PD-Rx Pharmaceuticals, Inc. (PDRX)

PDRX is a small unlisted pharmaceutical services company. They offer a full spectrum of medications and specialized services. For example, one of the services PDRX provides is a turn-key solution to physicians that dispense medication directly to their patients by providing pre-counted prescriptions. I am not an expert in the medical services field by any stretch - and there is naturally some controversy surrounding prescription dispensing physicians given the apparent conflict of interest - but on a quantitative basis PDRX is fundamentally cheap. Shares currently sell for around $3.00, and as I outline below, I believe them to be worth at least $4.95.

Quantitative considerations

Below is condensed balance sheet over last five years. Net current assets value (NCAV) in the table below is defined as current assets minus all liabilities ahead of the common.

June 30, 2012 2011 2010 2009 2008 Cash & Equivalents 3,885,618 3,083,988 1,818,320 2,144,120 1,952,845 Accounts Receivables 1,506,042 1,984,697 1,603,028 1,862,260 1,532,612 Inc tax Receivables 126,674 0 999 0 200,001 Inventories 1,591,046 1,924,072 1,673,621 1,282,776 1,017,371 Other 170,106 222,770 234,899 123,485 126,194 Total Current Assets 7,279,486 7,215,527 5,330,867 5,412,641 4,829,023 Net PP&E 1,076,973 956,182 966,404 967,249 799,755 All Liabilities 1,238,679 1,759,088 1,014,556 1,349,647 1,511,487 NCAV per share 3.41 3.08 2.43 2.29 1.87 NCAV + PP&E per share 4.02 3.62 2.98 2.83 2.32 NCAV/share CAGR 16.3%

Comments:

• NCAV per share is currently $3.41 relative to the share price of $3.00
• NCAV per share has grown at a compound annual rate of 16% since June 2008
• There is no debt as of June 2012
• 61% of the assets on the balance sheet consists of cash and cash equivalents

Typically a company selling for less than net current assets is one in perpetual decline, losing money year after year and burning substantial cash. PDRX on the other hand has been consistently profitable and cash flow positive. Below is the five year summary of its financial performance. "Adj inc" in the below table is defined as net income plus depreciation less capital expenditures.

	Year ended June 30,
	2012	2011	2010	2009	2008
Net sales	25,553,544	23,887,231	19,358,270	26,919,498	26,426,268
Op Income	1,130,280	1,822,851	390,240	1,474,471	1,093,734
Op Income %	4.4%	7.6%	2.0%	5.5%	4.1%
Net Inc	705,159	1,131,019	242,472	912,952	706,434
Net Inc %	2.8%	4.7%	1.3%	3.4%	2.7%
Tax rate %	39.1%	38.7%	39.8%	38.0%	38.1%
CFO	1,170,319	1,481,124	(133,689)	569,667	205,701
Depreciation	146,597	127,375	115,830	111,863	107,579
Capex	(268,705)	(115,948)	(104,781)	(283,179)	(119,471)
Adj Inc	583,051	1,142,446	253,521	741,636	694,542
Shares Out	1,769,326	1,769,326	1,774,898	1,774,898	1,774,898
EPS	0.40	0.64	0.14	0.51	0.40
CFO/share	0.66	0.84	(0.08)	0.32	0.12
Adj inc/share	0.33	0.65	0.14	0.42	0.39

Comments:

• Earnings, cash flow from operations, and adjusted income averaged 0.42, 0.37, and 0.39 per share over the last 5 years.
• Cash flow has been positive in all except one of the previous 5 years.
• Earnings and adjusted income have been positive in each of the previous 5 years.

Miscellaneous qualitative considerations

• Qualitatively I don't see any obvious reason why PDRX should fail to achieve performance in the future similar to its historical record. Granted, I am not at all a specialist in healthcare or medical services companies.
• Although the financial released seem robust, they are somewhat minimalist and are released only once a year 
• The financials do not include the auditor's (Grant Thornton) opinion, but the company provided this to me upon inquiry and the opinions are unqualified for each of the previous four years provided 

Valuation

Using a very simple and rough method, I estimate PDRX's value to be at least $4.95 calculated as follows:

Earnings measure (5y avg Adj Inc)	0.39
Discount rate	10%
Earning power value	3.85
Excess cash (50% of balance)	1.10
Value estimate	4.95

This ignores the possibility of growth or decline. PDRX has a huge cash balance of $2.20 per share. As illustrated in the above, I assume roughly half of that is excess and distributable. 

Conclusion

Based primarily on the quantitative considerations above, PDRX appears quite cheap. If modest growth assumptions are used instead, it looks incredibly cheap. However I am not an expert in this business, and am not able to conclude if growth or decline is more likely. For these reasons, I have initiated a position but have made it a relatively small position in the neighborhood of 2-3%.

Disclosure: Long PDRX