Major Concerns About Metabasis
Metabasis Therapeutics, Inc. (MBRX) is a biopharmaceutical company that engages in the discovery and development of drugs for chronic diseases involving pathways in the liver. In July 2007, the company suffered two major setbacks when its lead drug, CS-917, failed to meet the primary endpoint in a phase IIb trial and Schering-Plough (SGP) terminated its agreement for the development of pradefovir, based on the drug's toxicology results. Both products were in mid- to-late-stage trials.
The shares plummeted 54% in response to the news and the company has yet to recover from these setbacks. Investor confidence is not likely to return until the company reports positive results on its core pipeline candidates and enters into suitable partnership deals for its candidates.
Another major concern for the company is its cash position. Metabasis exited 2007 with $42.4 million in cash, cash equivalents and securities available-for-sale. The company expects net cash usage for 2008 to range between $40 million and $45 million. This includes $5 million raised through a venture debt facility in March 2008 and excludes any amounts that may be received through potential partnership agreements.
Even if the company is successful in entering into a partnership, we believe that it will need to raise cash sometime in 2008 and again in 2009. We believe that the company will need to fund its operations with a mix of debt and equity financing. Additional development setbacks will severely hamper the company's ability to raise cash from the market.
Despite some promising pipeline candidates, Metabasis pipeline remains in very early-stages of development and we do not see the company achieving profitability any time soon. Positive results on MB07803 and MB07811 would help restore confidence in the company and allow the company to enter into suitable partnership deals. We maintain our Hold rating on the stock with a price target of $2.50.
Hold Small-Cap Westell for Now
We maintain our Hold recommendation and the same valuation target for Westell Technologies (WSTL), a leading provider of broadband access products and conferencing services, following the mixed financial results for third quarter (ended December) fiscal 2008. While revenue declined as a result of transitioning a major contract with AT&T, Inc. (T) -- formerly the BellSouth territory -- EPS was above our expectation due to ongoing outsourcing and restructuring activities.
Consequently, gross margin returned to a slightly higher level. Although the company's financial outlook for the fourth quarter remains flat with the prior reporting period, we do believe that the situation may improve in early fiscal 2009 as Westell received two major contracts from AT&T, Inc. and
Verizon Communications (VZ).
Announcement of further headcount reduction and the decision to explore strategic alternatives for its conference services unit may also lead to improved financial prospects in future reporting periods. Westell is currently trading at 41.2x our estimated fiscal 2009 earnings.
This is at a significant premium over the S&P 500 average, but at a discount to the peer group average. With respect to other selected valuation metrics, the stock is also trading below its peers. Our assessment indicates that earnings volatility will remain, at least over the near-term, but we forecast financials to improve in mid-fiscal 2009 as the company harnesses revenue from its major contracts with AT&T and Verizon.
