The shares of Deciphera Pharmaceuticals (DCPH) have performed well in 2022, as they are up 40.4% while most healthcare stocks are down. Nevertheless, I would not buy shares of this stock due to a lack of interesting prospects for the treatments the company is developing. In fact, if I had shares in my portfolio, I would consider unloading them. As such, I am bearish on this stock for now.
So far, there has been no event that could justify such a price increase. A new equity offering was announced in late April to raise up to $150 million in cash to fund drug development. Furthermore, on June 16, the company named a former Novartis (NVS) executive as its new senior vice president and chief business officer.
However, none of this news can be classified as a strong bullish catalyst, resulting in a significant risk that this stock is being overvalued rather than reflecting the fair value of this company.
In addition, the portfolio of treatments that this specialist healthcare provider is developing does not seem attractive enough to push the share price higher.
About Deciphera Pharmaceuticals Stock and Its Treatments
Deciphera Pharmaceuticals is a biopharmaceutical developer of medication that aims to improve the effectiveness of cancer therapies and improve the quality of life of cancer patients. The company’s flagship treatment is QINLOCK, which is currently being used in the therapy against gastrointestinal stromal tumors (GIST). That is, it should be used after an initial (first-line) treatment has failed or stopped producing significant results or when intolerable side effects occur.
The treatment pipeline currently under development also includes an oral therapy to inhibit the causative agent of tenosynovial giant cell tumor (TGCT) and a product to treat RAS/RAF mutant cancers. However, this is still in the clinical phase. These RAS/RAF mutations are believed to be responsible for colorectal cancer (CRC).
GIST is a disease characterized by the formation of abnormal cells in the tissues of the gastrointestinal tract. Genetic factors are not the main cause of the disease, although some of them define a higher risk of developing GIST, which is usually manifested by either blood in the stool or vomit.
At an early stage of GIST, with a 5-year survival rate of over 90%, the tumor can be cured by surgical removal through a minimally invasive laparoscopic procedure that does not damage vital organs, followed by treatment in most cases.
GIST is rare because this type of tumor accounts for less than 1% of all gastrointestinal cancers and represents between 4,000 and 6,000 new diagnoses in American adults each year.
If malignant, TGCT is a rare clinical entity consisting of a lesion of the synovial membrane (tissue connecting the joints), the tendon capsule (tissue covering the tendons), and the bursa (a fluid-filled sac located between bone, tendons, and muscles) which persists repeatedly. A malignant TGCT may also co-occur with a benign TGCT lesion.
Based on various statistics, the global incidence of TGCT accounts for 2 to 50 cases per million people belonging to the general population. Therefore, TGCT is a rare disease.
Deciphera Improves Sales but Remains Unprofitable
In the second quarter of 2022, Deciphera achieved $32.5 million in total revenue, with $31.5 million coming from the sale of QINLOCK. Total revenue grew by 38% compared to the previous year, which exceeded the median projection of analysts by $2.4 million. The company is not yet profitable and posted a net loss of -$0.60 per DCPH share. This compares to a net loss of $1.21 per share in the same quarter of last year, beating analysts’ median estimate by $0.06.
Deciphera Can Fund Its Operations, for Now
The balance sheet showed a cash balance of $384 million, well in excess of total loans in operating lease liabilities of $30.58 million. This provides the financial flexibility to complete the Phase 1 drug inhibitor study in cancer patients with RAS or RAF gene mutations and the pivotal phase 3 study of a TGCT treatment agent. Given that the level of total costs and operating expenses are up 19% year-over-year to $76.3 million, the funds guarantee business continuity at best for a few more years.
After that, the company must be able to stand on its own two feet without relying solely on equity or debt, especially as the cost of capital continues to rise due to the Federal Reserve’s tightening policy.
Deciphera Pharmaceuticals has an Altman Z-Score of 2.21, indicating the company is neither distressed nor safe. A company is considered distressed as soon as the value falls below 1.8. On the other hand, a value of more than 3 means a healthy financial situation. However, unless the company starts producing profits or reducing its cash burn, then it will eventually enter the distressed zone fairly quickly.
Deciphera Has an Unattractive Portfolio of Drugs Targeting Rare Diseases
The company’s prospects don’t look very promising to me right now. Relying on the secondary treatment of a rare disease to generate the majority of revenue doesn’t exactly sound like a home run. This is especially true since DCPH is still unprofitable. In addition, the other drugs the company has in development also target rare diseases. Therefore, sales volume will ultimately be limited in the long run.
Is DCPH Stock a Buy?
In the past three months, eight Wall Street analysts have issued a 12-month price target for DCPH. The stock has a Hold consensus rating based on three Buys, three Holds, and two Sells. The average DCPH stock price target is $14.63, implying 6% downside potential.
Conclusion – DCPH Stock’s Risk is Not Justified by Its Portfolio
DCPH is developing a pipeline of treatments targeting very rare diseases, which will not be used as first-line medicines. The financial position is still strong, but that could change fairly quickly if the company doesn’t start producing profits. DCPH’s future is very uncertain, as it faces several challenges. These include a higher cost of capital as the Federal Reserve continues to hike interest rates to deal with galloping inflation.
