Collegium Pharmaceutical has been on fire lately. In the past six months alone, the company’s stock price has rocketed 68.7%, setting a new 52-week high of $49.89 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Collegium Pharmaceutical, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Is Collegium Pharmaceutical Not Exciting?
We’re happy investors have made money, but we're cautious about Collegium Pharmaceutical. Here are two reasons you should be careful with COLL and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $757.1 million in revenue over the past 12 months, Collegium Pharmaceutical is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Collegium Pharmaceutical’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Collegium Pharmaceutical isn’t a terrible business, but it doesn’t pass our quality test. Following the recent surge, the stock trades at 6.5× forward P/E (or $49.89 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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