Catabasis Pharmaceuticals Inc (NASDAQ:CATB) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Firstly, a quick intro on the company – Catabasis Pharmaceuticals, Inc., a clinical-stage biopharmaceutical company, focuses on the discovery, development, and commercialization of therapeutics based on safely metabolized and rationally targeted (SMART) linker drug discovery platform in the United States. Started in 2008, it operates in United States and is recently valued at US$49.36M.
The first thing that struck me was the pessimistic outlook for CATB. A consensus of US biotechnology analysts covering the stock indicates that its revenue level is expected to decline by -100.00% by 2021. As CATB is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$27.36M to -US$24.47M.
Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. A major red flag for CATB is that its cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (21.02% of equity), it cannot be serviced at all with cash from operations, which makes me worry. However, the company has been able to generate enough interest income to cover interest payments. Cash management is still not optimal and should be improved, but its overall interest coverage somwehat alleviates my doubts around the sustainability of the business going forward. CATB has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. One reason I do like CATB as a business is its low level of fixed assets on its balance sheet (1.79% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. CATB has virtually no fixed assets, which minimizes its downside risk.
CATB currently trades at US$1.67 per share. With 29.04 million shares, that’s a US$49.36M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 3.35x vs. the industry average of 4.05x.
A good company is reflected in its financials, and for CATB, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.