Merus Labs (TSX:MSL) Q4 results were “excellent” but Laurentian Bank Securities analyst Joseph Walewicz says the company’s guidance left him wanting more.
On Monday, Merus Labs reported its fourth quarter and fiscal 2015 results. In the fourth quarter, the company posted revenue of $16.1M, up 33.0 per cent year-over-year and ahead of Laurentian’s and the street consensus expectations.
“Over the last year, we successfully executed on our business priorities — strengthening our team, building strategic partnerships, optimizing current products, securing two additional established medicines and advancing on several promising acquisition opportunities. Our scalable platform is well positioned to take on new products, and we are committed to delivering long-term growth for our shareholders,” said CEO Barry Fishman. “Our underlying business, based on IMS data from pharmacy purchases, is performing as expected. Sintrom demand was stable year over year despite the launch of several new oral anticoagulants (NOACs) over the past few years. Emselex demand declined at 5 per cent year over year due to intense competition in the overactive bladder market. However, our focused demand-creation strategies in select markets for Emselex have made an impact. As an example, net sales in the U.K. have increased by more than 60 per cent during the last 12 months.”
Walewicz says this was an excellent quarter for Merus Labs, but his gaze was settled on the company’s guidance. Merus said it anticipates fiscal 2016 adjusted EBITDA, without consideration of new acquisitions, to be in the $30-million range. This, says the analyst, falls below his previous forecast of $37.8 million. His new forecast of $30.78-million, he explained in a research update to clients today, is part of the reason he has lowered his price target on Merus Labs.
“Fiscal Q4 was a solid beat, but the key headwinds (F/X, German pricing) will weigh-in in Fiscal 2016,” says Walewicz. “However, the valuation remains compelling, even on our reduced estimates, and MSL has the highest FCF yield (~14%) in our coverage universe. We maintain our Buy rating, but we are reducing our TP to $3.10 (from $3.40) based on the average of an 8.5x multiple (a 15% discount to its peers) applied to our F2017 EBITDA forecast, and a DCF-based approach (WACC of 9.52%, terminal growth of 1%). We have not forecasted any new deals – with low leverage and strong cash flows the company is well positioned to execute on new transactions.”
Vancouver-based Merus Labs, which was founded in 2011, is a specialty pharma hopeful focused on commercializing mature assets in niche medical markets. The company has five products; Simtrom, which it acquired in September of 2014, is an anticoagulant indicated for the treatment and prevention of thromboembolic diseases. The company’s former lead product, marketed under the names Enablex and Emselex, is a prescription medicine used in adults to treat symptoms of overactive bladder. The product works by blocking the nerve signals that cause the bladder to involuntarily contract. The company’s three other products are Vancocin, a C.difficile treatment, Salagen®, which is used to manage dry mouth associated with radiation therapy, and Estraderm, a hormone replacement therapy that contains the female hormone estrogen.
Walewicz’s new target of $3.10 implied a return of 78.2 per cent at the time of publication.