Paradigm Capital analyst Scott McAuley makes the case for investing in Canadian pharmaceutical companies, saying in a Thursday Healthcare report that sector valuations in pharma are now below historical levels. In the sector, McAuley recommended both Knight Therapeutics (Knight Therapeutics Stock Quote, Charts, News, Financials, Analysts TSX:GUD) and Valeo Pharma (Valeo Pharma Stock Quote, Charts, News, Financials, Analysts CSE:VPH).
McAuley began his report by noting how companies in the commercial pharmaceutical space differ from those in the drug development part of the market, with the latter being of a higher risk variety related to early-stage drug development uncertainties and regulatory challenges while the former are engaged in selling approved drug products without such scientific and clinical risks. As well, commercial pharma is an inflation-resistant field due to low material input costs and inelastic product demand.
Added to those attractive qualities McAuley said the commercial pharma space has been trading at a discount more recently.
“Over the last five years, the group has traded between an average of 3.0x and 4.0x LTM revenue and a median of 2.0–4.0x. After increasing to ~4.0x through H2/20 and H1/21, current valuations across the group have come down below the five-year average and median (five-year avg. 3.5x and median 3.0x vs. current avg. 3.0x and median 2.6x),” McAuley wrote. “With revenue expected to grow from expanding product portfolios in the coming years, this creates a favourable opportunity for investors.”
Commenting on Knight Therapeutics, which focuses on acquiring, in-licensing, selling and marketing pharmaceutical products in Canada, Latin America and other select markets, McAuley said for its most recently reported quarter (the company’s Q3 2021) Knight produced a strong beat on revenue, coming in at $73.3 million for a 62 per cent year-over-year growth rate. McAuley said margins were also stronger at 51.5 per cent for gross margin compared to the previous 43.2 per cent and at 23.6 per cent for an adjusted EBITDA margin compared to 9.3 per cent previously.
“Management highlighted that some of this growth was driven by stronger-than-usual antifungal revenue from higher rates of fungal infections in COVID patients. Also, revenue from the Alzheimer’s treatment Exelon, which was US$47 million in 2020 across GUD’s territories, are lumpy quarter to quarter,” McAuley wrote.
McAuley remarked that Knight has been active in its share buy-back program, purchasing 2.96 million shares for $15.4 million during the third quarter 2021 and subsequently acquiring an added 1.0 million for $5.3 million.
“With $160M in cash and equivalents, the company continues to have capital to support the ongoing NCIB and for potential M&A or licensing agreements,” he wrote.
McAuley estimates Knight will generate full 2021 revenue and EBITDA of $247.0 million and $43.1 million, respectively and 2022 revenue and EBITDA of $290.1 million and $58.7 million, respectively. On EV/Sales, the analyst has Knight at a 2.2x multiple for 2021’s figures and a 1.9x multiple for 2022, with the averages among a selection of Canadian commercial pharmaceutical companies being 3.0x and 2.0x, respectively.
McAuley has Knight rated as a “Buy” and a target price of $7.50 per share (both unchanged) for a projected one-year return at the time of publication of 36 per cent.
McAuley believes that 2022 will be an inflection point for Valeo Pharma, which acquires and in-licenses brand name and generic drugs for the Canadian and US markets with business segments in branded prescriptions and niche hospital injectable products. On the company’s most recently reported quarter, McAuley said Valeo’s Q3 2021 featured record revenue at $5.7 million (a 280 per cent year-over-year increase) and included the first full quarter of sales from injectable anti-coagulant Redesca and first sales of Enerzair and Atectura.
“The quarter benefitted from shortages of a Redesca LMWH competitor Lovenox (enoxaparin) in B.C. and customers building inventory that are not expected to carry through to the next quarter,” McAuley wrote.
McAuley said Valeo’s extra $25 million in cash brought on at the end of last year (through a bought deal of convertible debentures of $15 million on top of a $10-million private placement) will be used to support the commercial efforts for Redesca, Enerzair and Atectura, to reimburse previously issued debentures and to support an upcoming TSX listing application.
By the numbers, McAuley thinks Valeo will generate full 2021 sales and EBITDA of $15.2 million and negative $7.0 million, respectively, and 2022 sales and EBITDA of $41.0 million and negative $8.5 million, respectively. On EV/Sales, McAuley pegs Valeo at a 4.6x multiple for 2021’s figures and a 1.6x multiple for 2022, with the averages among a selection of Canadian commercial pharmaceutical companies being 3.0x and 2.0x, respectively.
McAuley maintained his “Buy” rating and $2.30 target on Valeo, which represented at the time of publication a projected one-year return of 259 per cent.
“We believe both VPH and GUD provide opportunities for investors who are interested in exposure to healthcare without the clinical risks of early-stage drug development,” McAuley said.