James Roumell presented his in-depth investment theses on Rosetta Stone (NYSE: RST) and Paratek Pharma (Nasdaq: PRTK) at Best Ideas 2017.
Update on Rosetta Stone: Rosetta Stone provides technology-based language learning solutions. RST continues to execute on its plan to focus on three core business lines: enterprise and education (E&E) language, literacy (Lexia Learning) and serious consumer language learners. Led by Chairman and CEO, John Hass, and a strong board, the company is showing clear signs of a successful turnaround. Jim believes the company will continue to materially improve operations and will attract financial and strategic buyers. The company recently reported its seventh consecutive quarter of year-over-year opex reductions. Summing the company’s net cash balance and the value of fast-growing Lexia Learning (year-end annual bookings run-rate of $40 million, coupled with 90% plus renewal rates and a 30% plus annual growth rate), implies little value for the company’s consumer and E&E language businesses. Jim assigns a $100 million valuation to Lexia (2.5x year-end bookings run-rate), leaving the company’s combined language businesses (consumer and E&E) valued at $52 million. Applying a modest 1x multiple to language revenue of about $150 million sums to a total RST valuation of roughly $285 million, or $13 per share. (Consumer competitor Duolingo recently raised capital at a pre-money valuation of $470 million. It is believed that Duolingo has less revenue than Rosetta Stone.)
Update on Paratek Pharma: Since presenting PRTK at Best Ideas 2016, the news flow from PRTK continues to exceed expectations. PRTK successfully reported out its Phase 3 ABSSSI (skin) IV to oral trial results in May 2016. The company recently made a number of very positive announcements. If the news on PRTK is so good, why did the stock drop ~30% last year? It is difficult to know, but at least two story lines are likely contributing to the sell-off. First, the NBI biotech index, comprised of the largest biotech companies, was down ~23% last year. PRTK is performing in-line with its smaller-cap biotech peers. This across-the-board selling seems to be the result of high-profile pharmaceutical price gauging cases leading to fears of legislative price restrictions on drugs. What does not seem to be well understood is that three years ago, Congress (with Democrats and Republicans joining together) passed the GAIN Act to increase the profitability in antibiotics in order to spur development given the dire need for new antibiotics articulated by the CDC and many world health organizations. Second, a PRTK competitor, Cempra recently experienced manufacturing problems and liver toxicity issues, sending CEMP stock down 60+% in one week. Jim continues to value PRTK at $1.5 billion (either 1.5x multiple to $1 billion in peak sales or 1x peak sales of $1.5 billion). On a per-share basis this translates to $65, compared to last year’s number of $86 per share, accounting for the recently higher share count associated with raising capital to fund an oral-only skin trial.
John Lewis also presented on Rosetta Stone at Best Ideas 2017.
About the instructor:
James Roumell is President and Lead Portfolio Manager of Roumell Asset Management, an investment firm focused on finding value through out-of-favor, overlooked or misunderstood securities. Prior to starting his own firm in 1998, he was a Registered Principal at Raymond James Financial Services, Inc. Jim is a graduate of Wayne State University in Detroit, Michigan. He is also a board member of Transitional Housing Corporation, Inc., a not-for-profit group providing affordable housing to low-income residents of Washington, D.C. Jim is married with two children and lives in Chevy Chase, MD.
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