Billionaire Stanley Druckenmiller has been making large changes to his portfolio recently, leaving retail investors struggling to keep up with what the famous stock picker is thinking.
One of the smaller holdings in Druckenmiller’s portfolio that makes for interesting examination is ARS Pharmaceuticals (NASDAQ:SPRY).
Druckenmiller’s 536,900 shares of SPRY are currently valued at around $7 million. Why did Druckenmiller decide to buy ARS Pharmaceuticals, and does the stock still look attractive to investors today?
Key Points
- ARS Pharmaceuticals’ neffy, a needle-free epinephrine spray, solves major issues with auto-injectors.
- Despite a $1.4B market cap on just $3M in trailing revenue, FDA approval and early sales success bode well.
- Druckenmiller’s $7M stake aligns with a unanimous Buy from analysts, who forecast 90% upside.
SPRY Has a Unique Angle On Old Problem
ARS Pharmaceuticals has developed an innovative solution to the problem of delivering epinephrine to treat severe allergic reactions.
Ordinarily, epinephrine is administered using a needle, as in the case of an epinephrine auto-injector. ARS has addressed this problem by creating a product it calls neffy, which is a nasal delivery system that requires no needles and can be easily administered upon the onset of an allergic reaction.
This delivery system is powerful enough to reverse the symptoms of anaphylaxis, but much more convenient and easier to use than a needle-based product.
Is SPRY Undervalued?
One possibility that fairly quickly rules itself out is the idea that Druckenmiller picked ARS because it appeared to be cheap relative to its current performance. At 6.9 times book value, the stock already appears fairly expensive.
This multiple, however, pales in comparison to the ratio between ARS’s trailing 12-month revenues and its market cap.
Over the last 12 months, SPRY has been able to generate only a little over $3 million in revenues. With a market cap of about $1.4 billion, it appears fairly clear that the price of SPRY is supported almost entirely by its perceived future potential.
Huge Market Opportunity for ARS Pharma
With future growth appearing to be the driving force behind ARS Pharmaceuticals, how much potential does the company actually have?
Even a cursory glance reveals that there may well be significant opportunity for a simple, convenient epinephrine delivery system. About 3.6 million people in the US alone have been prescribed epinephrine for severe allergies, and the global market for epinephrine is expected to exceed $4 billion by 2030.
Crucially, the product ARS has developed creates real-world value for the large number of people who are prescribed epinephrine but don’t carry their auto-injectors.
A 2018 study found that about 45% of people who were prescribed epinephrine didn’t have their auto-injectors with them during their most recent severe allergic reaction. 21% even revealed that they didn’t know how to use their auto-injectors. The solution ARS has developed would likely catch on with those who find auto-injectors cumbersome to carry or difficult to use, giving it a significant edge in the market.
Promising Results Early On Spark Hope
Management has announced some very promising early results. In Q3, the company began selling neffy after gaining final approval from the FDA.
It’s interesting to note that, due to the timing of the commercial launch, the company was only able to sell for about one week before the quarter ended.
Despite this and the fact that the product was brand new and had no time to penetrate the market, ARS reported $600,000 in net product revenues for Q3. Collaborative revenues of $1.5 million brought total revenue for the quarter to $2.1 million.
In addition to hitting the ground running with its product sales, ARS Pharmaceuticals is also in a good financial position to build its presence in the market over time. At the end of Q3, the company’s reserve of cash, cash equivalents and short-term investments totaled over $200 million.
The net loss for the quarter, meanwhile, was only about $19.1 million. While the company will almost certainly incur expenses relating to marketing and selling its product now that it has launched, it seems to have a solid financial foundation from which to do so.
Taking everything into account, it seems likely that ARS Pharmaceuticals will deliver very strong revenue growth in the coming years as it increases awareness of its product and the market for epinephrine continues to expand. The company is also seeking approval to sell in the UK and Canada, potentially adding international sales to its revenue base.
Why Did Stanley Druckenmiller Buy SPRY Stock?
Stanley Druckenmiller bought a small stake in SPRY to capitalize on its potential to disrupt a growing part of the pharmaceutical industry. The product ARS has developed solves many of the problems associated with traditional epinephrine auto-injectors, and it seems likely that the company will succeed in carving out a decent part of the epinephrine market for itself.
Although the stock commands high multiples, it’s worth noting that revenues are still brand new. As such, ARS has the opportunity to very quickly lower its price-to-sales ratio. In the meantime, the finances appear strong enough for it to keep investing in growth initiatives.
Druckenmiller doesn’t appear to be the only person expecting strong growth-driven returns from ARS pharmaceuticals. Despite its very high current valuation multiples, SPRY stock enjoys a unanimous Buy rating from the analysts covering it. Beyond that, the stock’s average price target of $27.25 implies an upside of more than 90% from the current trading price of $14.29.
As far as whether SPRY is still a buy at current prices, there are cases to be made in both directions. The stock is already up more than 100% over the last 12 months. This creates the potential that it could have become overbought and might be sensitive to corrections if the company experiences any kind of obstacles to its early revenue growth. On the other hand, the strong argument for ARS’s potential to disrupt the existing market could justify its rapid price surge.
Ultimately, SPRY might still be a buy for investors with a decently high risk tolerance who are looking for growth in the pharmaceutical industry. With FDA approval gained and a natural advantage over existing epinephrine products, SPRY is no longer a purely speculative buy. Its price will require solid execution and strong forward growth to justify, but the stock’s potential returns could be worth the risks associated with it.