There’s a favourable risk-reward opportunity to Canadian specialty pharma name Medexus Pharmaceuticals (Medexus Pharmaceuticals Stock Quote, Charts, News, Analysts, Financials TSX:MDP), according to Echelon Capital Markets, who initiated coverage of the stock on Friday with a “Speculative Buy” rating. Echelon analyst Stefan Quenneville said Medexus has a proven business model of in-licensing rare disease drugs and a healthy pipeline of products up ahead to provide catalysts for the stock. Medexus focuses on late-clinical and commercial-stage drugs in the areas of oncology, hematology, rheumatology, auto-immune diseases and allergy, with leading products IXINITY and Gleolan currently driving topline growth. The company pushed its revenue from $55.5 million in its fiscal 2020 to $76.7 million for fiscal 2022, while Quenneville is forecasting 2023 revenue at $108.3 million. EBITDA is expected to go from $8.2 million in 2021 and negative $3.9 million in 2022 to $16.3 million in fiscal 2023. (All figures in US dollars except where noted otherwise.) Quenneville likes Medexus’ specialty pharma model, which hones in on orphan drugs and products used to treat complex conditions and affecting smaller, distinct populations — in other words, drugs and therapies typically too small or niche to garner the attention of big pharma players. “ products are often afforded wide moats and sticky revenues. We believe Medexus’ focus on higher-priced cancer-adjacent and rare disease-oriented products affords them particularly wide moats and sticky revenues,” Quenneville wrote. One issue with which the company has been confronted in recent years is its US and Canadian licenses for Treosulfan, a treatment to prepare acute myeloid leukemia (AML) and myelodysplastic syndromes (MDS) patients for curative allogeneic hematopoietic stem cell transplantation (allo-HSCT). The drug has gone through a Phase 3 trial and received approvals in Europe and in Canada, but there have been delays in the US. Over the past two years, the FDA has delayed the approval process multiple times, calling on developer medac Pharma to submit further data but not requiring new clinical trials. The delays have impacted MDP’s share price, with three of the major drops over the past 18 or so months corresponding to announcements regarding the New Drug Application. But Quenneville said the approval is a matter of ‘when’ more than ‘if’ for Treosulfan. The latest from medac is that the new FDA request for data will take about one year or longer to complete and effectively pushes the approval date to early 2025 and then a commercial launch by mid- to late 2025, Quenneville said. “While management expects Treosulfan to be a significant driver of Medexus’ growth in the coming years, we note that Gleolan and IXINITY are also expected to be significant contributors to both top- and bottom-line growth. As such, the harsh selloffs of the stock upon each ~six-month FDA review delay may reflect decreases in confidence in Treosulfan’s ultimate approvability that we do not believe is entirely justified,” Quenneville wrote. With his “Speculative Buy” rating, Quenneville has issued a 12-month target price of C$3.00, which at press time represented a projected return of 140 per cent. Quenneville said MDP is currently trading below its ex-Treosulfan value, meaning that there’s significant upside and a “favourably skewed” risk-reward opportunity for investors. “MDP currently trades at 2.6x C2023 EBITDA, below peers at 7.0x, and below the DCF value of the portfolio ex-Treosulfan, which we estimate to be C$2.20/shr, while the value of Treosulfan is estimated to be C$1.00/shr (risk-adjusted with a 40 per cent probability of approval),” he said.