HLS Therapeutics gets target drop, still a Buy, says Clarus

Noel Atkinson of Clarus Securities has dropped his target on Canadian specialty pharma company HLS Therapeutics (HLS Therapeutics Stock Quote, Chart, News, Analysts, Financials TSX:HLS) but his confidence in the name remains resolute. In a Wednesday update to clients, Atkinson reiterated his “Buy” rating while lowering his target price from $33/share to $26.50/share for a 79.1 per cent projected return.

Toronto-based HLS Therapeutics focuses on acquiring and commercializing late-stage development, commercial-stage promoted and established pharmaceutical products for the North American market. Atkinson’s most recent update comes after HLS announced it had successfully completed negotiations with the pan-Canadian Pharmaceutical Alliance (pCPA) to get Vascepa, the company’s cardiovascular risk reduction offering, into formularies across Canadian provinces and territories within the next four months. However, softer than expected Vascepa pricing has prompted HLS to drop its peak Vascepa sales targets from a C$275-$325 million range to $250-$300 million.

“Nonetheless, this is a major milestone for HLS and should be the catalyst for a sharp, multi-year ramp in Vascepa revenues (we believe Vascepa is currently only driving a few million dollars per year in revenue),” said Atkinson, who indicated his target drop came from an update to his DCF valuation model.

Despite believing the drug could provide a hockey stick ramp trajectory, Atkinson included lower Vascepa sales targets for the next five years, dropping his 2022 estimate from $22.7 million to $19.5 million, his 2023 target from $114 million to $85.5 million, his 2024 estimate from $200 million to $150 million, his 2025 forecast from $259 million to $210 million, and the 2026 forecast coming in at $270 million instead of $288 million.

At the same time, Atkinson noted management’s optimism in terms of developing solid patient uptake for the drug, with the new expectation of converting at least ten per cent of its target population 1.5 million coming in well ahead of the previous guidance of between eight and ten per cent uptake.

“This LOI is a significant milestone for making Vascepa available to Canadians who are at-risk for cardiovascular disease and who are a part of one of the country’s public payer plans,” said Gilbert Godin, CEO of HLS in the company’s April 26 press release. “The LOI sets out the terms for reimbursement of Vascepa for statin-treated patients with established cardiovascular diseases and elevated triglycerides, which follows on the patient-population recommendation issued previously by the Canadian Agency for Drugs and Technologies in Health (CADTH).”

“We now look forward to working diligently with all participating jurisdictions to secure coverage from publicly funded drug plans across Canada, and for Vascepa to be added to their respective plans,” Godin added. “Based on recent examples, we believe that Vascepa will be progressively added to provincial and territorial formularies over the next few months.”

On account of the lower Vascepa sales targets, Atkinson has modified some of his financial projections for HLS moving forward. From a revenue perspective, Atkinson has lowered his 2022 forecast from $74.3 million (all projections are in US dollars) to $71.8 million, with the new figure representing a potential year-over-year increase of 19.7 per cent. Looking ahead to 2023, Atkinson has again lowered his projection from $149.1 million to $127.2 million, with the new figure projecting a year-over-year increase of 77.2 per cent.

Atkinson set a Price/Sales multiple valuation of 5.8x for 2022, with an expectation that it will fall to 3.3x by the end of 2023.

Meanwhile, Atkinson also lowered his adjusted EBITDA projection for 2022 from $27.1 million to $24.2 million for an implied margin of 33.7 per cent, while he also modified his 2023 estimate from $67.3 million to $47.2 million, suggesting a margin of 37.2 per cent.

In terms of valuation, Atkinson puts forth an EV/adjusted EBITDA projection of 20.4x for 2022, followed by a projected drop to 10.4x for 2023.

Overall, Atkinson continues to believe HLS is in a solid position, citing the company’s solid balance sheet and significant cash flow from across its portfolio.

“While our share price target has been revised lower, we are increasingly confident that Vascepa can become a blockbuster drug in Canada,” Atkinson said. “There remains significant potential for further increases in management’s peak sales outlook of Vascepa, especially if family physicians embrace the drug as a ‘top-of-mind’ complement to statins for CV risk reduction and in turn drive stronger patient adoption.”

HLS Therapeutics has seen its stock price fluctuate throughout the start of 2022 while posting a 5.8 per cent loss, having climbed as high as $15.99/share on March 10. However, it has been down since then, with a small rebound today after closing Wednesday at $13.76/share, a low point for 2022 to date.