Rating Update: Stock Rating F-Lowest (11/8/19)-Spark Therapeutics Inc (ONCE).

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BUSINESS

Spark Therapeutics, Inc. focuses on the development of gene therapy products for patients suffering from debilitating genetic diseases. Its products include LUXTURNA (voretigene neparvovec), which is in Phase III clinical trial for the treatment of genetic blinding conditions caused by mutations in the RPE65 gene; and SPK-CHM that is in Phase I/II clinical trial for the treatment of choroideremia. The company’s products also comprise SPK-7001 that is in Phase 1/2 trial for choroideremia; SPK-9001, which is in Phase 1/2 trial for hemophilia B; and SPK-8011 that is in Phase 1/2 trial hemophilia A. In addition, its product candidates and development programs include SPK-FVIII program to treat hemophilia A; SPK-TPP1 program for the treatment of CLN2 disease; RhoNova for the treatment of rhodopsin-linked autosomal dominant retinitis pigmentosa; and other neurodegenerative diseases.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to fall short of the cost of capital, ONCE is expected to continue to be a major Value Eraser.

Spark Therapeutics has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Spark Therapeutics has a very low Appreciation Score of 3 but a neutral Power Rating of 58, with the Lowest Value Trend Rating the result.

Spark Therapeutics’ stock is selling significantly above targeted value. The current stock price of $111.58 compares to targeted value 12 months forward of $17.
Spark Therapeutics’ very low appreciation potential results in an appreciation score of 3 (97% of the universe has greater appreciation potential.)
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Spark Therapeutics has a Power Rating of 58. (This neutral Power Rating indicates that ONCE’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been favorable. Offsetting factors are the trend in ONCE’s earnings estimates has been unfavorable in recent months; and is currently in an unfavorable positi.

INVESTMENT PROFILE

ONCE’s financial strength is average. Financial strength rating is 43.
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Relative to the S&P 500 Composite, Spark Therapeutics Inc has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ONCE is normal risk. Relative weaknesses include: low historical profitability, low financial strength, and low historical growth. ONCE’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. ONCE has unusually low market capitalization.

CURRENT SIGNALS

Spark Therapeutics’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Spark Therapeutics’ current technical position is very strong. The stock price is in a 3.3 month up move. The stock has appreciated 207.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Spark Therapeutics Inc (NASDAQ: ONCE). Important positive changes in investment behavior have recently occurred: positive upside/downside volume developed.
The stock is currently rated F.
Spark Therapeutics Inc (NASDAQ: ONCE) stock closed at $0.02 on 11/8/19 after a major decline of -12.4%. However, this decline was accompanied by unusually low trading volume at 66% of normal. Relative to the market the stock has been strong over the last nine months and has risen 2.2% during the last week.

CASH FLOW

In 2018, Spark Therapeutics experienced a significant decline in cash of -$66.56 million (-13%). Sources of cash were lower than uses. Cash consumed from 2018 EBITDA totaled -$186.42 million. Non-operating sources contributed +$114.61 million (-61% of EBITDA). Cash taxes consumed -$0.10 million (+0% of EBITDA). Re-investment in the business amounted to -$105.56 million (+57% of EBITDA). On a net basis, debt investors contributed +$49.19 million (-26% of EBITDA) while equity investors contributed +$61.71 million (-33% of EBITDA).
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Spark Therapeutics’ Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Spark Therapeutics Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Spark Therapeutics was in the top quartile. Currently, Spark Therapeutics is lower quartile at -61% of EBITDA (+$114.61 million).

Spark Therapeutics’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Spark Therapeutics Inc Peer Group as well. In most years, Spark Therapeutics was in the top quartile. Currently, Spark Therapeutics is at the upper quartile at +0% of EBITDA (-$0.10 million).

Spark Therapeutics’ Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Spark Therapeutics Inc Peer Group. In most years, Spark Therapeutics was in the top quartile. Currently, Spark Therapeutics is upper quartile at +57% of EBITDA (-$105.56 million).

Spark Therapeutics’ Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Spark Therapeutics Inc Peer Group. (Since 2015 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Spark Therapeutics was in the lower quartile. Currently, Spark Therapeutics is lower quartile at -26% of EBITDA (+$49.19 million).

Spark Therapeutics’ Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Spark Therapeutics Inc Peer Group. In most years, Spark Therapeutics was in the third quartile. Currently, Spark Therapeutics is upper quartile at -33% of EBITDA (+$61.71 million).

Spark Therapeutics’ Change in Cash, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Spark Therapeutics Inc Peer Group. In most years, Spark Therapeutics was in the lower quartile. Currently, Spark Therapeutics is upper quartile at +36% of EBITDA (-$66.56 million).
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Spark Therapeutics’ Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Spark Therapeutics Inc Peer Group. In most years, Spark Therapeutics was in the top quartile. Currently, Spark Therapeutics is below median at +701%.

PROFITABILITY

Spark Therapeutics’ operating performance since 2009 is unavailable.
The productivity of Spark Therapeutics’ assets rose over the full period 2009-2019: asset turnover has enjoyed a volatile overall uptrend that accelerated very sharply after the 2017 level.
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Spark Therapeutics’ return on equity is below median (-57.6%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is slightly above median (-30.8%) reflecting asset turnover that is at the lower quartile (0.08X) and slightly below median pretax margin (-397.%).
Tax “keep” rate (income tax management) is at the upper quartile (100.0%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is at median (1.87X).

GROWTH RATES

There are no significant differences between Spark Therapeutics’ longer term growth and growth in recent years.
Spark Therapeutics’ historical income statement and balance sheet growth are not available.

Annual revenue growth has been 54.3% per year.

Total asset growth has been 11.1% per year.

Annual E.P.S. growth is not available.

Equity growth has been 2.0% per year.
No consensus growth rate forecast is available for Spark Therapeutics.
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Relative to the Spark Therapeutics Inc Peer Group, Spark Therapeutics’ historical growth measures are erratic. Revenue growth (54.3%) has been at the upper quartile. Total asset growth (11.1%) has been at median. Equity growth (2.0%) has been at median. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Spark Therapeutics’ stock price performance has been variable and in line with the market. Between May, 2015 and November, 2019, Spark Therapeutics’ stock price rose +52%; relative to the market, this was a +3% gain. Significant price moves during the period: 1) December, 2018 – March, 2019: +191%; 2) June, 2018 – December, 2018: -53%; 3) January, 2016 – September, 2016: +113%; and 4) November, 2015 – January, 2016: -51%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 142.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 142.7% is upper quartile relative to Spark Therapeutics Inc Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ONCE’s overall valuation is exceptionally high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/equity ratio is upper quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Spark Therapeutics has a major value gap compared to the median valuation. For ONCE to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 69.41X to 24.81X. If ONCE’s ratio of enterprise value/revenue were to fall to 24.81X, its stock price would be lower by $-67 to $44.
For ONCE to fall to lower quartile valuation relative to the Spark Therapeutics Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 69.41X to 7.74X. If ONCE’s ratio of enterprise value/revenue were to fall to 7.74X, its stock price would decline by $-93 from the current level of $112.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to fall short of the cost of capital, ONCE is expected to continue to be a major Value Eraser.
Spark Therapeutics’ current Price Target of $18 represents a -84% change from the current price of $111.58.
Spark Therapeutics’ very low appreciation potential results in an appreciation score of 3 (97% of the universe has greater appreciation potential.)
With this low Appreciation Score of 3, the neutral Power Rating of 58 results in an Value Trend Rating of F.
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Spark Therapeutics’ current Price Target is $18 (+61% from the 2018 Target of $11 but -84% from the 11/08/19 price of $111.58). This dramatic rise in the Target is the result of a +61% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted decline in growth has no impact on the multiple. The forecasted decline in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is -10.% — significantly below our recent forecasts. Forecasted return on equity erratic but little changed between 2013 and 2018. The current forecast is significantly below the 2013 low of 4%.

PTR’s growth forecast is 30.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2013 and 2018. The current forecast is significantly above the 2013 low of 4%.

PTR’s cost of equity forecast is 8.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2018. The current forecast is above the 2015 low of 6.6%.
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At Spark Therapeutics’ current price of $111.58, investors are placing a positive value of $116 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 37.0% per year, and a return on equity of 4.0% versus a cost of equity of 9.6%.
PTR’s 2020 Price Target of $18 is based on these forecasts and reflects an estimated value of existing assets of $9 and a value of future investments of $9.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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