The small-cap biotech sector is a favorite of growth investors, but the space can be fraught with highly volatile companies prone to wild price swings where profitability is a far-off dream. Catalyst Pharmaceuticals (NASDAQ: CPRX) represents the rare stock in the space that has a proven track record, a reasonable valuation, profitable operations, and attractive growth prospects. For investors seeking to add healthcare exposure to their portfolios, CPRX could be worth a look. The Coral Gables, FL-based Catalyst was founded in 2002 and has a market cap of $780 million.
Catalyst develops and sells therapeutics for patients with rare, chronic neuromuscular and neurological diseases and disorders. The flagship product is Firdapse, which is a proprietary phosphate treatment for people with Lambert-Eaton Myasthenic Syndrome (LEMS), myasthenia gravis, and Ruzurgi, both on the adult and pediatric sides. LEMS is a rare neuromuscular disease where the immune system attacks the body’s cells and causes a breakdown in the body’s ability to send signals to nerve and muscle cells.
Firdapse (clinical name Amifampridine) is the only evidence-based FDA-approved LEMS treatment on the market for adult patients. It is also approved by the European Medicines Agency. Catalyst also received approval for the product in Canada in 2020 and is currently working to receive approval in Japan. Firdapse improves the communications of a signal called acetylcholine (Ach) between nerves and muscles.
Turning to fundamentals, Catalyst has solid gross profitability of 85.5% and net profitability of 31.2% coupled with a price-to-earnings ratio (P/E) of 20.7. These marks compare favorably to the biotech industry averages of 74% gross margin, 5% net margin, and the industry P/E is not available due to the large number of unprofitable companies that inhabit the space.
The analyst community is bullish on CPRX with five firms publishing coverage, all with a Strong Buy rating. The positive sentiment is most likely due to the company’s robust growth prospects, a bright spot within the industry. Catalyst is forecast to grow sales by 41% next year and earnings by 77.5%, compared to the industry estimates of -11.7% for sales and -5.7% for earnings for the same period. On the valuation side, Catalyst has an EV/EBITDA of 12.4 where the industry average is 17.8, suggesting upside potential for CPRX. A profitable company that is also set up for future growth is somewhat of an anomaly in the small-cap biotech arena, so Catalyst is a positive outlier.
Catalyst Pharmaceuticals has a compelling story as they have the only FDA-approved treatment in their space. The company has twenty years of track record, a profitable product line, and is in the process of opening up new markets. The company seems reasonably valued and while it is more volatile than the overall market with a beta of 1.23, it represents an interesting opportunity for investors seeking small-cap biotech stocks to add to their holdings.
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