Graham Net Net Stock Insmed Inc (INSM)

September 27, 2009 | Comments (16)

When you look hard enough and turn over enough stones, you are bound to find something sooner or later. One company I found and purchased recently is Insmed Inc (INSM).

Before going into what it does, the company is a pure Benjamin Graham net net stock without including any long term assets or intellectual property as well as a negative enterprise value stock. It is exactly the type of stock I like.

Quick Background

The company is a biopharmaceutical company with expertise in recombinant protein drug development.

I know I’ve said many times that I don’t invest in pharmaceutical companies, let alone biopharma, but I felt this company was too cheap to pass and I would use it as a learning experience.

On February 12, 2009, the company sold all of its assets related to its follow-on biologics (“FOB”) platform to Merck for $130m. The manufacturing facility and equipment went with the sale. Insmed’s only remaining source of income is from its Myotonic Muscular Dystrophy treatment called IPLEX, but since the manufacturing facility was sold off, production has been ceased. Insmed only has enough inventory to last at most 2 years with 70 patients worldwide.

However, the company is involved in researching the use of IPLEX for an Extended Access Program (EAP) for Amyotrophic Lateral Sclerosis (ALS). They obviously have to go through the different phases of testing and so far they are preparing for phase II to treat ALS patients. When is totally up in the air.

Benjamin Graham Net Net Working Capital Valuation

INSM Net Net working capital

Some points to correct with the above image.

Going through the latest 10Q, it shows that the cash and equivalents of $122m is not all 100% cash. $86.5m is in short term investments. I bring this up because there is a section which states the following:

We also hold an investment in NAPO Pharmaceuticals, Inc. (“NAPO”) which is currently valued at $0.  During 2008 we recorded an other than temporary impairment of this investment of $392,000.  This amount is reported as a loss on investments in our statement of operations for 2008.

Makes me wonder whether this management knows how to use its cash and whether the recent investments are going to be beneficial.

Company has no long term debt and the $4.6m are its current liabilities. This puts INSM in a great position to be acquired or to make very sly and calculated acquisitions. At a time when bio or pharma firms are craving money to continue their research, INSM has the potential to get some great deals.

As long as it isn’t a company like NAPO Pharmaceuticals…

Things I Do Not Like

  • I’m playing with fire by trying to go outside of my circle of competence…
  • Company could easily waste its money
  • The liquidity section of the quarterly report states: Even though we currently have sufficient funds to meet our financial needs for the upcoming year, our business strategy also contemplates raising additional capital through debt or equity sales.  We also plan to enter into agreements with corporate partners in order to fund operations through milestone payments, license fees and equity investments.
  • Dilution of shares
  • Huge long list of risks in the reports
  • Long history of losses and horrific fundamentals

Why Did I Buy?

Despite all the things I don’t like above, I asked myself about the possibility of losing everything.

And I just don’t see the company going under or me losing money in the short term with the company in its current position.

INSM is below Graham’s definition of net net working capital, negative enterprise value, plenty of cash and has slowed down its cash burn.

They sold off a big part of assets and equipment but they still have their main research facility. The current supply of IPLEX should be able to provide some income while they keep looking into other strategic alternatives.

Now I’m not hoping the company creates another drug or even passes its phase testing. It sure would help, but my thesis for the investment is that someone or some company will see the value and the quality of assets (highly liquid assets). This way the company could sell out or try to return value to shareholders in another form.

We have also engaged the services of RBC to act as financial advisor in evaluating other options for use of these proceeds which could include acquisitions of complimentary businesses or technologies, product licensing, mergers, share repurchase and the distribution of a portion of the proceeds to shareholders.

With plenty of cash, there are plenty of possibilities Insmed can pursue. This is a company I’ll have to monitor closely for sure though. If I see that management is trying to somehow beat a dead horse back to life by making overpriced acquisitions and going on spending sprees, I’ll be selling out immediately.

As an investment, I’m seeing this at around the $1.40 mark and due to my lack of industry knowledge, I’ve a little under 2% of total capital.

Disclosure

I hold shares of INSM at the time of writing.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

  • http://compoundinglife.com Ken

    Just did a quick scan of the quarterly. A couple of things I noticed…

    1. SG&A seems to have doubled. Any idea what the reason is?

    2. They seem to have answered your question about the short term investments they have:

    “at June 30, 2009, had $122.8 million invested in money market instruments, treasury bills and municipal bonds. Such investments are subject to interest rate and credit risk. Our policy of investing in highly rated securities whose maturities at June 30, 2009 are all less than one year minimizes such risks.”

    3. The special dividend and/or share repurchase sounds good, but I get the feeling they wouldn’t sell out the company to any bargain hunters, the anti take over provisions sound pretty good and it sounds like they want to grow the company through M&A.

    Interesting stock for sure and if they are selling IPLEX for another 24 months that gives it some time.

    4.
    .-= Ken´s last blog ..IGOI: Should I stay or should IGO? =-.

  • Todd

    Jae, an interesting idea. Negative cash flow (they are probably earning 25 bp on s/t t-bills), and the hope for an accretive acquisition – or a promising technology?

    I think the net/net is great, but I see so many of these high cash biopharmas albeit INSM has sold assets to Merck.

    Interesting idea.

  • Phil

    Insmed has a breakeven cash flow due to cost reimbursement from IPLEX use in Italy for ALS patients there. The Italian govt. has been reimbursing Insmed for IPLEX for about 2.5 yrs now for its citizens with ALS and this is why IPLEX is now being used in the US by approx. 13 patients with FDA approval. Insmed and FDA are monitoring these patients closely as a significant percentage of the Italian ALS patients showed either improvement in their symptoms or no further progression of the disease once on Iplex. Iplex has also shown great promise in ROP, severe burns, short stature in children ( for which it is currently FDA approved), and several other indications. It is NOT just IGF-1. Iplex is Igf-1 plus BP3 and the binding protein-3 is what makes it unique and especially effective. Hopefully RBC will negotiate a deal with a company to buy Insmed and utilize Iplex for the betterment of those who need this drug.

  • Floris

    Jae Jun, I believe there are quite a few other net nets out there trading at a more comfortable discount to current asset value. Some of these firms (adgf for example) trade at a much steeper discount, have easier business to value and probably more upside. It looks risky imho.

  • http://www.oldschoolvalue.com Jae Jun

    @ Ken,

    Yea I read that part as well but it isn’t specific about how much is in investment grade securities.

    I agree that the company won’t go bankrupt anytime soon though. I just need to get up to date about the history of the company and the involvement of the Italian government.

    @ Todd,

    I found it really hard to even find a true net net but if you know of any, I’ll be very interested to know. Feel free to jot it down in the forums so that we can keep track.

    @ Phil,

    Thanks for the additional info. I’m not too familiar with what IPLEX does but your info helps.

    I hope RBC will do something beneficial rather than just try to collect their own payment.

    @ Floris,

    I’ve known about ADGF for aquite a while but it was never an attractive net net for me. And using the same method I did for INSM, ADGF is still above the NNWC. Current price is $2.99 but the liquidation value is $2.66 so its over net net value by 33c.

    I’ve been going through so many deep value stocks but INSM and TSRI are the only true net nets Ive found.

  • Frankv

    Hi Jae, I took a chance on 100 shares of INSM @ 0.85. Let’s hope for good luck. What price would you bail out at if it drops. Also do you have any idea of what is going on with Bershire Hathaway B. BRK-B. Thanks, frankv

  • http://www.oldschoolvalue.com Jae Jun

    Frank. Hoping for a great deal on this one.
    Give it enough time for people to realize what a mistake they’ve made. Until then, keep an eye on company news and any related information. The 10-Q is out as well I believe.

    Will have to look into it.

  • Floris

    @Jae Jun

    It is due to the high inventory of ADGF that you measure the liquidation value being only 2,66. This assumes the company is in dire straits and will need to liquidate these assets at low prices. This is not the case for ADGF. The golf clubs are great and would most likely sell at or near cost.

    The issue I have with ISM is that I have no clue about the business and the golf business is much easier to understand. Furthermore I personally know they make great golf clubs, which makes me doubt that they will go under (I am considering buying adams hybrids because they are better than the major brands).

    The risks for ADGF are much more tangible whereas the risks for pharma are more difficult to understand. Pharma can have a tendency to waste cash and reduce cash exceptionally quickly. This is not the case for a consumer manufacturer, the expected outcome is much easier to estimate.

    All in all the risk/reward ratio for is easier for me to understand and increases the confidence level (circle of competence)

    reg,

    Floris

  • http://www.oldschoolvalue.com Jae Jun

    @ Floris,

    Yes the high inventory is why I discount it. It’s because the more specialized the inventory is, the more you have to discount it, not because the company is in a bad situation.

    Im sure you are well aware that after 1 year, the current inventory will be sold at cheap prices even in retail stores. Golf equipment and styles change so quickly that the price is never sustainable.

    So my argument is that while ADGF may have tangible assets, the margin of safety will erode even quicker.

    INSM has cash which they could easily burn, but there is a chance that it could make a return. Can’t say the same about golf clubs though. The only direction club prices move is down.

  • Niles

    Jae, what is your stance on TSRI? Do you own any positions or are you looking to open one? You said that it and INSM are the only true net nets that you have found. From my cursory analysis it seems to be another company that was hit hard by the recesssion, but unlike many other companies it hasn’t come up much off it it’s lows. This is despite the fact that the company still has positive earnings, the business appears to be solid (other than the macro environmental issue of the recession), the company has no risk of going out of business and of course its current net net valuation.

    INSM is something I am very intrigued by, but TSRI seems to be a safer net net opportunity because any sort of significant appreciation in the stock price doesn’t rely on any major event (i.e. M&A, drug trial/approval etc.) All TSRI has to do is continue to do business as usual and in 12-18 months I would think it should be trading at $3.50-$4.00.

    What do you think?

  • http://www.oldschoolvalue.com Jae Jun

    @ Niles,

    I agree with a lot of what you said. My comments are in the TSRI forum section. Floris also provided some excellent comments.

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