Medexus Trading at a Deeply Discounted Valuation?
Medexus Pharmaceuticals (TSX: MDP) (OTCQX: MEDXF) is a leading innovative and rare disease pharmaceutical company with a strong North American commercial platform with over 56 sales representatives throughout the United States and Canada.
Medexus has a strong line-up of prescription-based products for patients. This includes Metoject, Rupall, Gleolan, and far more. Each of these address a major medical need. Often, the drugs are sourced in Europe where they are already commercialized and then brough to United States and/or Canada depending on the competitive environment and greatly reducing the risk inherent in having new drugs approved by the FDA or Health Canada. The medical needs addressed by the drugs range from chronic rheumatoid arthritis to common allergy relief.
Source: Corporate Presentation
Recent Quarter
In the recently announced third fiscal quarter of 2022, Medexus Pharmaceuticals reported revenues of $21.3 million USD. Revenues grew 19% quarter-over-quarter, but fell short on year-over-year results, declining 12%. This was driectly related to a one-time order in the previous year which was realised in Q3 rather than Q2 due to the date which the order was received. Net losses continue to steadily improve, only $1.2 million USD compared to losses of $12.8 million USD during the same quarter in the previous year. Medexus Pharmaceuticals ended the quarter with cash and cash equivalents of $9.6 million USD, building a safety cushion for further projects and expenses down the road. Ken d’Entremont the CEO of MDP stated “We are encouraged to see sequential quarter-over-quarter growth in revenue and adjusted EBITDA this past quarter. In particular, IXINITY saw improved sales in Q3 versus Q2 of fiscal 2022 aided by supply chain improvements. We plan to build on this momentum by continuing to pursue opportunities to complement our existing product portfolio, while also preparing for the commercial launch of Treosulfan in the United States later this year, assuming approval by the FDA.”
According to management, the revenue climb in the third quarter was attributed to the sales of IXINITY with more planned growth in the future after completing further operational efficiencies. This product is a prophylactic treatment for adults and pediatric patients under 12 years of age who suffer from a hereditary bleeding disorder known as hemophilia B.
Rupall, a fast-growing anti-histamines product, also generated significant unit demand, growing 30% for the trailing twelve months ended December 31, 2021. Together, these products significantly contribute to top-line revenue growth.
The quarterly results were mixed, but Medexus Pharmaceuticals does remain promising over a long-term time horizon with its initiatives to grow the core product business.
Valuation
The stock currently trades at $2.53 USD or $3.34 CAD per share, significantly lower than its 52-week high price of $6.79 USD or $8.54 CAD. At its current valuation, investors should begin looking strongly at Medexus and at minimum worth putting on your watchlist. Here’s why:
Since Medexus is not yet consistently profitable due to its current focus on growth, valuing the opportunity based on price-to-earnings (P/E) is slightly misleading. Instead, investors should focus on the price-to-sales (P/S) ratio as it demonstrates how significantly undervalued the shares currently are.
Right now, Medexus Pharmaceuticals has a P/S of 0.73. This is because its full-year revenue for 2021 of $79.6 million was higher than its current market capitalization of $66.4 million. This is very rare and often a sign that a stock could be due for a rebound. Pharmaceutical companies can be valued significantly less based on competition fears, but that doesn’t seem to be the case given the diversified product portfolio.
It appears that MDP stock trades at a discount in terms of P/S. For reference, the average P/S ratio of a pharmaceutical or biotechnology stock is currently 5.33. It could be that the market has simply forgotten about this stock and therefore lowered its valuation based on recognition. This will likely change with time as the company continues to grow and prove itself.
The Homerun Opportunity
Treosulfan, a bifunctional alkylating agent is targeted to treat those with allogeneic hematopoietic stem cell transplantation. Medexus is in the process of commercializing this drug in both Canada and the United States. In fact, it has recently received Helath Canada approval in July 2022 and is currently awaiting approval from the Food and Drug Administration (FDA) later this year (Q3 expected). Treosulfan is expected to generate over $100M USD in aditional revenue for Medexus in the United States alone which more than doubles its current revenue. In addition, it has the potential to exceed Gross Profit Margins of 75% which further enhances the strong GPM generated by the rest of the portfolio. FDA approval would be a massive catalyst for MDP, and we believe this would propel the stock price a lot higher and create new all-time highs once approved.
Price Target
Medexus currently has three analysts that have given a price target for MDP over the last 3 months, for an average price target of $5.63. On March 1st, 2022, integrated financial service firm Raymond James announced a price target of $5.75 CAD, giving a potential increase of 86% from MDP’s current price.
On February 14th 2022, MDP announced that the Toronto Stock Exchange has accepted the company’s convertible buy back plan, allowing MDP to purchase up to $3.5 Million of its 6% unsecured convertible debentures which come due in 2023. The CEO Mr. d’Entremont was quoted “We will carefully monitor the market price of the Debentures, and we will seek to make purchases at times when in our view the Debentures may be undervalued, which our board believes these purchases would be an appropriate use of our available cash.” A share buyback of this nature is definitely bullish as this will reduce the amount of dilution as well as lower the amount of interest that needs to be paid to debenture holders.
Conclusion
Overall, the product line-up is vast and diversified which lowers the risk associated with competition and external factors. Management is focused on continuous growth across the entire business, which should excite investors who are interested in the stock. The present valuation is also attractive and could be utilized as an opportunity for investors who want exposure to a small-cap pharmaceutical company. After all, shares trade well below the industry average.
MDP currently has only 19.95 Million shares outstanding, with management and directors owning 12% and institutional investors who own 45%, leaving approximately only 8.5 Million shares available by retail. We really like MDP’s tight share structure, insider ownership, revenue growth and product expansion, we believe that MDP presents a lot of upside potential given its market cap of only $60 Million, MDP is certainly one pharmaceutical stock to watch in 2022.
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