Valeo Pharma is a Buy, says iA Capital

Chelsea Stellick of iA Capital Markets continues to see value in Valeo Pharma Inc. (Valeo Pharma Stock Quote, Chart, News, Analysts, Financials CSE:VPH), maintaining her “Buy” rating and target price of $1.60/share for a projected return of 119.2 per cent in an update to clients on Wednesday.

Valeo Pharma, the Montreal-based specialty pharmaceutical company founded in 2003, engages in the acquisition, in-licensing and commercialization of pharmaceutical products with a primary focus on neurodegenerative diseases, oncology and supportive care and hospital products.

Stellick’s updated analysis comes after Valeo announced its HesperCo product, a bioflavonoid consisting of hesperidin, which has strong antioxidant and immune system support properties, is now available in approximately 300 stores under the Loblaws umbrella.

“VPH achieved a significant HesperCo distribution win to over 300 stores in Canada, which will increase brand awareness and accessibility,” Stellick said. “We continue to focus on Redesca as the crown jewel of VPH’s portfolio in F2022 but do anticipate some growth from HesperCo following this distribution win.”

Among the stores to carry HesperCo are Loblaws, Dominion, Zehrs, Fortinos, and Your Independent Grocer and Superstore. Valeo has also entered into a licensing agreement with Ingenew Pharma where the two companies will develop, manufacture, and commercialize HesperCo, with Valeo retaining exclusive worldwide rights to the product. Stellick anticipates peak sales between $1 and $2 million, with margins of 75 to 85 per cent.

According to Stellick, HesperCo has a worldwide market of US$900 million, with the average retail price of a 60-capsule bottle ranging from $30 to $35, paired with an assumption that Valeo sells to retailers at $20 per bottle.

“The immune support properties of hesperidin, the sole medicinal ingredient contained in HesperCo capsules, has been well documented in numerous scientific publications,” said Steve Saviuk, CEO of Valeo Pharma in the company’s January 5 press release. “We are also encouraged by the results of the Hesperidin COVID-19 clinical trial which has recently been submitted for publication. The study concluded that hesperidin could have beneficial effects and may help reduce certain COVID-19 symptoms. The publication further suggested that earlier treatment of longer duration and/or higher dosage should be studied.”

The HesperCo clinical trial, conducted by the Montreal Heart Institute, evaluated the ability of hesperidin to mitigate COVID-19 symptoms in 216 patients. The study results showed that hesperidin could have beneficial effects and may reduce certain COVID-19 symptoms, with up to a 14.5 per cent improvement over the placebo in a specific category of symptoms. 

However, the result only showed statistical significance in Group A symptoms, including fever, cough, shortness of breath and anosmia, when subjects who failed to report symptoms (dropped out) are assumed to have no symptoms.

“We view the hesperidin clinical trial result as disappointing, due to the absolute improvement being marginal and dependent on attrition bias, although it is sufficiently positive for the Company to accurately market HesperCo as potentially beneficial for COVID-19,” Stellick said.

With probability adjustments factored, Stellick has not made any changes to her financial forecasts, putting Valeo Pharma on a steep upward revenue trajectory as she projects a bump from $17 million in 2022 to a projected $42 million in 2023, then rising to nearly $193 million by 2028. 

However, while revenue from HesperCo will grow slightly in that time period, the primary revenue drivers are expected to be Redesca, the company’s low molecular weight heparin biosimilar, and its Enerzair and Atectura Breezhaler products. In 2028, Redesca and the Breezhaler offerings are expected to account for 83.5 per cent of the company’s overall revenue mix, and 94.2 per cent of the mix from its product revenue.

With gross margin set at 55 per cent through 2030 in her projections, Stellick predicts a 90 per cent jump from $10 million to $19 million in cost of goods sold from 2021 to 2022, peaking at $87 million in 2028, the final year of reported revenue from the Breezhaler products.

Meanwhile, Stellick projects 2023 to be Valeo’s first year of positive net income at $14 million, eventually increasing to a projected $55 million from 2026 through 2028 before dropping back to a projected $13 million in both 2029 and 2030.

From a valuation perspective, Stellick believes Valeo will be falling in line with its peer group relatively soon from a sales viewpoint, as she projects the company’s EV/Revenue multiple to drop from the reported 7.9x in 2020 to a projected 3.7x in 2021, then dipping to 1.2x in 2022, getting ahead of the peer group (2x projection in 2022) after being a premium in both 2020 (3.3x) and 2021 (3.7x).

Meanwhile, Stellick also introduced an EV/EBITDA multiple projection for 2022, with Valeo’s projection of 35.2x being well off the peer group average multiple of 10x.

Valeo’s stock price dropped by 43 per cent over the last year, capturing a 52-week high of $1.46/share on January 25 before dropping to a low of $0.60/share on July 22.