Why You Should Be Bearish On Proteostasis Therapeutics Inc (NASDAQ:PTI)

Proteostasis Therapeutics Inc (NASDAQ:PTI) is a company I've been following for a while, and one that I believe the market is over-hyped about. The biggest risks I see are 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. It's crucial to understand if a company has a strong future based on its current operations and financial status.

Proteostasis Therapeutics, Inc., a clinical stage biopharmaceutical company, discovers and develops novel therapeutics to treat cystic fibrosis and other diseases caused by an imbalance in the proteostasis network. Since starting in 2006 in United States, the company has now grown to a market cap of US$157.93M.

The top-line decline of -36.30% was the first metric I noticed about PTI. A consensus of 4 US biotechnology analysts covering the stock indicates the future doesn't look much better. According to their forecast, PTI's revenue level is estimated to reduce by -45.01% by 2020. In addition to this, PTI is currently loss-making, delivering a recent bottom-line of -US$59.43M. With a declining top-line, moving towards positive earnings becomes harder, which is a concerning issue.

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 big red-siren warning for PTI is its low level of cash generated from its core operating activities. Given its debt level is relatively minimal (-323.09% of equity), the fact that PTI's cash only covers a mere -323.09% of debt makes me apprehensive. However, management has been able to reduce debt over the past five years, and it generates enough earnings to cover annual interest payments. There's room for improvement on the cash management side of things, but its overall debt level and interest coverage somewhat increases my conviction of the sustainability of the business going forward. PTI 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 PTI as a business is its low level of fixed assets on its balance sheet (17.55% 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. PTI has virtually no fixed assets, which minimizes its downside risk.

PTI currently trades at US$4.68 per share. With 34.48 million shares, that's a US$157.93M 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 2.34x vs. the industry average of 4.29x.

A good company is reflected in its financials, and for PTI, 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.