, with a FCFY of over 6% and makes me look at some other stocks I like to see their FCFY.

I saw a Vanda med ad for sleep-wake disorder (SMS) on TV yesterday. I would have never knew who they were except for you mentioning the stock as a possible candidate for growth, etc.

 

[Fermion]

I saw a Vanda med ad for sleep-wake disorder (SMS) on TV yesterday. I would have never knew who they were except for you mentioning the stock as a possible candidate for growth, etc.

Hah, yes they are spending a pretty penny on advertising for that, which in this case isn't the bad thing because there are a lot of people living with it that don't realize it is treatable. Insurers are not wanting to pay for it for sighted people (people who are not blind) because the testing was done in a blind population. This is part of the reason for the slower growth of sales of that drug. Safety wise, it should have the same profile in sighted or blind people.

I did buy some more at $14.15 the other day, it was just too cheap with $415m in net cash on hand plus the free cash flow. It is like buying Microsoft when it was $25

 

[NW-Bound]

^^^ You have proven right in the past, but I missed out. I was going to do it with an old stock pick, but then forgot.

This time, I have bought just a bit when you mentioned Vanda the other day and will buy a little more.

Looked briefly into their financial and saw a big dip in earnings recently. Did not look further to see what that was about, because my purchase is too small to put too much time in it. I do believe that the market is somewhat efficient, and whatever bad news have already been baked in.

 

[Fermion]

^^^ You have proven right in the past, but I missed out. I was going to do it with an old stock pick, but then forgot.

This time, I have bought just a bit when you mentioned Vanda the other day and will buy a little more.

Looked briefly into their financial and saw a big dip in earnings recently. Did not look further to see what that was about, because my purchase is too small to put too much time in it. I do believe that the market is somewhat efficient, and whatever bad news have already been baked in.

Wasn't really meaning to turn this into a Vanda thread but since you pulled my arm...

Vanda at $14.15 ($800M market cap, easy round number).

Revenue past 5 years:

2017 $165M
2018 $193M
2019 $227M
2020 $250M
2021 $280M (estimate, middle of low and high)

Cash on hand (including short term inv.)

2017 $143M
2018 $257M
2019 $312M
2020 $368M
2021 $415M (estimate)

Both drugs, Fanapt for treating schizophrenia, and Hetlioz for treating non-24 sleep disorder have good life left, 2027 earliest generic for Fanapt and 2035 earliest generic for Hetlioz. These two drugs are also in mid and late stage studies for other indications, including a big one, bipolar disorder, which would also extend sales and life of drug.

So the revenue stream *should* continue to grow, even slowly based on just those two drugs, which I believe if you did a NPV based on $800M market cap, $415M in cash and $60M a year in FCF would get you nice numbers by itself.

Then you have Tradipitant, which has just finished up a 12 week treatment phase III study for gastroparesis, which is currently treated by a 40 year old drug with a black box label (pretty serious side effects) called Metoclopramide. Vanda seemed pretty confident late in 2021 that they would be filing a NDA for this in early 2022 if the study turned out well (the phase II study was positive). There are currently a dozen people in the study who requested and received special permission from the FDA to continue receiving treatment beyond the 12 weeks of the study, which seems to be a positive to me. The CEO has said that commercializing Tradipitant would be "transformative" for the company. It is licensed exclusively to Vanda for development from Lily, with some small payment on approval ($15M) and a larger milestone payment ($80M) on meeting some sales goal. Royalties are said to be in the low double digits. Since Metoclopramide is prescribed to 300,000 people per month, there should be a ready market if Tradipitant has similar or better efficacy and a safer profile. It is also in a paused study to treat motion sickness (COVID put a pause on trials because of travel restrictions doing studies on boats and such). I assume they will eventually resume a phase III trial on motion sickness.

They did get into a tiff with the FDA over the need for animal safety trials for long term use (chronic condition) of Tradipitant. Vanda argued that the trials were not needed based on past studies of this drug and it would be cruel to animals, and actually sued the FDA with the typical result you get when you sue the government. This was probably the biggest reason for the drag on the stock as the FDA is like the IRS, you don't piss them off. They are going now instead for the 12 week duration and hope to expand treatment later after that is approved.

So there is risk obviously. Aside from the risk of a drug being recalled, there is risk they will not be able to grow revenue if the future drug trials on new indications for their existing approved drugs flop and there is risk that Tradipitant fails in the current phase III study in that the placibo has a similar improvement on nausea and vomiting (it didn't in the phase II study, but that was only 4 weeks, not 12 weeks). Maybe the drug initially helps but the effects wear off on continued use (this was addressed in a conference call and the CEO said this was not likely). They were supposed to be shooting for release of the phase III prelim data by end of 2021 but it has not happened yet. This has me a tiny bit worried but I hope it is just a holidays (they were shut down for a week or two) thing. Now I wonder if they will hold off releasing the data until Feb earnings.

Anyway, that was probably more info than you wanted, but that is what I have. I like the risk/reward here at $14 and change. I would actually buy quite a bit more if Tradipitant is delayed for some reason like COVID and the stock spikes down to $11...it would be steal at that level if there are no real issues with the pipeline. On approval I expect Vanda will return to the $20 area and as sales start coming in it should easily reach $30 a share.

So downside from $14 is about $3, maybe as much as $4, and upside is $10 to $16. My guess.

 

[Fermion]

Here is a little more color on the FDA tiff about non rodent studies for Tradipitant safety. Vanda seems to be dog lovers and pretty dang firm on that because it sounds like they won't budge. This maybe is one reason the stock is so down in the dumps because people believe they will get a refusal letter requesting a 9 month animal study (which requires the lethal dosing of a number of dogs).

From the Feb 10 2021 CC:

"Joel Beatty -- Citi -- Analyst

Great. Thanks for those great details. So, if I can finish up by asking two questions about tradipitant, one would be, what do you think you need to show an efficacy for FDA to be agreeable to approval, would it be a kind of standard 0.05 P value on the primary endpoint or is it a higher bar than that given, I think, originally an additional Phase III study was planned, that's no longer planned. And then the second question is regarding the nine month non-rodent animal studies, I know those haven't been completed, but has they been started or is there any way to start those before getting clarity from whether FDA will accept the filing or not or if you're granted to refuse the file with that begin a 9-month study at that time. Thanks.

Mihael H. Polymeropoulos -- President and Chief Executive Officer

Yeah, I'll start with the last one. No, we are not conducting these studies now. We've been very clear with the FDA that this is not a study that we'll undertake. And this objection is fundamental that Vanda does not believe in that unnecessary animal studies, especially in dogs should be conducted. And we're not alone thinking that, there is an entire movement of not conducting unnecessary animal studies. And part of this movement is the FDA themselves and they are making a lot of progress, trying to understand alternative technologies that can be used. Those that the FDA understands, the limitations of these studies that may not provide the information that is necessary for safe drugs."

 

[NW-Bound]

Tradipitant? Gastroparesis? I don't know anything about these but trusted that you would do a lot of investigation, and you certainly did. Thanks.

I am just going along for the ride with a small position (under 5 figure).

 

[chassis]

Free cashflow is arguably the most important aspect for company (and stock) valuation. Listen to Michael Mauboussin on Barry Ritholtz's recent podcast.

Free cashflow = EBITDA - capex. I use cash from operations as a proxy for EBITDA, it's close enough and and cash from ops is on the cashflow statement in the Ks and Qs.