Crinetics Pharmaceuticals (NASDAQ:CRNX) has had an extremely volatile year, ranging from a 52-week low of $24.10 to a high of $62.53. The stock, now trading above $40, is priced at over 2,600x its trailing 12-month revenues.
Thanks to a recent FDA approval, however, Crinetics is finally making the jump from a speculative pharmaceutical startup to a business that can actively engage in selling the drugs it has developed. Is it time to buy Crinetics, or is the stock still too risky and too expensive at today’s prices?
Crinetics Gets FDA Approval
Crinetics recently received FDA approval for Palsonify, a treatment it developed for the rare endocrine disorder acromegaly. This disorder, stemming from an excess of growth hormone produced by the pituitary gland, causes tissues throughout the body to grow larger than they otherwise would.
While surgical interventions can be used to treat acromegaly, they are not always successful and are not viable options for some patients. Palsonify, which demonstrated considerable effectiveness when compared to a placebo in clinical trials, offers a novel form of treatment for patients who have not responded to or who cannot undergo surgery to treat acromegaly.
Already, Wall Street is assigning very high possible revenue targets to Crinetics. Estimates of peak revenue from Palsonify range from $600 million to $1.5 billion, a broad range that seems to acknowledge both the very real commercial potential of the drug and the uncertainties that come with launching a novel pharmaceutical treatment.
The Risk of Being Focused on a Single Rare Disease
The downside for Crinetics is the fact that its breakthrough drug treats an extremely rare disease, a fact that puts a severe damper on its commercial base. While estimates of its prevalence vary, worldwide data suggest that somewhere between 30 and 60 people per million have the disease. The rarity of this disease at once could make it easier for a drug like Palsonify to build significant market share while also severely limiting the size of the market for it.
As with other drugs created to treat rare diseases, pricing could also prove to be an issue. During an investor call after the FDA approval came through, Crinetics revealed that its drug would be priced at $290,000 per year. Though this supports the high revenue expectations currently coming from Wall Street, the steep price tag could also work against Palsonify as Crinetics seeks to build market share.
How Does CRNX’s Valuation Look?
With a market cap of $3.9 billion, Crinetics is currently being valued at anywhere between 2.6 and 6.5 times the peak revenue estimates that have been offered for it. This could set up a valuation problem for the stock from the outset, as the sector average price multiple to trailing 12-month sales is just 1.7. Considering that it will likely take several years for Crinetics to reach the peak revenues Wall Street envisions for it, this puts CRNX trading at a rather large premium compared to the sector as a whole.
This hasn’t, however, stopped analysts from issuing very bullish price forecasts for Crinetics. The consensus forecast for CRNX over the next 12 months is $80.27, implying an upside of over 90 percent from the current price.
CRNX also has 10 buy ratings and 2 hold ratings, with no analysts currently rating the stock as a sell. The market at the moment seems to be similarly bullish, with the stock having risen nearly 35 percent in the last 30 days in response to the FDA’s approval of Palsonify.
What About Crinetics’ Pipeline?
With the stock seeming to command a rather premium valuation on the strength of Palsonify alone, it’s worth looking into the pipeline to see if other drugs under development at Crinetics could help make up some of the value gap in the future. Of first and foremost importance is the fact that Palsonify is also nearing approval in the EU, a fact that could help Crinetics expand its revenue base as it moves to treat acromegaly in markets outside of North America.
Crinetics also has multiple other drugs in Phase 2 trials. Two of the drugs that are getting closest to Phase 3 also treat rare endocrine disorders, namely carcinoid syndrome and congenital adrenal hyperplasia. This pipeline of drugs could help Crinetics to position itself as a major player in treating rare endocrine disorders. As the revenue estimates from Palsonify show, this niche has the potential to be quite lucrative, even if it does also come with the difficulty of a limited customer base.
Is Crinetics a Buy?
Crinetics is an interesting case at the moment. With the FDA’s approval of Palsonify, it’s clear that there’s real value in the business. This shifts Crinetics from the realm of a purely speculative pharma business to one that will gradually generate real revenues and likely eventual earnings. The additional drugs in Crinetics’ pipeline are also quite encouraging, as the business could position itself as a leader in the treatment of rare endocrine disorders.
The problem, however, is that it’s very difficult to pin down both how high Crinetics’ revenues will go and how long it will take the business to get there. Layered on top of this is the question of how profitable the business will eventually become once it can achieve peak revenue. With all of these questions in play and the business still at such an early phase of commercialization, nailing down an accurate valuation for Crinetics is extremely challenging.
At the moment, Crinetics stock may appeal to highly risk-tolerant investors seeking the potential for outsized gains in the pharmaceutical world. For more conservative investors, however, there’s a strong argument to be made that there are simply too many unknowns about the business and its trajectory at the moment. This likely puts Crinetics in the category of being a hold, as investors may prefer to wait for more concrete performance metrics to emerge as the business begins selling Palsonify before deciding whether or not to buy the stock.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.