A new royalty stream is cause for a target raise on HLS Therapeutics (HLS Therapeutics Stock Quote, Chart, News TSX:HLS), says analyst Noel Atkinson of Clarus Securities, who delivered on Thursday an update to clients on the company and stock.
Specialty pharma company HLS Therapeutics is focused on acquiring and commercializing branded pharmaceutical products in either late stage or commercial stage development or established brands. The company announced on Wednesday the acquisition from portfolio company CrownWheel Partners of the rights to royalty interests on global sales of four different products. HLS is paying an upfront $30.8 million cash plus commercial performance milestone payments of up to $18.5 million as well as potential contingent payments of up to $10.0 million tied to specific regulatory milestones. (All figures in US dollars except where noted otherwise.)
HLS is projecting average annual royalties during the first ten years of close to $11 million per year and is suggesting growth to $12 million per year in the later years. The company is reportedly using $10.8 million in cash on hand as well as $20.0 million drawn from its term credit facility.
Management said the purchase fits with its strategy of generating stable and durable revenue and cash flow so as to support organic and inorganic growth for the company.
“In the near-term, this royalty stream allows us to bolster cash flow and adjusted EBITDA with minimal operating requirements while we continue to focus on the execution of our Vascepa launch and the deployment of our CSAN Pronto innovation,” said Gilbert Godin, President and COO of HLS, in a press release. “In addition, we continue to prepare for the introduction in 2021 of two complementary pipeline products, PERSERIS and Trinomia currently in registration with Health Canada, as well as the
MyCare Insite diagnostic device.”
On the deal, Atkinson said it leaves HLS with $70.0 million available on its credit facility and $15 million in cash.
“[The acquisition] allows HLS to utilize some of its capital effectively (better than investing it in GICs or short-term debt instruments) but keeps management’s collective focus on ramping Vascepa sales. The Absorica royalty stream has outperformed expectations, so it makes sense that HLS pursues other royalty streams,” Atkinson wrote. “We continue to see potential for further increases to management’s outlook for peak sales of Vascepa, especially if family physicians embrace the drug as a ‘top-of-mind’
complement to statins and drive patient adoption. The Company also continues to have a solid balance sheet and significant cash flow from the rest of its portfolio – which should be meaningfully enhanced by the new royalty portfolio,” Atkinson said.
With the new deal, Atkinson has changed his estimates, now calling for fiscal 2020 revenue of $54.8 million (previously $52.7 million) and adjusted EBITDA of $21.4 million (previously $19.3 million) and for fiscal 2021 revenue of $89.5 million (previously $81.0 million) and adjusted EBITDA of $33.5 million (previously $25.0
Atkinson raised his target price accordingly from $31.00 to $33.25 per share while reiterating his Buy” rating. At press time, the analyst’s new target represented a projected 12-month return of 137 per cent.