| This Specialty Drug Company is Acquiring Assets on Acquires on the Cheap |
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We have added a Life Sciences expert to the Smallcap Discoveries team. Below is a write-up and insights from our Life Sciences expert on Medexus Pharmaceuticals, the most recently added Company to our Select Portfolio at $5.25 |
| In the world of small caps, it’s often the blind leading the blind. The cult of personality behind the anonymous Twitter accounts pumping random stocks, is rooted in a simple philosophy: if you can’t explain - confuse. Well, I’m here to hopefully change that.
Traditionally, unless your company does mining or cannabis, it is often misunderstood in the Canadian markets.
This has changed - ok well, at least it’s beginning to.
COVID-19 has disrupted our lives in unfathomable ways, but every cloud has a silver lining. For markets, it has meant that an under-served and oft-unrecognized sector is starting to get the recognition it deserves from the investor community. You guessed it, I’m talking about Life Sciences.
With mass media acknowledgement of biotech firms figuring out ways to help communities with heightened hygiene and medical concerns, life science companies have been spotlighted more and more in the stock markets.
Despite the welcomed recognition, any tech or life science company knows in order to get the financial support needed to execute or set themselves up for a big exit, the answer lies south of the border. It’s simple really - the money is south of the border with plenty of dry powder readily available to be plugged in. But like many great companies, most of these life sciences companies have humble beginnings.
I’m starting a quasi-biweekly report of the life sciences sector with 2 main points to address: - Bringing more awareness to undervalued companies listed on the Canadian market...I mean at this point, any Canadian company in this sector that offers value will begin to directly list on the NASDAQ or the NYSE, and that will only make hedge funds down south richer. My goal is to show such companies the value of listing on the Canadian exchanges to begin with, so then we as investors can invest in and contribute to some of that value.
- Showcasing undervalued companies in the sector and opening a line of discussion, regardless of their listing exchange. We could all use some more clarity about the science behind some of the companies out there.
Let’s begin… What carries the stock, isn’t always the science or some groundbreaking research development or some new drug discovery. Sometimes it’s good old hype, and frankly, there’s nothing wrong in riding along, as long as you get out before the wheels fall off. However, in this age of search engines, it’s not difficult to do some basic due diligence (the same kind I’m hoping y’all did before being an active voter!!). You don’t have to become a scientist overnight, but it’s not that hard to avoid making stupid decisions. The worst thing you can do is blindly follow a story and be fooled, when the resources are available to you for figuring out the fraud. Case studies:
Case # 1: Sona Nanotech (SONA.V)
On July 2, 2020 Sona Nanotech Inc. (CSE: SONA), (OTCQB: SNANF) put out the following news:
(the “Company”), a developer of rapid, point-of-care diagnostic tests, is pleased to announce that its rapid detection, COVID-19 antigen test’s laboratory validation studies of performance levels have resulted in a test sensitivity of 96%, test specificity of 96% and a Limit of Detection (“LOD”) of 2.1 x 102 TCID50.
Sounds great!!! However, this was done using the following:
Validation studies were also conducted in-house to assess potential clinical performance of the test using 30 nasopharyngeal samples from healthy individuals who were presumed negative for COVID-19. Results from the study generated a specificity of 96% (29/30) and a sensitivity of 96% (28/29). All specimen samples tested generated negative results, except for one, generating the above result of 96%. To generate the sensitivity data, the remnants of each negative sample were spiked with gamma irradiated COVID-19 virus and the tests rerun to determine the positive results, generating the above result of 96%.
The Limit of detection was obtained using:
MRIGlobal, using live COVID-19 viral cultures, determined the test to have a limit of detection of 2.1 x 102 TCID50.
The studies’ initial numbers look great on paper but the small sample size with no indication of the viral load is insufficient to warrant the type of investor enthusiasm it generated (163% from June 30th to July 6th). For your reference, the viral load is the amount of virus within the sample. If a sample is obtained from an individual, it is the amount of virus presence once a person has been infected, and the virus has had time to replicate in the patient’s cells.
This is especially the case when you look closer and you see that the Limit of detection samples were obtained using a lab culture, which is definitely not the same thing as samples from a patient with the virus.
Additionally, a quick Google search would direct you to numerous studies that outline concerns about antigen testing's, and you would come across a lot of paragraphs similar to this:
A recent independently conducted study found that the average “sensitivity” (ability to detect the virus) of a handful of recently-commercialized antigen tests was only 56.2%. Another recent study found that, in the case of asymptomatic patients, the “true positive” rate of the evaluated rapid antigen test was less than 32%, versus a laboratory-based PCR test.
Just to be clear, this is no disrespect to Sona or the work they are doing, but rather a showcase of the fundamental flaw that exists with the analytical mindset of many retail investors. A lot of companies - and life sciences corporations are no exception - will rely on an investor’s reticence to really delve into the technical details, and those companies are therefore able to successfully float percentages and results that on face value, seem great. The problem is after you scrape away the gilt, you’re left with the truth hidden behind a lot of technical definitions (which is where we’re coming in).
In fact, on August 4th, with the stock trading close to $13.50, I was part of the following Twitter exchange:
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| | | | | This is not an “I told you so” but rather a perfect example of the false confidence that often exists amongst investors.
After disappointments with the FDA, on Nov 25th, Sona announced that it has withdrawn its Rapid COVID-19 Antigen Test Application, based on feedback from Health Canada. It's since been trading at $1.01, a loss of 92.55% and $12.54 since Aug 4th.
Sona has announced that they will be re-submitting their application to Health Canada. I hope there is a happy ending for the sake of all the people invested in Sona.
Case # 2
We now move from doom and gloom, to stories that resulted in some VERY happy investors. These examples are predominantly to showcase the difference between Canadian-listed life science companies and the ones listed in the US.
Example 1: Trillium therapeutics (TRIL.S)
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| | Biologics are products with ‘biological’ origin. These include monoclonal antibodies, therapeutic proteins and peptides, and etc… (Biological products with medical applications for you, the consumer!!) “Biologics” is a buzzword you hear often when it comes to the future of therapeutics.
According to research released in February of 2020, “therapeutic antibodies have become the predominant class of new drugs developed in recent years. Over the past five years, antibodies have become the best-selling drugs in the pharmaceutical market, and in 2018, eight of the top ten best selling drugs worldwide were biologics”.
The global therapeutic monoclonal antibody market was valued at approximately US$115.2 billion in 2018, and is expected to generate revenue of $150 billion by the end of 2019 and $300 billion by 2025.
Now about Trillium.
“Trillium Therapeutics is an immuno-oncology company developing innovative therapies for the treatment of cancer. The Company’s two clinical programs, TTI-621 and TTI-622, target CD47, a “don’t eat me” signal that cancer cells frequently use to evade the immune system.”
Their science is great and intriguing, but is that what propelled their stock price to a 1152% growth year-to-date?
Or was it the fact that by virtue of being listed on the NASDAQ, Trillium’s advanced therapies developments were given exposure to specialized hedge funds and financial institutions, both groups with a particular understanding of the science behind Trillium’s works.
Would Trillium experience the same success with their share price if they were listed on the Canadian market only?
The answer is most likely no. Being listed on the NASDAQ most certainly provided them with exposure to a plethora of hedge funds who specialize in life sciences investments.
This becomes a lot more clear when looking at this handy chart provide by Insider Monkey:
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| | Furthermore, “according to Insider Monkey's hedge fund database, Peter Kolchinsky's RA Capital Management has the most valuable position in Trillium Therapeutics Inc. (NASDAQ:TRIL), worth close to $49.9 million, amounting to 1% of its total 13F portfolio. The second largest stake is held by Avoro Capital Advisors (venBio Select Advisor), managed by Behzad Aghazadeh, which holds a $38.4 million position; the fund has 0.8% of its 13F portfolio invested in the stock”.
Peter Kolchinsky’s education:
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| | And Behzad Aghazadeh’s education:
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| | | The two hedge funds with the largest positions in Trillium are both led by individuals with an actual, credible, extensive science education - the kind that an Asian mother would kill to have as a son-in-law.
If that isn’t enough of an indicator of success, I don’t know what possibly could be. (but seriously, genuinely solid research backgrounds from indisputably reputable schools)
Let’s take a look at another Canadian company listed down south:
Example 2: Zymeworks Inc (NYSE: ZYME)
“Zymeworks Inc. is a publicly listed (NYSE: ZYME), clinical-stage, biopharmaceutical company dedicated to the discovery, development, and commercialization of next-generation multifunctional biotherapeutics, initially focused on the treatment of cancer.”
In May 2017, Zymeworks raised $58.5 million in a dual listing that started company shares on trading on the TSX and NYSE simultaneously. It then went on to delist from TSX on October 1st, 2019. At the time of this delisting from TSX, Zymeworks had a market cap of $1.423 billion CAD, which made Zymeworks the largest biotech company on the TSX. At the time, the health care sector made up only 1.7% of TSX index.
Zymeworks, still operating out of Vancouver, BC, has continued to grow and now boasts a market cap of $2.225B USD (approx $2.93B CAD). That is thanks to massive hedge fund investments such as these:
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| | These are the top 5 of of many hedge funds invested in Zymeworks (image grabbed form Insider Monkey)
It should be kept in mind that the increase in market cap and investments are the result of Zymeworks’ growth as a company and their increasing revenues.
The examples above are just 2 of many Canadian-based companies who have opted to primarily list in the US markets, to their great financial gain. Canadian-listed companies will be hard-pressed to receive attention like this from the same above hedge funds.
This is not a confirmation that you, as an investor, should only invest in US-listed biotech companies, or that you need a PhD in science to safely invest in life science companies.
The point is this: - Investing in life science companies could be extremely profitable.
- It requires you to do your due diligence, or find yourself trusted individuals to follow, whose work provides you with a basic technical understanding of the scientific components.
- There are a ton of Canadian companies accomplishing tremendous scientific feats. (take that, Trump, and your America is the only and the best mentality. Hurry up and get out!!!!) And ultimately,
- There are some great Canadian-listed investment opportunities out there. These companies would be attracting all kinds of institutional money if they were listed in the US, and you (yes you!) can get in while the stock price is still low.
A quick positive note,
“We The North’ are on the right path however,
According to shortsdata.ca, the short positions in the health sector have decreased by 56% (TSX INDEX 2015 vs. 2020). That is a significantly larger change than in any other sector. As always, take that with a grain of salt because there are of course various other factors to which this change could be attributed, but nonetheless, it gives us hope for the continued growth of Canadian health sector markets. |
| | Where do we go from here?
Besides geeking out over sharing some cool graphs and info with you, there is another reason for the madness above.
The point is that I am going to provide you with a weekly report showcasing the “what’s happening” in the Canadian life science markets. Sometimes I’ll showcase companies that I think deserve to get noticed for what they currently are - and what I would expect them to become.
I’m going to explain the science to the best of our abilities and host representatives from companies to help with that, with the ultimate goals of: - Increasing general awareness for the life science companies in Canada,
- Showcasing interesting stories that deserve the recognition and exposure,
- Educating investors to the best of our abilities, and
- Aiming to grow the health sector in the Canadian markets.
Here we go then… first company to be featured, a favourite of mine: |
| Medexus Pharmaceuticals MDP-TSX.V / PDDPF: OTC
Current Price: $5.95
52 Week Hi/Low: $5.95 / $1.42 Issued and Outstanding: 14.5M Fully Diluted: 25.2M Debt: $44M* Market Cap: $80.2M Enterprise Value: $135M Cash: $8.6M $9.8M of total available liquidity |
| | | Overview:
“Medexus Pharmaceuticals Inc. is a leading specialty pharmaceutical company with a focus on the therapeutic areas of rheumatology, auto-immune disease, specialty oncology, allergy, and pediatric diseases.
We provide market-leading prescription and over the counter brands to patients and healthcare professionals, which we believe greatly enhances quality of life and promotes a healthy lifestyle.
We have a strong North American commercial platform and we currently operate through two unique segments: Medexus Pharma Canada and Medexus Pharma USA. Within the Canadian business we also have a pediatric focused unit called Pediapharm.”
Highlights:
- Established North American (Canada and USA) sales and marketing platform
- Diversified product portfolio and expanding product pipeline
- 92% of current revenue from products in growth phase
- Only 2% of current revenue from products launched recently
- 51.1m in revenue and $27.8m in gross profit in H1 2020 (57% growth)
- That is despite a $3m value order delayed due to COVID, later realized after Q2 in October 2020.
- EBITDA $3m (13% margins) vs. near zero last year
Business Model and Risk Mitigation:
As I’ve explained before -
“Here’s how big pharma generally works:- Spend money on research to create a new/better drug
- Apply for regulatory approval
- Repeat Step 1 and Step 2, do more research, more trials, and after some time,
- You have regulatory approval and can sell your drug
- Market and commercialize your drug, this is the part that justifies the spending in Steps 1 through 3
Of these, Steps 1 to 3 have the highest cost. This is explicitly monetary, as capital spent on years of research and drug development has no guarantee of a licensed FDA approval, or an international regulatory approval in a large enough target market. Implicitly, the cost is time. Every additional quarter or year spent in getting regulatory approval adds sunk costs, and can be enough to wipe out a firm [if the research doesn’t pan out in time].
Even after you’ve crossed those hurdles, new drugs can face steep barriers to entry when it comes to expanding to international markets (which requires more approval), or entering an existing market (which needs major strategy and commercialization)”.
Medexus creates a win-win for itself by avoiding both these costs. First, they partner with companies that have drugs already in the commercialization stage, so Medexus avoids major costs when it comes to capital expenditures on research and development.
Secondly, it avoids the major implicit cost of time, because Medexus doesn’t wait two or three years for regulatory approval. It simply finds companies that have already passed those initial hurdles but haven’t yet entered the drug markets.
The result: Medexus adds value by offering a unique opportunity to existing firms that would benefit from a market entry into North America. Medexus has established infrastructure and partnerships in navigating the North American landscape of drug commercialization, so it also provides major synergies for drug companies that don’t have the sufficient experience or money to waste, to enter their domain.
Experienced senior management team with proven track records in specialty pharma
It’s not often that you can say this about health science companies, but the Medexus team is the perfect marriage of pharmaceutical innovation and experience, and capital markets expertise.
Sanofi, Pizer, and AstraZenaca are companies that we’ve all heard of. Such companies embody the modern day success of modern day pharma. The management team at Medexus comes with a track record of established success from the above companies, as particularly exemplified by Ken d’Entremont who is the founder, president, and CEO of Medexus Inc. Previously, Ken was the General Manager and Vice President of Business Development at Sanofi, where he led the in-licensing initiatives for Sanofi Canada.
I’m not saying the team at Medexus is the 1992 USA Dream team, but I would definitely rate them at least as high as the 2010 Olympics winning Canadian hockey teams (men and women).
Analyst coverage:
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| | I now expect you to ask: Why the discrepancy? Why is Canaccord merely giving Medexus a hold rating?
To be fair, sell-side research is not very reliable. By virtue of the business, almost each bank has an incentive to go long, and I doubt you’ll ever find any company with a permanent SELL rating. When banks are often the initial and fundamental institutional investors in a listing, and compete amongst themselves to be the one to guide the IPOs, they’re not incentivized to burn bridges before they’re formed (mass retail investors’ sale of stock is Not Great for the company - it Looks Bad).
On the plus side however, sell side research can be a good proxy indicating the directions that institutions are taking with respect to a particular stock.
For all of you that love financial intricacies a bit too much, we did a bit of digging to understand the reason behind Canaccord’s hold rating:
- Growth assumption: due to the weakening of the USD/CAD exchange rate, the analyst believes that this is going to create downward pressure on the cash flow revenue and therefore compress the margins. This is partially offset by an increase in the FQ3 IXINITY sales forecast given the aforementioned shipment delay.
- DCF assumption: They use a 10-year DCF model ending in Fiscal 2031. The analyst has adjusted the WACC (Weighted Average Cost of Capital) from 13% to 12%, thus decreasing the cost of capital. (This is a good thing - however as mentioned, did not affect the projections)
- Free Cash Flow to Equity: Although MDP has shown a steady increase in revenues and is projected to reach between 100-120 million in revenues in 2020 (fiscal year ending in 2021), it is yet to break even, or produce positive Earning Before Taxes (EBT). This makes it difficult to project future cash flow unless very conservative assumptions are put in place. Usually, a business at this stage is using a lot of cash for development, capital expenditures for growth, and working capital needs, and will have a persistent negative cash flow provided by operating activities.
In situations like this, it would seem more appropriate to conduct a peer analysis, by looking at the total sales of EBITDA produced in the industry and coming up with an Average EV/Sales or EV/Adjusted EBITDA multiple for valuations. Mackie’s report has a table we can look at.
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| | Looks good!
Why do I like the company/why did I invest in it?
- It’s criminally undervalued. The true test of value in the health sector for me is when you compare the company to its peers. When you do that, the company is undervalued by at least a multiple margin. Additionally, you will be hard pressed to find any other peers that have 94% of their revenues from products in the growth or early stages. This means all of those products are slated to experience even more growth in revenues generated in the next year.
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| | - The team. The Medexus team exudes the calm confidence and combination of skill sets required to make a pharma company excel. If no deals were to be signed or any further M&A to be done, Medexus would still experience significant growth in revenue. Having gone through all the interviews and had the opportunity to speak to Ken, I am confident that his team is always looking for additional products that can bring value to North American consumers - and add revenue to Medexus. In fact, according to Canaccord’s analyst report, “the team is in late-stage discussions for three in-licensing deals and is working on out-licensing the rights to IXINITY in major markets outside North America (e.g., China, LATAM, EU). MDP hired Michael Pine as the new SVP Business Development and Strategy. Mr. Pine will manage the aforementioned licensing deals and spearhead future M&A, including identifying, evaluating, negotiating and acquiring new products”.
- This following bit is perhaps the most important factor in understanding sales and marketing in the pharmaceutical sector and its importance. Selling, general and administrative expense (SG&A) is often the largest expense for pharmaceutical companies. Looking at the latest financial results:
- 2019 Revenue in the first 6 months of $32.5m, vs. SG&A expenses of $21m - aka 65% of revenue
- Revenue in the first 6 months of 2020 being $51.1m, and SG&A expenses being $22.4m, or 44% of revenue
This means that the company has already established sales and marketing platforms across Canada and the US, and has capacity to increase revenue in the future with relatively little to no increase in SG&A expenditure.
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| | I could go on and on but I'm afraid this has already turned into me being the crazy uncle talking about stocks at the Thanksgiving table (and my editor will kill me).
You might now be thinking, if this stock is so great, what is holding it back? Paul Andreloa said it perfectly in a tweet: “[Medexus is too] pricey for retail investors and too illiquid for institutional investors. Stock is falling between the cracks and creating an opportunity for sophisticated retail investors. Small investors do have advantages over institutions if they know what to look for.”
If you need any more convincing, follow along and I will go over the product line up at Medexus and their potential, in a follow-up article.
Thank you for reading, stay safe everyone!
Coming up next:
1. Appili Therapeutics: Gilead, watch and learn (December 10th)
2. Immunoprecise Antibodies: Listing on the Nasdaq, NOW WHAT? (December 11th)
3. Neupath Health: Am I missing something??? (December 13th)
4. Medexus Pharmaceuticals Part 2: Product line up and their potential (December 15th)
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