Stifel GMP analyst Justin Keywood is staying bullish on HLS Therapeutics (HLS Therapeutics Stock Quote, Chart, News, Analysts, Financials TSX:HLS), reiterating his previous “Buy” rating and $36.00/share target price in an update to clients on July 29.
Toronto-based specialty pharma company HLS Therapeutics focuses on acquiring and commercializing late-stage development, commercial-stage promoted and established pharmaceutical products for the North American market. HLS is expected to report its second quarter financial results on August 5, with Keywood believing HLS’s solid growth patterns will continue.
“We expect a string of good growth quarters ahead as Vascepa starts to contribute more meaningfully on top of a solid base business of Clozaril and an improved portfolio of royalty assets,” Keywood wrote.
Specific to the second quarter report, Keywood expects HLS to bring in $15 million in sales, which would mark a 20 per cent year-over-year jump, and an adjusted EBITDA of $6.2 million, good for an approximate 40 per cent margin and up 30 per cent year-over-year.
Keywood says those numbers would be largely attributable to momentum building around data points involving prescriptions of Vascepa, which drove higher total revenues in the opening quarter to offset impacts of additional trade purchasing in another HLS product, Clorazil. Vascepa is a highly pure omega-3 fatty acid capsule which has been shown to lower triglyceride levels in relevant patient populations without raising LDL-cholesterol levels. HLS struck an agreement with Amarin in 2017 for the commercialization of Vascepa in Canada. Vascepa (or icosapent ethyl) capsules are comprised of active ingredient icosapent ethyl (IPE) and was approved by Health Canada in early 2020 to reduce the risk of cardiovascular events.
HLS got a shot in the arm in late March after the Canadian Cardiovascular Society added Vascepa to its 2021 Guidelines for the Management of Dyslipidermia for the Prevention of Cardiovascular Disease in the Adult, published in the Canadian Journal of Cardiology, with demand set to potentially spike with an update on public reimbursement for Vascepa set for next week.
Keywood said data for the month of June 2021 suggested Vascepa had an estimated net sales run-rate of $14 million, an increase from $12 million in May and $6 million in January, with a 34 per cent increase in patient count serving as a primary driver as pandemic related restrictions continue to ease.
Overall, HLS is in position to take a big step forward according to Keywood’s projections. After posting $56.1 million in revenues in 2020, Keywood forecasts a jump to $69.8 million for 2021 for a 24.4 per cent year-over-year improvement, though 2022 figures to be significantly bigger, with revenues forecast to jump to $155 million, which would mark a 122.1 per cent year-over-year projected increase.
The analyst projects EBITDA to follow a similar trajectory, growing from $24.1 million in 2020 to a projected $29.2 million in 2021 for an estimated 21.2 per cent year-over-year increase, though the figure balloons to a projected $68.2 million for 2022, an approximately a 133.6 per cent year-over-year projected increase on a 44 per cent margin.
From an investment perspective, HLS could prove to be an attractive addition to a portfolio, as key multiples in the Stifel analysis on key multiples present HLS as a value add. Stifel has the EV/Rev multiple dropping from the 2020 figure of 9.6x to a projected 7.7x in 2021, then further plummeting to a projected 3.5x by 2022.
The EV/EBITDA multiple looks set to follow a similar path, dropping from the reported 2020 figure of 22.3x to a projected 18.4x for 2021, then dropping steeply to a projected 7.9x for 2022.
Meanwhile, Keywood sees 2022 to be the first year investors can expect a return, with the earnings per share forecast to hit $0.70/share after being in negative territory in both 2020 and 2021, while the price-earnings ratio clocks in at a projected 19.7x.
Keywood thinks that currently the market isn’t taking Vascepa’s input into the consideration for HLS’ share price but is instead resting its case on Clozaril.
“HLS’ foundational mental health asset Clozaril represents ~80 per cent of LTM sales and has shown tremendous resilience during the pandemic as a critical Schizophrenia medicine. Clozaril is unique, has strong free cash flow, and we value it at $15/share (implies a 14x FCF multiple). HLS also has royalty assets with an early vintage, that we value at $3.00/share or $18.00 in total, excluding Vascepa,” Keywood wrote.
“Our base case estimate for Vascepa is also $18/share, or $36 in total and equivalent to our current target price. We see a compelling investment case for HLS with relative downside risk protection, while maintaining potentially strong upside with Vascepa and early Rx data supports our view,” he said.
Since reporting its first quarter results in May, HLS has been making the rounds, participating in the Jefferies Virtual Healthcare Conference and the Raymond James Human Health Innovation Conference, with plans to present at the Canaccord Genuity 41st Annual Growth Conference on August 12.
Despite the potential risks of product concentration, patent expirations and acquisition risks, Keywood believes HLS to have solid management and a strong cash flow platform to leverage growth.
“We have performed extensive due diligence on HLS’ current platform of products, including speaking to many medical contacts, comprising doctors and industry experts,” Keywood said. “From this due diligence, we believe there are certain benefits to the platform that are not reflected in the stock price and also think management will be successful in executing on new value creating transactions.”
HLS Therapeutics closed Thursday trading at $16.99/share on the Toronto Stock Exchange, a 60 cent drop from its opening figure. For 2021, HLS is down one cent overall, with its high point for the year to date coming in March, when it traded at $21.37/share.
Keywood’s $36 target represented at press time a 107.7 per cent projected return.
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