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Should You Wait Before Investing In Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX)?

Simply Wall St

As the US$673m market cap Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Catalyst Pharmaceuticals is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Catalyst Pharmaceuticals’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.

See our latest analysis for Catalyst Pharmaceuticals

What is cash burn?

With a negative free cash flow of -US$8.9m, Catalyst Pharmaceuticals is chipping away at its US$60m cash reserves in order to run its business. The riskiest factor facing investors of Catalyst Pharmaceuticals is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and Catalyst Pharmaceuticals is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

NasdaqCM:CPRX Income Statement, September 19th 2019

When will Catalyst Pharmaceuticals need to raise more cash?

When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Catalyst Pharmaceuticals has to spend each year in order to keep its business running.

Free cash outflows declined by 4.2% over the past year, which could be an indication of Catalyst Pharmaceuticals putting the brakes on ramping up high growth. If Catalyst Pharmaceuticals kept its cash burn rate at -US$8.9m, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and Catalyst Pharmaceuticals still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Catalyst Pharmaceuticals be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how CPRX is expected to perform in the future. I suggest you continue to research Catalyst Pharmaceuticals to get a better picture of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CPRX’s future growth? Take a look at our free research report of analyst consensus for CPRX’s outlook.
  2. Valuation: What is CPRX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CPRX is currently mispriced by the market.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.