Synlogic Inc (NASDAQ:SYBX) has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. 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. It’s crucial to understand if a company has a strong future based on its current operations and financial status.
Synlogic, Inc. a clinical-stage biopharmaceutical company, focuses on the discovery and development of synthetic biotic medicines to treat metabolic, inflammatory, and cancer diseases in the United States. Since starting in in United States, the company has now grown to a market cap of US$243.06M.
The first thing that struck me was the pessimistic outlook for SYBX. A consensus of 3 US biotechnology analysts covering the stock indicates that its revenue level is expected to decline by -85.10% by 2020. In addition to this, SYBX is currently loss-making, delivering a recent bottom-line of -US$44.17M. 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. Alarm bells rang in my head when I saw SYBX’s cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (0.61% 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 earnings to cover annual interest payments. There’s room for improvement on the cash management side of things, but its interest coverage somewhat increases my conviction of the sustainability of the business going forward. SYBX 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 SYBX as a business is its low level of fixed assets on its balance sheet (9.61% 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. SYBX has virtually no fixed assets, which minimizes its downside risk.
SYBX currently trades at US$9.55 per share. With 25.45 million shares, that’s a US$243.06M market cap, which is too low compared to its peers based on its industry and adjusted for its asset level. Currently, it’s undervalued by 168.56%, with a PB ratio of 1.64x vs. the industry average of 4.42x.
A good company is reflected in its financials, and for SYBX, 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.