Embattled fund manager Neil Woodford has been selling stocks left, right and centre. He’s desperate for cash and liquid blue-chips in his gated £3bn Equity Income fund in order to meet redemptions when the fund reopens.
Because he’s been selling down big stakes in smaller companies, many of their share prices are languishing at depressed levels. Circassia Pharmaceuticals (LSE: CIR), which released its half-year results today, is one example.
While I see value in some stocks Woodford has exited, Circassia isn’t one of them. Here, I’ll discuss its valuation and prospects, and explain why I’m continuing to avoid it.
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Mutually supportive no more
The company was founded in 2006 and joined the stock market in 2014. Woodford had been a cornerstone investor from before its 310p-a-share flotation. When he launched his Patient Capital Trust in 2015, Circassia’s co-founder and chief executive Steve Harris got a side-gig as one of the trust’s independent non-executives.
With the current unfolding Woodford crisis, and questioning of the independence of Patient Capital’s non-executives, the trust announced on 2 September that Steve Harris had stated his intention to step down at the end of the month. Following the announcement, Woodford slashed his stake in Circassia from 20% to below the disclosable threshold of 5%.
Transitioning
Circassia, whose whole allergy therapeutics programme collapsed a few years ago, following the failure of its flagship treatment, has accumulated losses of over half-a-billion quid in its lifetime. It’s now trying to “transition to self-sustainability” with four other treatments.
It sells its NIOX asthma management products (currently two-thirds of group revenue) across a wide range of countries. In a deal with AstraZeneca, it also has the US commercial rights to chronic obstructive pulmonary disease treatments Tudorza (currently one-third of revenue) and Duaklir (launch imminent). Finally, earlier this year it acquired the US and Chinese commercial rights to ventilator-compatible nitric oxide product LungFit PH (potential launch in the second half of 2020) from Beyond Air.
Continuing to avoid
In today’s results, the company said it had made “good financial and commercial progress” in the first half of the year, and that it has “growth drivers in place to achieve £60m-£65m full-year 2019 revenues.” However, it reckons it needs £75m annual revenues to achieve positive earnings before interest, tax, depreciation and amortisation (EBITDA).
It posted an EBITDA loss of £12.4m in the first half of the year, but burnt through £19.6m cash. The latter was a result of a whopping £46.3m outflow from operating and investing activities, partially offset by raising cash from issuing shares and borrowing.
While management highlighted a “dramatic reduction in net cash outflow post-period-end,” at the head of the report, when we get down to the section on principal risks and uncertainties, we find: “The group has incurred significant losses since the inception of its various businesses and anticipates that it will continue to do so for some time due to the high level of expenditure required to develop its NIOX business and to promote Tudorza and launch Duaklir.”
The shares are currently trading at 16p (4.5% down on the day), valuing the company at £60m. It’s not expensive on the face of it, at around one times sales, but with plenty of attractively-valued and profitable small-caps around, I’m continuing to avoid Circassia for the time being.
