Valeo Pharma is a high-growth healthcare name, Paradigm says

Paradigm Capital analyst Scott McAuley has slightly altered his outlook on Valeo Pharma Inc. (Valeo Pharma Stock Quote, Chart, News, Analysts, Financials CSE:VPH) as he maintained a “Buy” rating on the stock but lowered his target price from $2.60/share to $2.30/share for a projected return of 229 per cent in an update to clients on Tuesday.

Founded in 2003, Montreal-based specialty pharma company Valeo acquires, in-licenses and commercializes pharmaceutical products with a primary focus on neurodegenerative diseases, oncology and supportive care and hospital products. In particular, Valeo has an eight-year agreement with Novartis for the rights to a pair of new asthma drugs.

McAuley’s updated analysis comes after Valeo Pharma announced the closing of $25 million in convertible debenture financing, while also announcing that Quebec and Nova Scotia have added the asthma treatments Enerzair and Atectura to their public formularies.

The convertible debenture financing is in two parts including a $10 million private placement with Investissement Québec and a $15 million bought deal private placement. Both debentures are unsecured at 12 per cent and will mature in December 2024 and convert at $1.15/share.

In addition, Valeo also has a separate 12 per cent debenture valued at approximately $1.6 million, which will mature in February 2023 and converts at $0.40/share, as well as approximately $4.2 million across 12 per cent and eight per cent non-convertible debentures that mature in January and July 2022.

“[The new financing] provides VPH with capital to expand commercial activities for its core products, Redesca, Enerzair and Atectura, pay back its nonconvertible debentures, improve working capital and support an upcoming TSX listing,” McAuley said.

Meanwhile, Valeo’s respiratory portfolio is now covered in three provinces, as Quebec and Nova Scotia joined Alberta in allowing market access through both public and private payer coverage and inclusion in hospital  formularies; the company’s Redesca offering is nearing coast-to-coast coverage, with British Columbia being the lone province where it’s not covered.

“We are pleased to be reporting today the addition of Quebec and Nova Scotia to join Alberta on the list of provincial public coverage secured for both asthma medications,” said Frederic Fasano, Valeo’s President and Chief Operating Officer in the company’s December 15 press release. “Public reimbursement access makes a meaningful impact for asthma patients left with no coverage so far, and also simplifies health care providers procedures to provide access of both medications to their patients. Enerzair and Atectura are innovative asthma therapies that are helping make asthma control a more attainable goal for Canadians asthma patients.”

The announcements have also prompted McAuley to revise his financial projections, acknowledging a slight overaggression in the initial estimates. McAuley has lowered his revenue estimate for 2021 from $18.1 million to $13.3 million, implying year-over-year growth of 77.3 per cent and coming in below the consensus projection of $15.2 million. 

McAuley attributes the drop to a number of factors including distributors building inventory of Redesca, a shortage of competitor Redesca reference biologic Lovenox (enoxaparin) in British Columbia and the switching process for GPOs and hospitals from LMWH reference products to biosimilars taking longer than expected.

Turning to 2022, McAuley has cut his projection from $60.6 million in revenue to $40.1 million, a potential year-over-year increase of 201.5 per cent, which is relatively in line with the consensus estimate of $41 million and was a domino effect of pushing out the estimates on Redesca, Enerzair and Atectura revenue.

Meanwhile, after projecting losses of $7 million in 2021 and $8.5 million in 2022, McAuley projects the company’s EBITDA to turn positive in 2023 at $7.1 million, implying a 10 per cent margin on the $71.2 million revenue projection, which is in itself a year-over-year implied jump of 77.6 per cent.

From a valuation perspective, McAuley believes Valeo is in a positive position, as he projects the company’s EV/Sales multiple to drop from 4.9x in 2021 to a projected 1.6x in 2022, then falling to a projected 0.9x in 2023. By comparison, McAuley presents Valeo at a discount in comparison to the company’s peer group, with projected multiples of 2.2x in 2022 and 1.8x in 2023 in play.

Meanwhile, with the positive projection in place, McAuley introduces an EV/EBITDA multiple estimate of 9.1x in 2023, slightly behind the peer group average of 5.8x for that year.

“We continue to see VPH as an opportunity for investors to gain exposure to a high-growth healthcare name without the related clinical development risk,” McAuley said. “The company has an experienced and highly invested management team with significant insider ownership. With the eight-year Novartis deal for Enerzair and Atectura, it has a long runway to grow its revenue, with additional product acquisitions as potential additional upside.”

Valeo’s stock price has dropped by 44.6 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.