At the beginning of April, 2016, Minnesota based biotech Vascular Solutions, Inc. (NASDAQ:VASC) reported that it was withdrawing and recalling a large number of its lead product, its Guardian® II Hemostasis Valves, from the market. The recall came on the back of findings that suggested the product could leak, and in turn, cause serious AEs or, in worst case scenario, death, in patients fitted with the valves.
Despite the announcement, however, the company’s market capitalization has risen across the remainder of the month, and Vascular stock currently sits at $38.15 – a near 60% increase on the company’s February lows.
Why the gains? Well, across the period mentioned, a host of positive fundamental drivers have conspired to induce favorable sentiment. In February, the Vascular’s earnings topped out on estimates, and the company reported a better than expected gain period to period on a year earlier. Shortly after, a reshuffle in management led to positive expectations, and shortly after, the lifting of an overhanging litigation involving the company and its CEO Howard Root compounded the positive sentiment. The case in question related to an alleged “off-label” promotion of one of its products – the Vari-Lase Short Kit.
On the lifting of the litigation, Root had this to say:
The company and I are vindicated by today’s verdict, but outraged by the obscene legal process we were forced to endure… We greatly appreciate the jury’s complete rejection of the government’s false allegations.
At time of writing, Vascular closed out for a market capitalization of a little over $663 million, for a PE ratio of 65.78 on the trailing twelve months.
The big risk with this one is capital standing. At last count (December 31, 2015) Vascular reported just $41 million cash on hand. Selling and general regularly comes in at just below $20 million a quarter, and R&D tops out at around $5 million. With a quarterly net income of around $1.5-3 million quarterly, $41 million looks precarious.
DISCLAIMER: There is a substantial risk of loss with any speculative asset, especially small cap stocks. The opinions expressed are those of the author, and do not constitute recommendations to buy or sell a stock. Do your own research before committing capital.