Deciphera Pharmaceuticals: Restructuring Plan Was Necessary for Survival

Deciphera Pharmaceuticals (NASDAQ: DCPH) is a biotechnology company that develops and manufactures kinase inhibitor treatments for cancer by cutting off the ability of tumor cells to thrive and spread. 

The company designed a drug candidate, DCC-2618, to inhibit the full spectrum of mutant or amplified KIT and PDGFRa kinases that drive cancers such as gastrointestinal stromal tumors (GIST), advanced systemic mastocytosis (ASM), gliomas, and other solid tumors. 

The company was founded in November 2003 and is headquartered in2.8% in the past year and 74.4% in the past three-month period. I am bearish on DCPH stock.

Deciphera Pharmaceuticals Business News

On December 21, Deciphera announced the approval of its QINLOCK® (ripretinib) medicine in the United Kingdom for “the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST) who have received prior treatment with three or more kinase inhibitors, including imatinib.”

On November 30, the biotechnology company announced “that the European Commission (EC) has approved QINLOCK® (ripretinib) in the European Union (EU) for the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST)”

The biggest news for the company came on November 30.

First, a restructuring plan was deemed necessary to shift focus to select clinical development programs, streamline U.S. operations, and reduce expenses drastically. 

The company also announced a near-35% reduction of its workforce. The company’s core focus going forward will be on the clinical development of Vimseltinib and DCC-3116, while the Rebastinib program was discontinued.

In addition to this news, Deciphera will put its key efforts in its sole marketed medicine, Qinlock (ripretinib), launching it in select European markets, and estimated its cash runway would be extended into 2024 as a result of significant operating expenses reductions.

Restructuring

This restructuring plan signals a couple of things for the future of the firm, leaving investors wondering which side, bullish or bearish, is now the most logical one.

The bullish side will argue that any company can decide to announce a restructuring plan if it is going to create growth and value, and QINLOCK’s approval in the European market should boost revenue. 

The annual sales growth of 68.35% in FY 2020 to $42.09 million was important. In Q1 2021, year-over-year revenue growth reported was 29.10%. Q2 and Q3 sales growth of -6.29% and -1.50% showed a slowdown.

The bearish side has a lot more factors to mention that spell a lot of trouble for DCPH stock in 2022. DCPH stock earnings have been negative, and the company is not only unprofitable, but net losses have been widening very fast. In 2016, a net loss of $25.94 million was reported, which grew to $266.49 million in 2020.

Q1 2021, Q2 2021 and Q3 2021 net income reported was ($61.3 million), ($70.43 million) and ($79.84 million), respectively.

DCPH stock has a Piotroski F-Score of 3, which usually implies poor business operations, and an Altman Z-score of -0.67 placing it in the distress zone. This implies bankruptcy is possible in the next two years.

One of the biggest red flags for Deciphera is its cash burn problem. Apart from widening net losses, the firm has reported widening negative free cash flows on an annual basis.

Diluted shares increased from 42.87 million in 2019 to 55.78 million in 2020, another negative factor for the intrinsic value of the stock. In 2020 the free cash flow reported was ($243.67 million). Turning to quarterly analysis in the first nine months of 2021, Deciphera announced a cumulative free cash flow of ($174.87 million).

Wall Street’s Take

Turning to Wall Street Deciphera Pharmaceuticals has a Hold consensus based on two Buys, eight Holds, and one Sell rating. The average Deciphera Pharmaceuticals price targetof $12.25 represents a 33.4% upside potential.

Bottom Line

Deciphera Pharmaceuticals has announced an important restructuring plan that will help it extend its operations until 2024. 

The deepest causes of this plan are poor fundamentals, widening net losses, and an important cash burn problem. The firm has to put too much effort into a turnaround soon.

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