Newbie - Help evaluating SCMP

I am new to the board though I have been reading for a while now. I am relatively young (27), and have recently taken a much larger interest in active investing as I’m finally at the point in my life where I have a decent amount of disposable income.

I’m interested in Saul’s strategies and those of others that post in this board. Rather than blindly follow the advice of successful investors, I want to learn as much as I can, so that I can identify potential opportunities on my own, and develop my own strategies.

This morning I was playing around with screening stocks and came across SCMP which drew my attention. I am not necessarily planning on purchasing this stock, I simply would like some help understanding whether I’m looking in the right direction, or if my thought process is completely off.

Sucampo (SCMP) is currently priced just above $10. They are a drug manufacturer, currently selling one product. Current P/E is 13.97 Past 5 year EPS is 65.5%. Quarter to quarter sales growth is 46.6% and Q/Q EPS is 15%. Net income is up 58% over the past year.

Two questions:

  1. What caused the sharp decline in September? I cannot seem to find any news stories. I did see they missed Q3 estimates.

  2. Their Q4 EPS was more than double analyst estimates, but the stock continues to drop. Why? I know they only produce one drug currently which I guess could be a concern, however they do have more products in the clinical trial.

Could anybody give me some input/guidance? What are some other things I should be focusing on? Anything important I am missing? I did notice they have a high Dept/Equity ratio, if that plays any part in it.

Hopefully these aren’t stupid questions.



Welcome to the board and thanks for the questions.
Everyone here will point you to Saul’s Knowledgebase and recommend you read through that carefully. I echo the same sentiment.

It would be helpful for us to have an idea of what revenues and ADJUSTED EPS have been doing over the past two years or so.

You can generally find these numbers by scanning the quarterly earnings press releases on the company’s IR website.

By getting two years of data, we can develop trailing twelve months earnings and compare growth. We’ll be able to develop the P/E based on adjusted earnings and can take it from there.

Do you want to take a crack at finding revenues and adjusted EPS for the past 8 quarters as a start?

I’m not familiar with this company and would need to do some research on your specific questions. Maybe others have more knowledge.

Let us know of questions and you can feel free to email me personally if you’d like.


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Hello A.J.

Thank you for the response. Would adjusted EPS be the same thing as ‘diluted’ EPS? If so, here is what I found.

Here is what I found:

Revenue | EPS

Q1 22.2M | .02
Q2 24.1M | .04
Q3 31.5M | .03
Q4 37.8M | .21

Q1 29.5M | .14
Q2 34.9M | .21
Q3 33.4M | .16
Q4 55.4M | .43


Yes, diluted is the same as adjusted EPS. Here are the interchangeable terms I see:

Adjusted, diluted, fully diluted & Non-GAAP.

Good work on finding the numbers. Their TTM earnings are 94 versus the prior year of 30. For a growth rate of 213%.

Assuming a $10 stock price, their PE is 10.64.
Their 1 YPEG is 0.05.
These are certainly numbers that warrant further investigation into this company.

I won’t be able to look into this any further until this evening. I plan on reading the conference call transcripts to see what is going on with the company.

Good initial screen at least through my lenses. Let’s see what more we can find about SCMP.

Take care,

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Those terms are not interchangeable.

GAAP is generally accepted accounting principles

Adjusted- the company makes adjustments to the GAAP earnings that it argues are more appropriate to the business. With honest managements this is reliable, with others is can be the source of lots of nonsense.

Diluted can be either GAAP or non GAAP (adjusted) and it relates to whether all authorized shares are issued or not. Companies ask for authorization from existing shareholders, but may delay issuing shares. But a wise investor acts as if all authorized shares Will be issued

Refer to recent threads about AMBA on Saul’s investing discussion to see and example of adjustment and its impact. Look at many a tech company to see the impact of compensation with newly issued shares, and how that affects existing shareholders…

Accounting is a primary tool of investing, I wish I had learned that earlier. I would advise every investor to learn accounting and read the company reports yourself. Otherwise you will be basing important decisions on things you do not understand.

Good hunting
Today Long AMBA but that could change


Accounting is a primary tool of investing, I wish I had learned that earlier. I would advise every investor to learn accounting and read the company reports yourself. Otherwise you will be basing important decisions on things you do not understand.

This ^^^ cannot be said enough. All the clever systems, chart-watching, and story-stock investing notwithstanding, the way to consistent, long-term success in investing is to understand how financial statements are built. If you don’t know that, you are merely guessing.

You rock, Flygal.

Tiptree, Fool One guide


When calculating the number of shares, GAAP assumes all possible future conversions correct?

It is my understanding fully diluted means the same.

Are we parsing between diluted and fully diluted?

Thanks for any clarification.

I found the error in my way of thinking so no need to reply to my prior post.

However, hopefully this won’t curtail the conversation about this company.


Hi Newbie and welcome to the board. Here’s what adjusted or non-GAAP earnings are. This is straight from the Knowledgebase, which is at the top of the right hand ribbon descending each post page on this board:

## Investment Primer

Adjusted earnings are another important term. The accountants preparing the quarterly reports have to follow what are called GAAP rules, which stands for “generally accepted accounting principles.” The problem is that some of the rules distort the true picture of how the company is doing, and others are just stupid.

Therefore, many, many companies give non-GAAP or “adjusted” results alongside the GAAP results. If the company had a large one-time expense or windfall, a legal expense or suit settlement, for example, they would remove these from the calculations to get adjusted results.

Also stock-based compensation, or option grants must be counted as an expense by GAAP rules, although there is no cash expense, and in spite of the fact that they are already counted by an increase in the diluted shares. Almost all companies remove this double counting expense in figuring adjusted earnings.

I ignore GAAP results almost entirely, and almost always use adjusted results, which usually make more sense and are more useful.

## Adjusted (Non-GAAP) vs. GAAP Earnings

I use adjusted results because they tell you what the real company is doing. I pay no attention to GAAP earnings and only look at non-GAAP or adjusted earnings. I know this bothers some people, but it’s what I do. I feel that GAAP earnings ridiculously distort the picture. (Consider company X that has a big tax benefit this quarter and reports huge GAAP earnings, and then next year they pay normal taxes and looking at GAAP it appears as if their earnings have tanked, just for a trivial example. Or company Y that has outstanding warrants. If their stock price goes up, GAAP rules makes their apparent GAAP earnings go down due to repricing of warrants. Just nonsense. I especially remove stock-based compensation as an expense).

I don’t like excessive stock compensation either, but you have to remember that at most small technology companies, that is most of executive compensation as the companies don’t have much money. It also allies the insider’s interests with ours if they have options that are only valuable if the price goes up.

I ignore the stock-based compensation because it is already accounted for in diluted shares. More shares reduces earnings per share. Taking it as an expense too double counts it, which is why almost every company that I know of subtracts out the stock based compensation non-cash expense when they figure adjusted earnings or “real earnings.”

In the earnings press releases, management almost always gives a reconciliation between adjusted and GAAP figures and how they got there. You can see exactly what they leave in and take out so you aren’t taking it on blind trust. If I have confidence in management, I just use the adjusted earnings they give. If I start messing around and adding and subtracting things I won’t remember next time what I did and why, and also the earnings won’t be comparable with past and future earnings. On the rare occasions that I do eliminate something (sometimes companies show big swings up and down in foreign exchange gains and losses, for instance), I make a big note in red in my notes about the quarterly results so I’ll remember to eliminate the same thing next time. This perhaps sounds overly trusting, but what I’m aiming for is seeing how the company has been functioning over time, and accepting management’s adjusted earnings usually works for me. After all, they are trying to evaluate the same thing.

It’s important that you realize just how insane that GAAP rule is. Let’s consider what would happen if some terrible news came out about PSIX during the next quarter. For example, if a big new engine had a bunch of defects, or a new competing product showed up which was taking lots of their customers, their revenue was dropping like a rock, and their price really crashed (for good reason!).

GAAP rules for repricing the warrants would mean that the company would show huge (imaginary) INCREASES in GAAP earnings for the quarter!!! And this is from a system that is supposed to be giving the public a clearer idea about what is really happening at the company!

(For those who wonder what their rational is, it’s: stock price down = obligation from warrants reduced = more GAAP “profit”)

By the way, analyst earning estimates are almost always adjusted earnings too, as far as I know. Also the companies’ disclaimers almost always specify that they use adjusted earnings for their own internal evaluations of how the company is doing. They often give GAAP results as a formality, and then base their entire discussion of results on adjusted results.

For those who think that GAAP are the only valid earnings, and that Non-GAAP are just “cheating,” here are the latest PSIX results.

GAAP earnings: 68 cents
Adjusted earnings: 39 cents

WHOA! Adjusted just about half of GAAP? It’s supposed to be the other way around! How can that be? Because, as usual, GAAP has a lot of nonsense in it:

  1. GAAP is up because the stock price was down so they had to reevaluate the “liability” of the warrants downward due to the lower stock price. This gave more GAAP “earnings”. (Note that if the stock price had been up, repricing of the warrants for more liability would give lower earnings. If you think that makes sense, well…)

  2. In addition, GAAP income includes a non-cash gain resulting from a decrease in the estimated fair value of the “contingent consideration liability” recorded in connection with an acquisition. This also gave more GAAP earnings.

Now if you think GAAP gives a better idea of how the actual business did in the quarter, be my guest. As I said, it’s nonsense to me.


However, hopefully this won’t curtail the conversation about this company.

The only reason I can find that SCMP is down: fears that their one FDA approved drug will be disrupted.…

It also looks like they made an acquisition in Q4 of 2015?

Have the fears/uncertainty been priced in and now it’s time to buy? Seems extremely cheap for a high growth stock, however risky.

And invain, just in case this is helpful to you, the way I figured out they had an acquisition was that I was looking at the Balance Sheet by quarter. Goodwill and Intangibles were essentially $0 until Q4 when they spiked to $190 M. That also explains why sales were higher than expected in Q4. Some of the acquired company’s sales for the quarter are probably being included.

Another clue (back on the Income Statement) was that cost of revenue was up substantially in Q4 (ie Gross Margin dropped a good bit). Operating margin was also down. This probably means the margins on the company they acquired aren’t so good.

Maybe it’s an early stage drug they acquired and it’s a good opportunity. Who knows. But that is where I’d start digging.

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Seems extremely cheap for a high growth stock, however risky.

I believe it’s valued pretty cheaply because they essentially only have one drug that is their entire revenue stream currently, right? If that one drug is disrupted in any way, the floor will fall out on this one.

In the opinion of at least this guy, the acquisition provides some pipeline diversification:…

I read the SA article and the last conference call. The company develops compounds, but uses partners such as Takeda and Mylan for sales & marketing. I’m trying to get a handle on their huge growth in 2015 and look ahead to 2016.

Some growth was not organic and is due to the acquisition of R-Tech Ueno. The two companies actually have the same co-founder and Ueno used to manufacture AMITIZA for SCMP. So they’ve brought the manufacturing in house and are gaining pipeline with the acquisition.

There were some one-time growth items such as a lower tax rate of 24%. They expect 37% to be the norm and last year was a whopping 52%!!! They also benefited from a one time milestone payment for a volume goal hit this year.

Their guidance for 2016 is interesting forecasting 30% revenue growth but only 8.5% EPS growth. I’m surprised no analysts asked about this on the call.

Considering the low PE and pipeline potential, this seems like a decent investment for a small percentage of my portfolio.



I look at the success and growth they are experiencing with just one approved drug. They have three more related drugs currently in Phase 2 clinical trials. I would be interested to see what happens if any of these make it past Phase 3 and get approval.

Thank you, that is absolutely the kind of input I am looking to gain here!

They have three more related drugs currently in Phase 2 clinical trials.

They do have drugs in Phase 2 trials, but there are drugs in Phase 3 as well. There is a drug for pediatric constipation with results expected in 1H’16 and NDA in 2H’16. Although I hear the data is having a tough time getting out…I couldn’t resist.

They are also starting a Phase 3 trial for an alternative formulation in liquid instead of capsule form. Apparently, 11% of patients can’t swallow capsules. That trial begins in 1H’16.

Thanks again for bringing this one forth.

I’d be interested in others opinions too.

Take care,

I couldn’t resist.

Ditto that. Just took a small position. A great price to jump in, and a lot of potential for a big year in 2016.

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I actually took a small position this morning as well.

I brought the company up initially for the learning experience/input on my thought process but the more I look into Sucampo the more I like the prospective outlook, especially if any of the other drugs in the pipeline pan out.