Medexus Pharmaceuticals: Initial Report

                                    Q1 FY 2020 Review & Update: MEDEXUS PHARMACEUTICALS

This update is based on recent results published on Aug. 22nd, 2019. The company’s revenue results of $16.1 Mil were quite close to our estimate of $16.2 Mil. The slight shortfall appeared to be the result of lower than expected contribution from the Canadian segments of the business. Nevertheless, the deviation does not change our positive outlook as growth patterns remained intact during the first quarter of the new fiscal year. The shares remain significantly undervalued when compared with industry peers. The company has plenty of cash to execute its business plan and should achieve positive cash flow from operations for the full fiscal year.

As noted in our last update, anemic trading volume could be contributing to a discount in the share value. 

                            RATING: SPECULATIVE  BUY              PROJECTED VALUE: $7.65/share

DATE:  Aug 29th, 2019                 MARKET VALUE (000’s): $43.1 Mil                 NET CASH:    $-20.8 MIL

EXCHANGE: TSXV/OTCQB         ENTERPRISE VALUE: $63.9 Mil                      EV/EBITDAS:  10.5 (FY ‘20 EST)

INDUSTRY: Specialty Pharma       AVG. DAILY VOL:  446                           REVENUE:   $53.6  MIL (FY ‘20 EST)

BETA: 0.07                          SHARES OUT (000’s): 14,765                         CFO:      $3.0 MIL

SYMBOL: MDP.V or PDDPF         FLOAT (000’s):    12,495                            CAP EX:   $0.05  MIL (FY ’20 EST)

CURRENT PRICE:    $2.92          INSIDER OWNERSHIP: 15%*                                FCF:      $2.95  MIL

52-WEEK RANGE:  $2.92 - 5.38       INSTITUTIONAL OWNERSHIP: 44%*                  DEBT/CAPITAL: 41%

NOTE: ALL DOLLAR AMOUNTS IN THE ABOVE TABLE ARE IN USD. 

The basis for our current rating on Medexus is as follows (AMOUNTS IN CAD):

· Results for Q1 FY ’20 were as follows: (i) Revenue:  $16.1 Mil; (ii) Operating Loss: $1.1 Mil; (iii) Adj. EBITDA: $0.5 Mil; (iv) Net Loss: $2.2 Mil and (v) CFO: -$0.2 Mil

· Revenue growth was significant but YoY comparisons are worthless because last year’s quarter only reflected the legacy PediaPharm business. The company has not published YoY pro forma information.

· Our revenue estimate ($71.5 Mil) for the FY remains essentially unchanged….we hold a cautiously-upward bias if some of the newer products begin to gain traction later in the FY.

· GAAP Operating Income diverges from Adj. EBITDA due to the significant non-cash expenses flowing through the income statement.

· Adj. EBITDA was a positive $0.5 Mil…below our estimate due mainly to R&D expenses that we had not anticipated. We now believe that $8.1 Mil is a realistic Adj. EBITDA target for the full fiscal year, as we anticipate continued R&D expenses. These expenses mainly stem from the company’s efforts to provide additional information to the FDA.

· The GAAP Net Loss line is also impacted by non-cash expenses and the large interest expense flowing from the convertible debentures.

· CFO would have been positive  by $0.4 Mil after adjusting for working capital fluctuations. We still expect CFO to easily reach $3.0 Mil for the full fiscal year.

· Rasuvo, distributed by the company’s U.S. subsidiary, contributed approx. $9.6 Mil in revenue during the quarter, representing 14% unit growth. This was slightly above our estimate of $9.5 Mil. Management expects double-digit unit and sales growth aided by a small increase in unit pricing.  After the 5% YoY growth last quarter, it was good to see growth increase to the mid-teens area once again.

· As noted in our last update, the auto-injector market continues to gain market share with plenty of room to expand in the U.S., so we would expect the above growth trajectory to continue. 

· Other operational highlights included: (i) 122% YoY unit growth in Metoject units during the quarter and (ii) 68% YoY unit growth in Rupall for the quarter. 

o Metoject is now available in a 15 mg dose, which gives the company a new dosage to offer to patients in Canada. The dosage was launched on May 1stand is already the 3rd highest in volume. It is unclear as to whether there will be any cannibalism of other dosages. 

o Metoject growth next quarter (ending Sept. 30th) should be bolstered by a full quarter of contribution from the 15 mg dose.

o As for Rupall, this unique antihistamine offering continues to experience robust growth. The growth is coming from market share gains as more physicians switch patients from generic prescription and OTC products.

· In addition to the three products outlined above, the company again discussed new and prospective products such as Treosulfan, which is now being distributed in Canada under the Special Access Program and is shipping to hospitals across Canada. Sales should accelerate once the product is fully registered. Peak sales are estimated to be between $40-50 Mil. 

· The pro forma balance sheet continues to shine, with approx. $27.4 mil of cash, $37.9 mil of convertible debt and a contingent liability of $17.2 mil. Dollar amounts in CAD. 

· We continue to expect Medexus to eclipse $70 mil (CAD) in revenue in FY 2020. We have lowered our Adjusted EBITDA estimate to approx. $8.1 mil, reflecting increased operating expenses. 

· Results for the current quarter (ending Sept. 30th) should be bolstered by: (i) seasonal strength of NYDA, (ii) a full-quarter contribution from the 15 mg dose of Metoject, and (ii) seasonal strength of Rupall during the peak allergy months. 

· We maintain our price target of $7.65 per share (USD). We derive this valuation by applying a multiple of approx. 3X to projected revenue of $53.6 Mil for FY ’20 and deducting net debt of $20.8 Mil.  

· Trading volume remains a concern. However, the company has been buying back shares through a normal course issuer bid. A signal that the company is willing to support the shares at this low valuation. 

· There are still many risks to be considered including regulatory risk, lack of liquidity, contingent liabilities and further dilution due to convertible securities.

Medexus, formerly Pediapharm Inc. (the company) has a history in pediatric care, distributing specialty pharmaceutical products into the Canadian market. These are medicines used to treat pathological conditions that mainly affect children from infancy to eighteen (18) years of age. However, due to two major and recent acquisitions, which closed Oct. 16th, 2018, the company has expanded its suite of specialty pharmaceutical products to include treatment for Rheumatoid Arthritis (RA), autoimmune diseases and pediatric arthritis, among other indications. 

NOTE:  SEE DISCLOSURE SECTION FOR POTENTIAL CONFLICTS OF INTEREST