Merus Labs International Inc. (NASDAQ: MSLI) (TSX: MSL) is a specialty pharmaceutical company focused on the licensing and acquisition of recognized products that are under-promoted from larger pharmaceuticals. The company uses a diverse, opportunistic approach in seeking out acquisition candidates. Merus does this by sourcing pharmaceutical products across extensive therapeutic classes. This enables the company to acquire strategic targets not available to other companies. Merus acquires prescription medicines on patent at the maturity stage of the product’s life cycle. It also targets branded generics, niche market pharmaceuticals, and products with annual sales below the critical threshold for pharmaceuticals. A drug below this $200 million revenue threshold is generally a minor focus for most sizeable pharmaceutical companies and is generally drawing near the end of its product lifecycle. The under-promotion of these products provides an ideal opening for Merus to acquire them at affordable valuations and expand revenue through directed sales and marketing strategies.
The company’s portfolio includes such profitable products as: Enablex® (darifenacin), or Emselex®, a prescription medicine used in adults to treat overactive bladders, Vancocin® which is used to treat severe cases of C.difficile, and Factive, which is used to treat chronic bronchitis and pneumonia. In order to manage their product portfolio and control costs, a dynamic operating model has been implemented in which there is a light infrastructure footprint. Merus has also strategically partnered with third party contract manufacturing and regulatory service providers to leverage their knowledge yet maintain greatest flexibility for MSLI. The company has a strong management team that is determined to fuel growth through further strategic acquisitions.
Merus targets acquiring drugs in a valuation range of two to three times sales and three to six times EBITDA. The company estimates that there is an aggregate global pharmaceuticals market of $80 billion consisting exclusively of products with less than $200 million in revenue. MSLI’s dynamic management team actively builds upon strong relationships with large pharmaceutical business development teams. By doing so it has positioned itself as a preferred partner with global commercialization capabilities. Management is determined that Merus will continue to execute on its merger and acquisition strategy in order to step up top-line growth going forward. Additionally, in December 2011, Merus Labs merged with Envoy Capital Group. The transaction has resulted in a stronger balance sheet and will allow Merus improved access to capital with its new cross-border listing.
Merus currently has a market cap of $19.79 million and is trading at the lower end of its 52-week range. This provides an optimal entry point for perspective investors. Its relatively low beta of 0.78 suggests minimal volatility and a nice play as a long-term investment venture. The stock has garnered a 2.26 percent uptick in trading so far today and analysts’ sentiment is bullish. Canaccord Genuity has arrived at a 12 month target price $2.90 (CAD) which translates into a 70 percent return on the current price of the stock. They have also issued a buy recommendation citing strong future revenue streams. Byron Capital has also issued a strong buy rating with a $3 one year target based on the products in the Merus portfolio.
Comparable companies in this sector include Paladin Labs (TSX: PLB), Warner Chilcott (NASDAQ: WCRX), and Cumberland Pharmaceuticals (NASDAQ: CPIX), with Paladin and Cumberland being the nearest competitors based upon similar business strategy and focus.
Paladin Labs Inc. is also focused on the acquisition and in-licensing of pharmaceutical products. The company’s product portfolio includes Tridural, Abstral and Trelstar. In February of 2011, PLB acquired the Tempra line of products in Canada from Bristol-Myers Squibb (NYSE: BMY). In November of 2011, the company garnered the rights to Travelan in Latin America, Canada, and Sub-Saharan Africa. Beginning January 1, 2013, the company acquired Ativa Pharma S.A. Paladin has a current market cap of $1.04 billion (CAD) and is trading close to its 52-week high of $51.89 (CAD). The company has a P/E of 17.61 and EPS of 2.86.
Cumberland Pharmaceuticals is another specialty pharmaceutical company that concentrates on the acquisition of branded prescription products. Cumberland’s objective is to acquire rights, develop, and commercialize prescription products for the gastroenterology market. Its portfolio includes: Acetadote Injection for the treatment of acetaminophen poisoning, Caldolor (ibuprofen) Injection for pain and fever, Kristalose (lactulose) for oral solution, a prescription laxative, and Hepatoren (ifetroban) Injection for the treatment of patients suffering from hepatorenal syndrome. The company has a market cap of $94.9 million and is trading at $5.07. CPIX has a P/E of 17.14 and EPS of 0.30.
On another note, investors should be aware that investing in small-cap companies can be risky. Shares are thinly traded boosting the volatility of the stock. Also lack of liquidity may make it difficult to buy or sell the play on demand. That is not to say that you should not invest in reputable small-cap companies. Investor should always do a little homework and Merus appears to be a solid play worth a spot in any portfolio.
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