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What are we looking for?

Canadian-listed specialty drug manufacturers – many of which are involved in cannabis production – that appear undervalued.

The screen

We used StockCalc’s screener to select the nine largest stocks on the the TSX and TSX Venture Exchange under the Morningstar category ”specialty drug manufacturers.” We then use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see which are undervalued or overvalued compared with their price.

We calculated fundamental valuation for each stock in this portfolio using standard valuation techniques including discounted cash flow, price comparables and adjusted book value.

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  • Discounted cash flow is a valuation technique where cash flow projections are discounted back to the present to calculate value per share;
  • Price comparables value the company on the basis of ratios from selected comparable companies;
  • Adjusted book value is calculated by multiplying book value per share by the stock’s historical price-to-book ratio;
  • Where a stock is covered by analysts, we also want the consensus target price.

More about StockCalc

StockCalc (stockcalc.com) is a fundamental valuation platform with tools to calculate and report on value per share for the 8,000 public companies listed on the U.S. and Canadian exchanges. StockCalc also contains lists of undervalued and overvalued stocks, as well as numerous tools to help you evaluate the stocks you’re investing in (Globe readers wishing to subscribe can receive a discount by using promo code “Globe30”).

What we found

The accompanying table shows the difference between each stock’s recent close price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the valuation techniques and analyst target data. With many of these stocks just starting to generate revenue, we see a lot of variability in valuations with the different techniques used.

Looking for attractively priced stocks, we see underperformers over the past 12 months, such as Aurinia Pharmaceuticals Inc., that show larger upside potential than those that had an outstanding past 12 months, such as Canopy Growth Corp. Others, such as Valeant Pharmaceuticals Intl Inc., look inexpensive by all measures and Hydropothecary Corp. and OrganiGram Holdings are also well supported across the board. The different techniques can also complement one another: For example, a low DCF against price suggests that cash flow needs to be looked at in detail.

Investing involves risk, especially for volatile stocks such as these. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

Select specialty drug manufacturers

CompanySymbolMkt Cap. ($ Mil.)Recent price ($)StockCalc Valuation ($)Difference (%)DCF Value ($)Price Comps ($)Adj. BV ($)Analyst Target ($)1Y Rtn. (%)
Valeant PharmaceuticalsVRX-T11,491.932.9036.8512.0178.7171.7238.5435.7395.0
Canopy GrowthWEED-T8,111.440.6828.79-29.235.2514.8121.0933.93496.5
AphriaAPH-T2,272.812.7919.2650.598.7210.7020.5324.96171.6
Knight TherapeuticsGUD-T1,149.78.059.7320.871.265.859.519.89-19.0
Hydropothecary Corp.THCX-X927.65.187.0836.682.906.808.717.70210.2
OrganiGram HoldingsOGI-X712.65.726.3511.011.206.636.986.79171.1
Aurinia PharmaceuticalsAUP-T625.67.4313.1877.39-0.2710.278.3316.46-13.0
Emerald HealthEMH-X598.54.424.777.92-0.419.449.97n/a305.5
ZymeworksZYME-T562.121.9914.28-35.06-2.3882.4114.28n/a61.7

Source: StockCalc

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