Following first quarter results that were in-line with his expectations, Euro Pacific Canada analyst Doug Loe says Merus Labs (Merus Labs Stock Quote, Chart, News: TSX:MSL) is undervalued.
In a research update to clients Friday, Loe maintained his “Buy” rating and one-year price target of $4.00 on Merus Labs, implying a return of 118.6 per cent at the time of publication.
Last Thursday, Merus Labs reported its Q1, 2016 results. The company lost $900,000 on revenue of $15.9-million, a 50 per cent topline increase over the same period last year.
“We are pleased with our fiscal first quarter results, which confirm the strength and predictability of our business,” said CEO Barry Fishman. “Over the past several months, we have enhanced our team, improved business processes and increased our pipeline. Our most significant advantage is our scalable platform. The recent acquisition of the nitrate portfolio from UCB demonstrates our ability to leverage our 30-country European platform, access to low-cost debt and favourable tax rates.”
Loe says he remains upbeat about Merus’s acquisition-based growth strategy, but says he understands that the markets are grappling with how to value a company that is a product consolidator rather than an innovative drug developer. But the analyst says he believes the market is currently assigning more risk to the name than he thinks is justified.
“Capital markets are clearly pausing to reflect on specialty pharmaceutical business models and valuations, but we still endorse Merus’ growth strategy even if focused more on mature assets than on growth assets,” says Loe. “We sympathize with capital markets caution on just how specialty pharmaceutical/asset consolidators/ acquirers are valued in the current climate, particularly with several larger entities with similar business models (Valeant Pharmaceuticals [VRT-T, NR], chief among them) experiencing dramatic valuation downdraft in recent months.
Loe adds that Merus Labs quandary is not unique to its sub-sector.
“Sector-wide focus by US firms on acquiring international peers headquartered in low-tax rate jurisdictions (or that allow re-location in low-tax jurisdictions) was a longtime valuation driver for Merus and its peers (famous transactions include Endo’s [ENDP-Q, NR] acquisition of Paladin Labs, Perrigo’s [PRGO-NY, NR] acquisition of Elan, and Actavis’ [now Allergan/Pfizer (PFE-NY, NR)] acquisition of Warner-Chilcott, to name three of many, all in 2013) and while the pace of newly announced similar transactions has not diminished entirely nor is it particularly pharmaceutical industry-specific (Burger King acquiring Tim Horton’s (both are now part of Restaurant Brands, QSR-T, NR) in 2014, for example), it seems to have lost some gravitas as a valuation driver across Merus’ publicly traded peer group, at least for now.”
Shares of Merus Labs closed Friday even at $1.90.
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