Medicure is undervalued, says PI Financial

PI Financial analyst Bob Gibson says the most recent news from Medicure (TSX:MPH) is more proof that the stock is undervalued.

This morning, Medicure announced that its majority-owned subsidiary, Apicore Inc., had received FDA approval for its new drug application, which is the generic equivalent of a product called Xenazine, currently sold by Valeant Pharmaceuticals. The drug is used to treat certain symptoms of Huntington’s disease.

Gibson says this development is part of a much larger story for Medicure. He estimates that this is one of 15 abbreviated new drug application (ANDAs) that the company is developing and one of two that have already been approved by the FDA. The analyst says that under the right circumstances, ANDAs can be a big boost to the bottom line.

“According to industry sources, sales in the US were about US$250 million last year,” he says. “There are two other tetrabenazine generics in the market. We would expect number three would have to be priced below the first two, to compete. Generics are very profitable; first to market can expect to earn as much as 90% margin. New entrants, who have to cut the price, would be expected to generate lower profitability. Management has not disclosed what percentage of the profit they will receive from TAGI. In fact, each ANDA is different. What we do know is all profit flows straight to the pre-tax line. The costs involved for Apicore, developing the drug, have already been spent.”

In a research update to clients today, Gibson maintained his “Buy” rating and one-year price target of $11.25 on Medicure.

Gibson believes Medicure will post Adjusted EBITDA of $10.16-million on revenue of $33.66-million in fiscal 2016. He expects these numbers will improve to EBITDA of $22.64-million on a topline of $73.07-million the following year.

The analyst, however, says there is room for his financial models to change, given more detailed information on Medicure’s ANDAs.

“We have been assuming Apicore’s ANDA profit sharing will add about $2.0 million to income in 2017 and $4.0 million in 2018,” says Gibson. “Now that we know one of the products, our numbers in 2018 may be too conservative. But we won’t have any kind of handle on this ANDA’s potential until Medicure releases its second quarter in August.”