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 Numbers
The results from the second quarter of 2013 have far exceeded management's expectations. For the three months ended March 31, the company sustained a net loss of $2,298,698 compared to a net loss of $362,684 for the three months ended the same period of 2012. For the three months ended March 3, EBITDA was $3,653,871, compared to $415,626 for the period ending March 31, 2012. Adjusted EBITDA was $3,899,632, compared to $954,191 for the prior year same period. Revenues for the three months ended March 31, 2013 were $5,848,983, which were comprised of sales of Vancocin®, Factive®, and Enablex® (Emselex® ). Gross margin for the same period was $5,540,765 or 95%.
For the three months ended March 31, 2013, the net sales for Vancocin® were $1,265,275. For the three months ended March 31, 2012, the net sales of Vancocin® were $2,205,628. The decrease was primarily due to the entry of a generic Vancomycin which received reimbursement status in several provinces during the company's 2013 first quarter. For the three months ended March 31, 2013, the net sales for Factive® were $385,948. The company did not record any sales for Factive® during the same quarter in 2012. Merus did not own Enablex® in 2012 so there is no comparable.
President and CEO Elie Farah commented on the quarter saying, "We are pleased with the results of this quarter in which we generated total in-market net sales of $7.4 million, adjusted EBITDA of $3.9 million, and a corresponding increase in net cash of $4.0 million. The overall business is tracking to plan and in the last six months we have generated adjusted EBITDA of $9.1 million. Over the last year, there have been product acquisitions and other events which have created fluctuations in product revenues; however, we have now reached the point where there is enhanced visibility on the substantial EBITDA generating capacity of the existing product portfolio on a normalized basis.”
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 $1.01 billion (CAD) and is trading close to its 52-week high of $51.89 (CAD). The company has a P/E of 16.72 and EPS of 2.94.
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 $86.69 million and is trading at $5.07. CPIX has a P/E of 14.69 and EPS of 0.32.
Things are looking up at Merus and investors should take note. The company currently has a market cap of $17.5 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 0.83 suggests minimal volatility and a nice play as a long-term investment venture. Canaccord Genuity has arrived at a 12 month target price $2.90 (CAD) which translates into a 383% (at the time of writing) 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. The company expects to release its next earnings statement on August 8, 2013.
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