Graham Net Net Stock Insmed Inc (INSM)

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

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.