Ventyx Biosciences: Ready To Escape "The Crash Cycle"

seekingalpha11-04

Based on quatitative factors, Ventyx is similar to other issues I've rated here on Seeking Alpha that have outpaced the market.Because of its extremely low valuation and strong financials, I see ...

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J Studios/DigitalVision via Getty Images  Introduction I recently rated a small cap company called Amylyx Pharmaceuticals (AMLX) a \"Buy\" here on Seeking Alpha. Since then, that stock has climbed ~71% and now will fail the buy screen that I generally run for issues of that kind. Luckily, I found another one much like it: Ventyx Biosciences, Inc. (NASDAQ:VTYX). This stock shows all the characteristics of a highly underappreciated issue with surprisingly valuable assets that can be bought at a substantial discount. I'll explain why below.  Based On Quantitative Metrics, Ventyx Should Beat The S&P 500 Ventyx is a small cap pharmaceutical company that shares some characteristics with other small cap pharmaceuticals that I have rated here on Seeking Alpha. These issues tend to do well against the market. The table below presents results so far had you followed my \"Buy\" rating on the date of my analysis against the performance of the S&P 500 from the date of the rating as of writing this analysis on 17 October 2024:   Company Date Performance Market Performance   Amylyx (AMLX) 09/09 +141.03% S&P 500 +5.27%   Energy Vault (NRGV) 31/07 +87.16% S&P 500 +4.05%   Inogen (INGN) 01/01 +58.87% S&P 500 +20.73%   Avg. return   95.69%   +10.02%   Click to enlarge So what do these stocks have in common?  First of all, these stocks all trade very near or even below net current asset values (NCAV). At the time of rating, Energy Vault and Inogen traded at 1.2 times NCAV and Amylyx traded below NCAV at 0.72x.  Another common feature is that all of the companies have cash and equivalents exceeding their total liabilities. Some companies will trade near or below NCAV not because of their large cash position but because they have other current assets - such as inventory - thus hiking their NCAV without that neccessarily translating into a robust liquid reserve. I want candidates to hold more cash than total liabilities because that provides definite near-term financial strength which other current assets may not.  It follows from the above that these issues will have typically seen dramatic price drops: All issues had dropped at least 60% year-over-year at the time they were rated. Because otherwise, a stock just doesn't trade this cheaply. Nobody IPOs at or near NCAV. That would be like selling a dollar bill for a dollar and giving away all other assets the company holds, including long-term assets and off balance sheet items.  So buying into these issues makes you a contrarian by definition.  So what makes these issues appear from time to time? And what happened to Ventyx to make it into this group of unfortunate stocks? I'll explain the common path below.  \"The Crash Cycle\" In very general terms - and perhaps a little over-simplified - what's often happened to companies like Ventyx (and the peer group mentioned) is they're early-stage companies that tend to be in the fields of healthcare or technology where they're pushing to do something new. They IPO to great fanfare and raise a lot of cash on the stock exchange. They then run into trouble - be it a key drug that fails or some technological process not quite delivering as expected. In the case of Ventyx, it released results from a Phase 2 drug that disappointed and then discontinued that drug. There are companies like these outside the fields of healthcare and technology, but they're relatively rare. The company is left with a dented business model, but still sit on a pile of cash from the IPO with almost no debt to it. These companies are in operational distress - something with their business isn't working - but they're not in financial distress, the kind of distress that leads to bankruptcy. That's what set them apart from other distressed issues. Then investors get disappointed from the distress and panic spreads. The stock trades down and down. Eventually, the stock sells at or near liquidation value, NCAV. You pay about a dollar for a dollar's worth of cash but get everything else inside the company for free, including the potential for an actual turnaround, merger, acquisition, etc., not to mention the value of any long-term assets since they don't go into NCAV.  That's the basic thesis behind the screen that lead me to finding Ventyx. The situation described applies in some form or another to the peer group I listed above. And it's largely the situation with Ventyx, too.  Ventyx currently has cash and equivalents of $239.4 million according to data from Seeking Alpha. That is enough to cover their total liabilities of $28.4 million. Ventyx has current assets of $256.9 million. That makes its net current asset value (NCAV) $228.5 million. That's against a market cap of $152.7 million. In other words, Ventyx trades at a ratio of 0.67x NCAV which is remarkably low.  Management Actions And Risks Here's the catch: Even if you buy a stock for more or less its intrinsic cash value and get everything else for free, you still rely on management to not burn through cash reserves and destroy the assets.  In other words, since you rely on management taking appropriate actions to navigate whatever caused the distress, you have to know what they are doing about the issues. Being an early-stage pharmaceutical company, knowing their pipeline is key to understanding this. Ventyx currently has the following drugs in their pipeline: Ventyx Biosciences Management last provided an update on the progress of their pipeline on May 9, 2024 via an earnings call with investors. First of all, management highlighted one of the stars of their pipeline, VTX3232, intended for use obesity and Parkinson's disease. Back in March, Ventyx had reported positive top line results from a Phase 1 single dose and multiple-ascending dose trial. Management praised results, saying that: We, thus, believe that these data establish VTX3232 as a potential best-in-class drug candidate for the treatment of neuroinflammatory diseases and conditions - Raju Mohan, CEO Ventyx The positive data has lead management to saying VTX3232 is now ready for Phase 2 trials, starting with the Phase 2a trial of the drug in patients with early Parkinson's disease. The Phase is set to initiate in the second half of 2024.  Management also spoke of another Phase 1 drug in their pipeline, VTX2735. Also back in March, Ventyx had announced positive top line results from the Phase 2 trial of VTX2735 in cryoprin-associated periodic syndromes (OTCQB:CAPS), a rare autoinflammatory disease.  Management also updated on a trial for Crohn's disease treatment, although this study did not meet its main goal. This last result shows the operational risk of buying into an early-stage pharmaceutical company: the risk of drugs not coming through the pipeline and going commercial. This will typically cause severe volatility in the stock. This again shows a more general risk of buying distressed issues: because of the volatility, you may find it hard to hold on to distressed issues through the inevitable ups and downs. Look at any of the graphs of the stocks discussed in this analysis: even if you're statistically set to gain massive returns on these issues, it's a mental challenge holding on to your stock when on paper - at any given time - you may have lost a substantial percentage of your investment.  Then of course there's the question of free cash flow or lack thereof. Even though Ventyx has a lot of cash, it's also burning through that at a rapid rate. In the past twelve months, it's had negative free cash flow of $159 million, slightly better than that of 2023 which came in at a negative of $167 million. The only current asset Ventyx has which isn't cash or equivalents are prepaid expenses, so the company will have no cash coming in from business operations. So with cash of $239 million, it seems possible that the current cash runway will only sustain them into 2026. After that, the company could need to raise debt or equity, the latter with dilutive effects to current shareholders.  Key Takeaways Ventyx Biosciences is a small cap pharmaceutical company whose stock has seen sharp price decline in recent times. This is in part due to the failure of one of its key drugs. It's entered a \"crash cycle\" where the price is down so much that its cash easily covers all its liabilities, and it trades at a substantial discount to net current asset value (NCAV).  This makes it statistically set for outperformance. But as an investor, you'll rely on management taking the right steps and advancing their pipeline to actually pull through the adversities.  Because of its extremely low valuation, I see potential for outperformance of the S&P 500 in this issue. Because of the risks involved in holding such issues - including the mental challenge of accepting inevitable fluctuations in price - I suggest holding it in a well-diversified portfolio of similar issues.  For the reasons stated above, I rate Ventyx a Buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481539186"}