Echolon Wealth Partners analyst Douglas Loe says strong gross margins from Cardiome (TSX:COM) mitigate the company’s near-term business risk and cash crunch.
On Friday, Cardiome reported its first quarter, 2016 results. The company lost (U.S.) 1.23-million on product sales of $7.0-million, a 27.2 per cent increase over the $5.5-million topline the company reported in the same period last year.
“Q1 2016 unfolded as we expected it would. Revenue growth of 29 per cent reflects the progress that we see in our commercial markets and we are extremely pleased with our recent licence of Xydalba from Allergan PLC that was announced subsequent to quarter-end,” said CEO Dr. William Hunter. “We anticipate our first commercial sales of Xydalba this year and a larger commercial rollout during 2017. Brinavess continues to grow as per our expectations and our recent product addition of Esmocard will start to have a positive impact on our results this year as well. We are also preparing for the potential Canadian launches of Brinavess and Aggrastat early in 2017, as well as Trevyent in our territories after that. We are well on our way to executing our strategy of building a robust product portfolio consisting of stable revenue-generating products coupled with proprietary high-growth products, such as Xydalba. We hope to add more products to our portfolio in the near term that will shorten our path to profitability as we continue to be very active in business development activities.”
Loe notes the company’s core CV product showed substantial growth, providing a stabilizing effect for the launches of products such as Xydalba and Trevyent, and also provided Cardiome with a comparatively strong gross margin of 79.9%. But the analyst says it is obvious the company will need to strengthen its balance sheet.
“Cardiome’s need to recapitalize the firm just leaps off the financial statements, with or without Xydalba deal economics factored in,” says Loe. “On the balance sheet, Cardiome exited the quarter with US$14.2M in cash/restricted cash and we know that this balance is at least US$5M lower today just on the upfront payment to Allergen for Xydalba marketing rights, and will decline by another US$8M in FQ316 on the same deal. Cardiome’s total debt, in which we include US$4.6M in future cash obligations to legacy Correvio shareholders, was US$13.2M and the timeframe over which these obligations will require repayment is fairly near term, before end-of-F2018 in all cases. Accordingly, it is clear that modifications to Cardiome’s capital structure are being pondered, and we infer from conference call commentary that debt instruments are being explored more aggressively than equity instruments. Our model does not currently have any overt bias on either of these options and we will infuse new debt/equity and associated capital costs once details are revealed.”
In a research update to clients today, Loe maintained his “Buy” rating and one-year price target of (U.S) $8.00 on Cardiome, implying a return of 60.3 per cent at the time of publication.