Corcept Therapeutics: Korlym Overhang Appears To Be A Drag On Valuation Upside

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Investment Summary

The important repricing of equities crossed 2022 has widened the database of imaginable opportunities to allocate hazard superior towards successful the caller year. Noting the selloff successful Corcept Therapeutics (NASDAQ:CORT) astatine the backmost extremity of FY22', pursuing a caller colony with its Korlym label, we were instantly drawn to the prospects of immoderate upside seizure that could beryllium connected the table.

After rigorously analyzing each of the contributing factors to the concern debate, we judge determination are much selective opportunities elsewhere for now, and complaint CORT a hold. Here I'll tally done our concern findings successful greater detail.

Korlym overhang appears to beryllium a resounding origin for CORT

Korlym [drug name: mifepristone], is CORT's main gross driver, since being approved successful 2012. The statement is indicated to dainty hyperglycemia owed to hypercortisolism successful adults diagnosed with endogenous Cushing’s syndrome. For reference, endogenous Cushing's syndrome is simply a uncommon upset that is caused by excessive accumulation of the hormone cortisol by the adrenal glands. Cortisol being the hormone that helps modulate the accent and immune effect successful the body. Symptoms are wide and mostly rather inhibiting connected the affected individual.

The Korlym travel has been fraught with challenges implicit the past 2-3 years, namely owed to the challenges to CORT's patent connected the drug, starting with Teva Pharmaceutical (TEVA) successful 2020. Back successful November FY20', the U.S. Patent Trial and Appeal Board upheld the validity CORT's patent claim, saying TEVA "has not shown by a preponderance of the grounds that claims 1-13 of the '214 patent would person been evident implicit the operation of the Korlym Label and Lee", and, that "[i]n information of the foregoing, it is hereby ordered that [Teva] not proven by a preponderance of the grounds that claims 1–13 are unpatentable;...."

In December 2021. the U.S. Court of Appeals for the Federal Circuit upheld the archetypal decision and denied TEVA's effort to invalidate the Korlym patent erstwhile again. The lawsuit is inactive successful arbitration, nevertheless management noted connected the Q3 net telephone that should the tribunal regularisation CORT's favour, TEVA would beryllium "barred from selling generic Korlym until 2037 erstwhile the 214 patent expires". On the different hand, if it rules successful TEVA's favour, it volition caput to proceedings to reason oregon a favourable judgement.

Aside from that, successful 2021, CORT besides sued Hikma Pharmaceuticals USA Inc. ("Hikma") aft Hikma attempted to record an abbreviated caller cause exertion ("ANDA") to merchantability a generic mentation of Korlym successful the marketplace. CORT reached a settlement with Hikma successful December 2022, with the presumption allowing it to marketplace a generic mentation of Korlym not until October 1st, 2034.

One mightiness presume this provides clarity for CORT investors connected a forward-looking basis, and shores up gross extortion for Korlym into the adjacent decade. However, the terms effect from the marketplace was incredibly mediocre [Exhibit 1] and investors sold disconnected CORT shares en masse to adjacent retired the year. This is further exemplified successful Exhibit 2 wherever we noted the level of on-balance measurement and momentum thrust to caller lows, demonstrating the deficiency of buyers to marque a marketplace for CORT.

Exhibit 1. Price effect to Hikma determination mediocre with accelerated selloff successful CORT equity

Data: Updata

Exhibit 2. On-balance measurement and momentum studies show deficiency of buyers for CORT

Data: Updata

Deeper look astatine CORT fundamentals

The underlying question successful the CORT concern statement truly stems backmost to what benignant of maturation imaginable are we buying, and does this correspond worth – particularly with the caller selloff. Here I'll instrumentality a hard information attack and tally done respective measures to underline wherever the grounds of firm worth for CORT whitethorn oregon whitethorn not be.

First, astatine a precocious level, it's worthy noting CORT's sequential gross maturation since FY16', demonstrating cyclical upsides implicit this clip [Exhibit 3]. More recently, maturation percentages person slowed, whilst halfway EBITDA hasn't exhibited a tenable maturation signifier since FY20'.

However, investors tin inactive bargain CORT astatine a 5.8% trailing FCF yield, which represents tenable worth connected implicit presumption successful our opinion. Moreover, it besides has a 98% gross nett borderline to nutrient its quarterly revenues, which is besides precise attractive.

Exhibit 3. CORT sequential revenue, halfway EBITDA and FCF yield, FY16'–date

Data: Refinitiv Eikon, Koyfin

Delving a small deeper, we investigated however and wherever CORT is investing its capital, and what benignant of returns it is seeing connected this.

For those observing Exhibit 4, you'll enactment the institution has held a dependable enactment connected the trailing instrumentality connected its invested superior ("ROIC") these past 2 years. It realized a 28.6% TTM ROIC successful Q3, an upside from 27.8% the aforesaid clip successful FY20'.

At the aforesaid time, it's printed a dependable watercourse of escaped currency inflows implicit this time, and recorded $116mm successful TTM FCF past quarter. However, you'll besides announcement that the grade of NOPAT maturation the company's generated has stalled implicit the investigating period.

Question is, why, and what's really driving the beardown trailing ROIC each period?

Exhibit 4. CORT's maintained a beardown ROIC and FCF conversion these past 2 years, but NOPAT maturation is stagnant

Data: Author, CORT SEC Filings

To analyse this, we broke the drivers of the ROIC down into its subcomponents, NOPAT borderline and invested superior turnover [Exhibit 5].

As you tin spot successful the illustration below, NOPAT borderline has been a level 28–30% of gross successful our investigating period, whereas invested superior turnover has curled up precise gradually implicit time. What this tells america is that the bulk of the ROIC during the past 2 years has stemmed from CORT investing much capital, much often each period, and not needfully a greater level of NOPAT.

This is particularly existent successful the Q1 FY22' period, wherever ROIC leapt to ~51%, providing a misleading measurement of firm worth creation. Moreover, this, arsenic gross has crept up from $301mm successful FY19' to $392mm connected a TTM basis.

Therefore, CORT's superior strength has accrued since then, without the pull-through to profitability. In presumption of superior budgeting, this is an unfavourable result successful our opinion.

Exhibit 5. Despite beardown ROIC numbers, this has stemmed from higher turnover of invested capital, not greater NOPAT margin

Data: Author, CORT SEC Filings

Adding immoderate equilibrium to the risk/reward calculus, we'd besides exemplify that absorption person generated affirmative economical worth added ("EVA") implicit the past twelvemonth to date. It generated $94mm successful EVA past quarter, utilizing TTM numbers.

Moreover, CORT's outgo of superior is charismatic and sits successful a favourable scope of ~500bps, meaning it comfortably covers its hurdle complaint from ROIC. This information should beryllium factored into the concern statement successful our opinion.

Exhibit 6. CORT absorption generating EVA supra outgo of superior connected TTM basis

Data: Author, CORT SEC Filings

Valuation and conclusion

At archetypal glance, there's assorted charismatic features that marque CORT a imaginable standout successful the existent macro-landscape.

However, we've already shown these mightn't beryllium arsenic charismatic arsenic connected look value, and, paying 21x guardant net for this adds to this sentiment. This is besides good supra its humanities averages.

Exhibit 7. CORT humanities trailing P/E, FY18'-date

Data: Refinitiv Eikon, Koyfin

Moreover, CORT is besides trading astatine 4.7x publication value, the trailing ROE of 23% tightens to conscionable 4.9% for the capitalist ROE. Hence, not increasing firm worth [NOPAT, NOPAT margin] and trading astatine precocious multiples challenges the bullish presumption successful our estimate. Only happening near is EPS upsides and the imaginable for valuation upside looking ahead.

Factoring successful FY22 statement EPS estimates of $0.95 [to which we are aligned], we judge the banal is reasonably priced astatine ~19x guardant earnings. Based connected these figures, the banal inactive looks costly and we terms it astatine $18.16 [Exhibit 8]. This confirms our clasp thesis.

Exhibit 8. Fair valuation of $18.17 demonstrating deficiency of valuation upside.

Data: Author estimates

Based connected the culmination of information points discussed successful this report, the CORT concern statement is equilibrium successful our opinion. There's corroborative and mitigating factors connected some sides of the risk/reward equation. Most importantly, however, is that determination appears to beryllium a deficiency of valuation upside connected offer, which advocates against introduction astatine this point. We were keen to recognize if the caller selloff successful CORT's equity warranted a proposition of value, however, based connected these findings, we judge this mightn't beryllium connected the array close now. Net-net, we complaint CORT a hold.

Editor's Note: This nonfiction discusses 1 oregon much securities that bash not commercialized connected a large U.S. exchange. Please beryllium alert of the risks associated with these stocks.

Buy broadside equity portfolio strategist serving mandates passim EU/US/APAC. Helping you presumption your portfolios for the aboriginal is my apical priority. Shoot maine a connection to sermon commercialized ides oregon speech portfolio construction. Disclaimer:The opinions expressed successful each articles bash not represent arsenic concern advice. Please retrieve to behaviour your ain owed diligence.