Valeo Pharma is a 6x return, says Paradigm

New quarterly earnings from Valeo Pharma (Valeo Pharma Stock Quote, Charts, News, Analysts, Financials TSX:VPH) offered no surprises, according to Paradigm Capital analyst Scott McAuley, but the growth indicators look strong for the specialty pharma company’s asthma portfolio.

Quebec-based Valeo Pharma delivered its second quarter fiscal 2023 results on June 13 for the period ended April 30, showing record quarterly revenue of $13.6 million, up 184 per cent year-over-year, with revenue from products Enerzair and Atecura up 271 per cent. The company’s adjusted EBITDA loss was $1.7 million compared to negative $3.6 million a year earlier.

“Enerzair and Atectura’s revenue and prescription growth is reflecting broadening adoption. As we are still in the early stages of their commercialization, we expect this trend to continue to gain traction in the coming quarters,” said Valeo CEO Steve Saviuk in a press release.

In his report on Thursday, McAuley focused on VPH’s operating leverage, which he said continues to ramp, with gross profit up 19.2 per cent sequentially while operating expenses dropped by 4.5 per cent. Cash burn for the quarter was also lower than expected, he said, at $0.8 million.

On prescriptions for Enerzair and Atectura, McAuley said they’re showing strong growth over the past 12 months, hitting 45,000 prescriptions and rising more than 20 per cent month-over-month for the year. McAuley said Valeo’s Redesca is set to benefit from a recent Ontario government policy favouring biosimilars over the originator products and the drug is starting to see market expansion from hospitals.

“We continue to like VPH for its product portfolio, healthcare-focused funding partners, insider ownership and demonstrated ability to sign deals with top global companies like Novartis,” McAuley wrote.

The analyst thinks Valeo’s revenue will hit $60.5 million in fiscal 2023 with adjusted EBITDA at negative $6.3 million, rising to $91.6 million in revenue in fiscal 2024 and EBITDA at positive $12.1 million.

VPH’s share price shot up in mid-2020 but has drifted downward over the past three years. But McAuley is staying bullish, reiterating in his report a “Buy” rating and $2.40 target price, which at the time of publication represented a projected one-year return of 500 per cent.

“Our $2.40 target is based on a DCF to our FY27 peak sales assumptions discounted at 12 per cent. However, we also see value in the near term with a 1.5x multiple on our 2024 revenue estimate, resulting in a $0.95/sh value. We expect investors will pay more attention to the opportunity in the portfolio as the company approaches breakeven and fills the upcoming gap in the balance sheet,” McAuley said.