This is DIR’s initial report about Medexus Pharmaceuticals (TSXV: MDP.V, OTCQB: PDDPD) whose stock trades on the TSX Venture Exchange and on the OTCQB market. 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, autoimmune diseases and pediatric arthritis, among other indications. See Appendix A for a detailed look at the acquisitions. Here is a brief quantitative overview of the transformed company:
RATING: SPECULATIVE BUY INITIAL VALUE: $7.58/share
DATE: Jan. 25, 2019 MARKET VALUE (000’s): $50.9 Mil NET CASH: $-5.9 MIL
EXCHANGE: TSXV/OTCQB ENTERPRISE VALUE: $56.75 Mil EV/EBITDAS: 13.8(FY ‘20 EST)
INDUSTRY: Specialty Pharma AVG. DAILY VOL: 1,000 REVENUE: $ 56.1 MIL (FY ‘20 EST)
BETA: 0.49 SHARES OUT (000’s): 14,700 CFO: TBD
SYMBOL: MDP.V or PDDPF FLOAT (000’s): 12,495 CAP EX: $0.04 MIL (FY ’20 EST)
CURRENT PRICE: $3.46 INSIDER OWNERSHIP: 15%* FCF: TBD
52-WEEK RANGE: $3.39-5.38 INSTITUTIONAL OWNERSHIP: 44%* DEBT/CAPITAL: 45%
NOTE: ALL DOLLAR AMOUNTS IN TABLE ARE IN USD. *ASSUMES CONVERSION OF CONV. DEBT
The basis for our initial rating on Medexus is as follows:
· The recent acquisition of Medac Pharma gives the company a signature product that is enjoying double-digit unit and revenue growth in a large market.
· The acquisition of “legacy” Medexus Inc. further expands the company’s opportunity in the treatment of Rheumatoid Arthritis. FDA approval is currently pending in the U.S.
· Together with the legacy Medexus infrastructure, the company is well-positioned with over 40 sales reps in both Canada and the United States.
· The Medac purchase also gives the company the right of first refusal to market a pipeline of products that would enhance productivity of the above-noted salesforce.
· The pro forma income statement points to a company generating approx. $56 million (CAD) in revenue and breakeven Adjusted EBITDA. Incremental revenue growth from here should flow to the EBITDA line at a much higher percentage.
· The pro forma balance sheet shows approx. $34.5 mil of cash, with $42 mil of convertible debt.
· At current growth rates, the newly-combined entities could easily eclipse $70 mil in revenue in FY 2020.
· Given valuations easily above 3X EV/Revenue multiples for comparable companies, we believe the shares could easily double within the next year. Our initial price target is $7.58/share (assumes full conversion of convertible debt).
· There are still many risks to be considered including lack of liquidity, contingent liabilities and further dilution due to convertible securities.
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